Crowdfunding isn't exactly a new idea. The first successful example of crowdfunding happened in 1997 when a British rock band took online donations to pay for a tour. By 2009, crowdfunding had gone more mainstream, raising more than $530 million, and it has grown at an impressive rate ever since.
According to a Massolution report, the estimated fundraising volume of the industry was $34 billion in 2015, although that figure includes around $25 billion in peer-to-peer (P2P) lending, which is usually excluded from the crowdfunding category. CrowdExpert.com, which maintains and tracks a comprehensive crowdfunding database, puts the true crowdfunding market at about $2.1 billion in the U.S.
As an alternative method of raising capital, crowdfunding turns the traditional method of business funding upside down. Instead of shopping a business plan to several different banks and financial institutions, crowdfunding platforms let an entrepreneur showcase his or her idea and provide investors of all sizes an opportunity to participate in growing the business. The arrangement could be as complex as equity agreements for major investors to pre-market product samples for smaller contributors.
The risk of fraud exists as some creators may use funds for purposes contrary to those of the fundraiser or may represent other's intellectual property as their own.
In general, there are three main crowdfunding types: donation-based, reward-based, and equity. The first category is typically reserved for nonprofits and humanitarian efforts. Reward-based crowdfunding works best if the total amount being raised is less than $50,000. Finally, equity crowdfunding is usually offered only to accredited investors, who may receive stock or convertible debt instruments in return.
If you're looking at crowdfunding a business idea or nonprofit charity, here are the major platforms in the market.
Kickstarter is the most well-known name in crowdfunding and arguably the most active platform, raising over $2 billion since its launch in 2009. On a typical day, the Kickstarter community pledges over $1.5 million. Kickstarter's largest project was Pebble Time's smartwatch, which generated over $20 million in March 2015, with a million of that pledged within the first hour. Parent company Pebble Technology got its start with a record-breaking campaign on the platform in 2012, in which it raised more than $10 million.
Kickstarter backs creative projects only (e.g., film, games, music, and technology). The platform does not accept charity or humanitarian projects or other personal use projects that other platforms allow. It's also an all-or-nothing deal; if a project doesn't reach its goal, no money will be collected, so there's a bit of a risk involved. Kickstarter also keeps 5% of every successful project.
Indiegogo was the first major crowdfunding platform, and it has raised over $1 billion since its inception in 2007. In 2015, the platform funded over 175,000 campaigns with contributions from 2.5 million people across 226 countries.
Indiegogo has no prohibitions against cause-related and humanitarian projects, and it also offers a "flexible funding" option that allows you to collect all your donations even if you don't reach your goal. The company keeps 5% of all money raised, whether you hit your goal or not. There's also an additional fee of 3% plus $0.30 per transaction on any contributions made by credit card. There's also an equity investment option offered in partnership with MicroVentures.
CircleUp, located in San Francisco, is an equity-based crowdfunding company designed to help emerging brands raise capital and grow their business. Since its launch in 2011, CircleUp has helped 211 entrepreneurs raise $305 million. The average raise is less than $1 million, and the average investment is $100,000. Most campaigns take between two and three months to close.
CircleUp has a good reputation for elaborate due diligence on the companies it accepts. Most of the investors have deep experience in retail and consumer brands and are willing to provide strategic guidance and support during the process.
To apply, most companies must show revenue of at least $1 million, although CircleUp has made exceptions for promising companies with revenue in the $500,000 range. The company offers no-cost escrow services, and it takes a percentage of the rise in commission.