A passing fad or the next big thing?  

This three part article discusses the latest on the crowdfunding craze.

What is it? Crowdfunding is one of the latest buzzwords to hit mainstream America.  In the broadest sense, crowdfunding is a process by which people with ideas can get money (funding) from others (the crowd) to pursue those ideas.  More subtly, crowdfunding can a unique mechanism for sophisticated entrepreneurs to market their products.  However, crowdfunding is not for everyone. 

The new Crowdfunding page (tab above) of this blog is a three part article detailing the ins and outs of this phenomenon.  Part 1 of this article defines crowdfunding and discusses the participants involved.  Part 2 describes campaigns and their components used by innovators to solicit funding.  Part 3 discusses the advantages and disadvantages of crowdfunding and potential pitfalls.


Finding funding to develop and commercialize an idea is a difficult process.  Crowdfunding facilitates the funding process by making it easier for potential investors to meet and people with ideas that need support.  In the past, this process was mainly phone calls and emails.  With the advent of social media, websites provided a way for everyone to reach out to their social networks and beyond.  If you can tell anyone what you ate for breakfast, why not tell them about your latest idea to change the world?  Websites started specializing in linking people with ideas with people who liked those ideas and wanted to support it. This trend has compelled many innovators and entrepreneurs to attempt crowdfunding and hundreds of crowdfunding websites to pop up. Massolution claims that there were over 500 crowdfunding sites at the end of 2011 with over a billion dollars invested. Deloitte Global Services estimates that crowdfunding websites will raise $3 billion in 2013. Over 100,000 projects have been supported using crowdfunding.  So what is the big deal?   

For example, Sally has an idea for a flashlight that runs on air.  She wants $5000 to pursue this flashlight.  She tells the crowdfunding website that she wants $5000 to pursue her idea for new flashlights.  The website tells users (the crowd) about Sally’s idea and what she wants.  Users of this website provide money to to support Sally’s flashlight idea.  The website transfers the money to Sally.  Sally makes flashlight.  Simple, right?  Not so much.

There are several main components to crowdfunding: the campaigners and their ideas or causes, the crowdfunding website or platform, investors in the crowd, and campaigns to solicit funding.

A.    Campaigners are the people with ideas who want to pursue this idea on a larger scale.  They are responsible for communicating to the potential investors (through the website) about their cause, status, and progress. They are also responsible for completing the project as promised.  Campaigners can act as individuals, corporations, or charities. The ideas are the product, service, business or cause that the innovator(s) want to pursue.  These are not limited to a widget, but also include charities or special programs.

B.     The crowdfunding website is also known as a platform.  It is the place where innovators request money to pursue ideas, where investors go to look for ideas and innovators to support, and the platform for the safe exchange of capital. 

C.     Investors are those people or organizations that provide the funding to the innovators through the website.  Investors can find campaigns and provide funding through crowdfunding platforms, starting with small amounts like $5 up to thousands.  They are participants of the crowd and can be investors or philanthropists, individuals or organizations.

D.    The campaign is the pitch from campaigners or innovators to potential investors.  The campaign should discuss the idea or project, its value, the people who will implement the project, and any rewards that may be provided in exchange for funding support.  Campaigners can offer rewards and accolades to investors.


You don’t need to be a struggling entrepreneur to campaign for crowdfunding.  Campaigners take many forms from individuals to organizations.  Activists, inventors, students, movie producers, bands, artists, authors, and actors have all been successful crowdfunding. Just about any legal entity can participate including corporations, partnerships, sole proprietors and charities. 
At the end of the day, a person or team has to take responsibility for setting up, maintaining, and fulfilling the crowdfunding campaign.  This is not to be taken lightly.  This person is responsible for completing projects and fulfilling any perks offered during campaign and can be held legally liable.  Individuals who participate as themselves or sole proprietors are personally liable.  If you aren’t able to provide the rewards or repayment promised, investors may want their money back.  This means that the individual campaigner’s personal assets are at stake.

            Campaigners use crowdfunding for several reasons.  The most obvious is to get funding, but there are a lot more than that. 

Why do firms participate?
Reach a wide pool of investors
Expand network
Relatively little interaction
Way to get working capital prior to delivery of product
Can provide audience feedback
Promotes product or service to a large market
Acts as a place to create a proof of concept that can help gain more funding 
Can reach interested parties who believe in the product but cannot afford large donations
No equity is at stake (for reward or donation campaigns)
Little risk
Not geographically restricted
Little intellectual property risk
Simple transaction
Relatively low cost
Less formal
... ok I am going to stop here.  

