What is crowdfunding?

August 04, 2015

Crowdfunding is a popular way for aspiring entrepreneurs to test and market new ideas for products and services. Backers (also known as funders) support story-driven projects that pique their interests, then "pre-pay" for a specific good or service that will result from the project they are funding. Backers also contribute because they become engaged emotionally, and they want to see the ideas come to life.

Generally speaking, individuals and early stage companies can raise small amounts of capital from a large number of individuals to finance a new business venture by leveraging a crowdfunding platform. They must also tap into their vast network of friends, family and colleagues through social media platforms like Facebook, Twitter, and LinkedIn to get the word out about the crowdfunding campaign and attract investors.

The appeal of crowdfunding

Crowdfunding gives communities the ability to directly bring an idea to life—no matter how big, small, wacky, or serious. At its heart, it is a movement about people connecting at a deeper level than a simple, single transaction. I like to think of crowdfunding as the new “like” button, since it is immeasurably more valuable than just a click of approval. Funding is where the real “rubber meets the road.” This phenomena of bringing new things into the marketplace through a “bottom-up” community driven model is a game-changer; and for some, a welcomed shift from the “top-down” model that has been the dominant force of the modern commercial age.

To me, crowdfunding exemplifies the notion of consuming local, authentic, transparent, and story driven-products. The crowd has a direct impact on whether or not a project is successful, and often the opportunity to interact with the visionaries during the creative process. Think of the model as “high-tech meets high-touch.” Backers make their choices based on merit, and can pick where they want be on the spectrum.

Benefits of crowdfunding to backers and entrepreneurs

For backers, crowdfunding is a way to build a direct relationship with an entrepreneur. They often form an attachment to the story of how a product was made. Each backer remarkably becomes an integral part of the narrative that an emerging entrepreneur is telling. I’ve even had our community tell me they watch the companies they have funded the way they root for their favorite sports teams! These backers feel that they are part of a special tribe and often have high emotional stakes at play.

For entrepreneurs, this is a whole new way to test and market new product or service ideas. In the past, many entrepreneurs needed to have relationships with banks, venture capitalists, or angel investors to ramp up their endeavors. With crowdfunding, the “raving-fan customer” is becoming the bank. Online crowdfunding democratizes access to capital in a major way by breaking down regional and social barriers. Plus capital formation via crowdfunding is at a relatively low cost. Entrepreneurs in their early stages can fundraise with “perks” instead of debt or equity transactions, which can be significantly more costly and time intensive.

Crowdfunding is a popular way for aspiring entrepreneurs to test and market new ideas for products and services.

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