Crowdfunding platforms are websites where people solicit funds.  People with ideas post their projects, often called campaigns, on the websites. Platforms usually require that the campaign be project based with a finite deliverable or end point.  With the increased interest in crowdfunding from both innovators and investors, there are more providers of crowdfunding services and sites than ever.  Crowdfunding platforms are very different and deciding which organization is critical for the campaign’s success. 

Platform Type: Crowdfunding websites specialize in one of four types of funding techniques: reward-based, equity, lending, and charitable giving. 

  • Reward-based: Crowdfunding is often associated with campaigns during which people propose a product and asks for investors to provide funding to support the creation of the product in exchange for rewards or accolades.
  • Equity: With the passage of the JOBS Act, firms will be able to offer equity for investments in which the investor is provided a share of the resulting business entity.  Until recently, equity-based crowdfunding was strictly limited to outside of the U.S.
  • Lending: Crowdfunding can also be used for loans, where the campaigner borrows money and pays back principal and interest.  This is often called peer-to-peer lending or P2P. (Some argue that crowdfunding that involves lending money isn’t actually crowdfunding.
  • Charitable giving: These are based on donations provided for a cause.  (Some argue that crowdfunding that involves charitable giving money isn’t actually crowdfunding.)

Campaign niche: The majority of crowdfunding websites are open to a wide range of projects from new products to technology to community outreach. Other crowdfunding websites target projects in a particular niche such as renewable energy (e.g. AbundanceGiving and Mosaic), or music (e.g. PledgeMusic), books (e.g. TenPages or Unbound), or charitable projects (USAProjects and

Audience:  With so many choices, potential investors select only a handful of crowdfunding websites to peruse.  Just like the campaign niche, finding the right audience is important to the success of the campaign.  Think about the person who actually visits these websites.  Are they the right person to see value in your project?  A little digging can usually determine the number of users a website has.  Larger websites such as Kickstarter, Indiegogo, and Fundable publish statistics on their funders and campaigns.  Be careful.  Having more users does not mean better chances of funding.  If the campaign focuses on gaming and the gazillion users tend to fund medical research, there is little in common to unite the two. 

Funding models:   All or nothing (AON) funding model is contingent on the success of the campaign.  At the beginning, the campaigner selects a target funding amount as the goal.  If the campaign fails to raise at least the target figure, no money is collected and the campaigner gets nothing.  If the goal is met, the money is collected from the investors and allocated to the campaigner after costs.
            The keep it all (KIA) model is more flexible and allows the campaigner to set a target goal, but funding is not contingent on meeting that goal.  The platform collects funding during the campaign and it is distributed to the campaigner after the service fee is collected.  (It is important to note that the campaigner is still responsible for completing the project and giving the supporters any rewards promised.  As discussed earlier, if this cannot be done, the campaigner is responsible for refunding the funding to the investors.)

Fee structure: Platforms charge for their services.  Three fee structures prevail: flat, fixed percentage, and goal contingent.  The flat fee cost structure charges one amount for listing the project or a monthly service fee.  The fixed percentage fee structure is a portion of the total funding obtained by the campaign. The goal contingent fee structure charges a percentage of the total funding campaign obtained, however if the goal is met, the platform refunds some of this money back to the campaigner (often as much as 50% of the premium).  This incentivizes campaigners to set reasonable goals for their campaign, but raise as much as possible. 

Payment services:  Each website uses a 3rd party service for financial transactions. For example, Kickstarter uses Amazon payments and Indiegogo uses Paypal.  You may find that the requirements for using these services are more restrictive than others.  If you already have one type of account, it may be easier to integrate with the platform that supports it.

Platform services:  The increased number of crowdfunding websites has led to greater competition and more services offered to the campaigners and investors. Services can include marketing, campaign templates, manufacturing advice, mentors, connections with other programs and apps such as Facebook, and links to attorneys.

Other restrictions:  There always very specific conditions.  Read the fine print.   


In mid-2012, the American Dream Composite Index surveyed a sample of the U.S. population to establish demographics for crowdfunding participants.

  • Age. Individuals ages 24-35 are much more likely to participate in crowdfunding campaigns; those over 45 are significantly less likely to back campaigns
  • Gender. Men are much more likely to take a risk on an unknown startup.
  • Income. Those earning over $100,000 per year are the most likely to invest in startups through crowdfunding

But why? One of the first things that I hear when discussing crowdfunding is, “Why would give someone else money for nothing?” You are not going to get your money back, so why do this? 

1) Tangibles:  As mentioned, investors can get rewards, accolades, equity, or interest on debt. 
Rewards and accolades: Indiegogo and Kickstarter use “perks” to entice investors.  Perks are rewards such as products or services in exchange for funding.  In many cases, perks are simply the product being developed, but often times involve stickers, t-shirts, and other inexpensive swag.  Thus, investors are pre-purchasing products or services, often as a discount compared to the ultimate retail price.  Crowdfunding rewards allow early movers to get access to new products and technologies before they go on sale to the general public.

Equity: Firms can offer a share of the company in exchange for funding.  The latest phase of the JOBS Act to pass allows firms to solicit (advertise and promote) their project to accredited investors and offer equity in the company in exchange for funding.  This must take places within the confines of a “walled garden” in which both parties are verified.

Loan interest: Crowdfunding websites can facilitate loan transactions.  The investor can support a cause or idea by loaning as little as $5.  Interest rates are typically set ahead of time as part of the campaign. 

2) Intangibles: Along with tangible rewards that an investor can obtain, crowdfunding does offer intangible benefits as well.  For example, some investors participate so that they can be part of something new or contribute to a larger cause.  Many see the value in the idea and want to see it fulfilled.  Others are early adopters of new products and want to learn about new technologies.  Still others simply participate as a show of support in an idea or person. 

As with any investment, there is a high risk that investors do not get the benefit that they were promised or expected.  Things go wrong.  It is up to the investor to perform any due diligence needed to confirm the validity of a campaign and the campaigner.  There are many scams out there from impersonations to misrepresentations of capabilities to fake charities.  Even in the internet age, due diligence can be very difficult.  Investors must look for any clues about the project’s viability.


Crowdfunding campaigns are the actual call for support by the crowdfunding organization.  This is where one weaves a story that describes the problem being solved, the solution, and why someone should fund your idea.  It is the elevator pitch and road show of the crowdfunding world.  A campaign can be broken into the following five parts: description, video, value to the investor, online presence and promotion, and fulfillment.  

Description of project (product/service/charity):  
The description is the written summary of your work.  Don’t be shy or too humble – be thorough.  StartUpSmart recommends over 200 words.  Get cracking.
  First, describe the problem that is being addressed and make the description simple.  The campaign will be seen by a wide audience and it needs to be easy to understand.  You must convince the potential funders that there is a problem to solve and that people care to have a solution.  In other words, there is a market dying for your new invention, new casual chic clothing line or new thrash metal folk music album.  Many campaigners opt for the – I was standing around with my friends and realized, life would be so much better with a new  flaming pumpkin launcher and many other people want it too. 
 Now the second part – your solution.  What are you doing?  How?  Whatever the reason, the campaigner’s job is to convince the reader that the problem exists, people care about it (preferably lots), and the campaigner can solve it. 
Third, tackle the why question.  Here you need to describe not only the problem and solution, but also how the organization is adding value to the transaction.  What does this mean?  This is where you tell the audience - Why you? Why is this organization the one to fix this problem?  Do you have something special?  Do it in a special way?  Have a hidden network? Elaborate skills?  Undeniable passion about a cause? Get the reader fired up not only about your ability to do what you say, but also why you want to. 

Not all crowdfunding platforms require a video, but many strongly recommend them.  Indiegogo and Kickstarter have found that campaigns with videos are about 20% more likely to achieve their funding goals.  It is well known that visual cues are more effective than text. The videos don’t need to be long, but they do need to be compelling.  In fact, shorter is often better.  Face it, the human attention span is getting shorter and shorter every day.  It is unlikely that we will watch a video over 2 minutes unless we paid for it or it is bookended with commercials.  That means that the video need to be succinct.  Make a list of all of things that you think are really important to tell the viewer.  What would you want to know?  What do other videos cover?  Take some time and watch other videos on both the platform that you plan to use and others.  After 5 or 10, you will get a very good sense of what works and what doesn’t. 
Making a video can be intimidating.  Videos don’t need to be professional, but they should be clean and understandable.  Many of us don’t like being in front of the camera and I am one of them.  Focus your video on the company, the product or service, and the outcome.  It is helpful if you can show your solution/ product/ service/ beneficiary.  Lots of people are visual and want to see what is going on.  That means – less time with you in the picture and more time showing your product or social cause or whatever it may be. 
There are several websites that provide advice about creating a video.  There are videos about making videos.  Take your time and don’t rush it.  Prepare.

Value to the investor (rewards, equity, social good, etc.): 
Give something to get something.  As described in Part One, these can be tangible and intangible rewards for participating in the campaign.  Often, the rewards offered are pre-orders of the product being campaigned. The investor can often get the product being created below the retail price and before it hits the stores. This is why crowdfunding has been so popular and successful for consumer goods. For example, Lumio’s reward was their “illuminated book” (aka lamp).  Boombotix rewarded supporters with their first run of their wireless ultraportable speakers.  Pebble rewarded fans with their product (smart watch) at a price below retail and before they hit the stores. 
Not all campaigns can offer their products as rewards.  And sometimes, campaigners want to provide a reward that is worth an amount different than that of the product.  For example, Blade Battery Electric Vehicle could not reward funders with a car, but they did give those that pledged $100 a car emblem.  Less creative is the t-shirt.  T-shirt printers must be getting rich right now as campaigners keep promising t-shirts to participants.  You can’t blame the campaigners – t-shirts enable the campaigner to not only get funding, but now they have hundreds of fans running around like walking billboards.  Nice! 

Don’t go crazy creating a lot of reward levels.  Too many choices become confusing for the reader and unmanageable later on.  Provide a variety of rewards at different levels, but realize.  Most funders in crowdfunding invest from $10-$25
There are a few crowdfunding websites that allow investors to obtain equity of the firm being funded.  For example, AngelList, CircleUp, RockthePost, SeedUps, and Fundersclub help start-ups connect with accredited investors.  The reward is ownership in the company, so the value will fluctuate. This is a more complicated transaction and is only for firms that are willing to take on active investors.  Campaigners interested in equity investing must remember that they are selling part of their company and their investors will expect returns. 
Quite a few crowdfunding websites are dedicated to non-profits and charitable causes. Crowdrise, Razoo, Rally, and Piggybackr are just a few of these.  Obviously, there is no product involved, and the reward to donate is the knowledge that the donor is helping others. Razoo alone raised over $170 million for thousands of causes. That goes a long way.

Online presence and promotion(social media, network, etc): 
The overall online presence outside of the crowdfunding platform (website, Facebook, Twitter, Pinterest, etc…) is a factor on some crowdfunding sites.  The campaigner has to convince the investor that they are legitimate and can do what they promised.  More experienced funders will look not only at the crowdfunding site for information, but also outside as well.  First of all, get a website. For consumer or business products, a website is a must.  However, non-profit organizations and donation campaigns often have websites as well. A lot of information that doesn’t make it to the crowdfunding site can be posted there.  Events, projects, and charitable causes can all have a website giving a potential donor much more insight into the problem at hand.  It also helps if you can link this to other outlets such as networking sites. There are many companies that host websites for free and several have templates to improve the design and function.  People will expect that if the campaigner is serious, a website will exist.
Social media is a critical factor in crowdfunding success. For example, links to Facebook or Google+ accounts are common. We like to think that life after high school is not a popularity contest.  Here is one time when it really does help to know everyone. The more people you know online, the higher your chances are to meet your funding goal.  During the campaign, the campaigner is trying to convince a potential investors or donors to essentially give them money. The more people in the network, the more people that can be contacted for help.  The top crowdfunding platforms have found that over 25% of the funding for a typical campaign will come from friends and family.   The campaigner should also be willing to ask just about everyone they know for funding. 
            What if the campaigner doesn’t have a huge network?  That is ok; this is why we have the crowdfunding sites in the first place.  Getting the word out to as many people as possible is the first step.  Market yourself and your project.

FulfillmentYou mean I have to make this stuff?
The money has been raised, now it is time to fulfill all of those promises made in the campaign.   For any type of campaign, give the backers updates on your progress. (updates during the campaign are also very effective for promotion.)  People (such as future buyers) will be looking for signals about your post campaign success. 

For reward based campaigns – Now you realize that you have to make and send out the stickers that you promised to each of the 500 backers at the $3 level.  This is going to take time and organization. Download the investors’ information from the crowdfunding website.  Some have tools to help manage the fulfillment, which is something to look for when looking for the right platform.
If you are not able to fulfill the promised rewards, don’t try to hide it.  Tell the crowdfunding site and investors. 

For equity based campaigns – Welcome to your new best friends.  After a campaign, a business owner will be working closely with the new co-owners.  The crowdfunding website may have guidelines for communication with investors – read and follow those closely.  The relationship between investor and campaigner varies a lot.  Some investors want to be involved while others just want periodic updates if something big happens.  Progress reports help establish the relationship.  If the investor wants more information or involvement, they will contact the campaigner.  Just because an investor gave a campaign money doesn’t mean that the campaigner has to do everything the investor says.  Business owners still need to do what they think is right for the company, and disagreements happen.  And sometimes minority shareholders will not agree.  It is just part of the landscape, but you should still remember to manage their expectations

For donation based campaigns – Let donors know that you made progress toward your goal or how much capital was raised.  Tell stories of what was able to be done – did a trip occur, was a wish fulfilled, or was a surgery successful?  This connects the donor with the cause and provides an intangible reward.  Also, some fundraisers do multiple campaigns for different causes or even the same cause.  By reporting in, the campaigner can build a track record and reputation.  Crowdfunding campaigns are not small projects, these are accomplishments which build legitimacy for future campaigns.

It is becoming more and more evident that crowdfunding is not for the small start-up looking to get funding for their fledgling idea.  Crowdfunding is sophisticated, challenging and competitive.  During the early days, just about any anonymous entrepreneur could launch a campaign.  Not anymore.  

·       It isn’t as easy as it seems.  You get out what you put in.  Takes time and energy.  During the campaign, someone needs to be managing the campaign, maintain the social network, post updates, and respond to comments and questions.  While all of this money is rolling in, you still need to manage your existing job/business. 

  •        Speaking of time, it is a resource too and we only have so much of it.  Just like a marketing campaign or promotion, you need time manage a crowdfunding campaign.  Someone needs to respond to the queries, comments, and concerns of potential funders.  You need to post updates on your progress.  People want to see that you are doing something. 

  •        However, don’t let the campaign take you away from what you should be doing, which is growing the idea/prototype/business/cause.

  •        Successful crowdfunding campaigns typically bring in $1000-$10000. Compared to other methods of raising money, this may not be enough. 

  •        There is no intellectual property protection.  Granted, a campaigner shouldn’t be announcing their “secret sauce” as they say, or how they will achieve their competitive advantage.  However, you are broadcasting your idea and how you plan to enact it to billions of people on the internet. Another person can take that idea and with the right resources could attempt to take the idea to fruition. 

  •        You are responsible for fulfilling the promises made as part of the campaign. This is especially important for people who have not incorporated to protect their own assets.  For example, campaigners have been sued by investors for not fulfilling their rewards.  Don’t make promises that you can’t keep.

  •        It is all about money and money is a sensitive topic.  A campaign is asking others for money.  Some people are uncomfortable asking for money.  Some feel like crowdfunding is the equivalent of asking (or begging) for money. Some people don’t like being asked.  This is tricky and needs to be managed with care.  Don’t guilt Uncle Stan out of his last $40 just so you can “reach your goal” and he can “get” a t-shirt.

  •        Conflict of employment contract – Did you work on this project on company time?  Use the company computer or other assets?  Did you sign any contract that assigns the company all intellectual property you create related to your job?  Even if you left a job, you may have signed a non-compete agreement when hired or on your way out.  Find out.  Also, there is the potential for conflict of interest – It sounds obvious, but many people don’t realize that using professional connections or leverage to help your crowdfunding campaign creates a conflict of interest.  It is best to keep your professional worlds separate when conflict of interest is a risk.   

  •        These things stick around.  Oh yeah – the crowdfunding website will keep your campaign up there indefinitely.  For the entire world to find, including potential employers, competitors, and girlfriends.

  •        Competition. Recognize that you are competing for the attention of all other people visiting the site.  If it were not on the chosen crowdfunding website, would anyone pay attention?  

  •        IRS.  The money that you get from crowdfunding may be subject to income tax depending on the structure.  For example, rewards-based crowdfunding often involves a product or service in exchange for funding.  That can be considered income. And they know how much you raised, everyone does.  See above. 

  •        And then there are the scams.  Potential investors that solicit your participation in their campaign.  Some of these may be credible, but you have to be careful.  Most the solicitations that I received that requested quid-pro-quo participation or promotion were scams.  These need to be reported so that the crowdfunding site can remove them.


  1. Determine why you should use crowdfunding compared to another way to raise funding or market your product.  If it weren’t on the crowdfunding platform, would people still pay attention? Why?
  2. Who is the right audience for this campaign?  Who will care?
  3. Before you get started, determine why you are crowdfunding.  What do you expect to get out of the processes?  Money is not the only benefit. 
  4. How much do you really need?
  5. How much should you ask for?
  6. How will you use it?
  7. Do you have an online presence?  Social media presence? 
  8. Can you deliver?
  9. Can you tell a story?  Quickly and convincingly?  
  10. Is your story compelling? Why should someone support you? Is the campaign interesting? 
  11. What does an investor need to know?  Think about it from an investor’s point of view.

  •      The Crowdfunding Bible by Scott Steinberg: 

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