Crowdfunding – The practice of funding a business by raising money from a large number of people online
(Pronounced krowd fun-ding)
To remember what crowdfunding means use the following mnemonic:
The whole crowd helped by funding (crowdfunding) the business. A large number of people giving a small amount of money added up quickly.
Crowdfunding is usually carried out through the internet on platforms such as Kickstarter, Indiegogo, Patreon and SeedInvest. Entrepreneurs will create an online pitch to entice potential backers who can then choose different amounts they can pledge in return for early access to the product/service when released or promotional merchandise. The average pledge on crowdfunding sites is $25, but the backers should not expect to see a monetary return on this. Unlike a typical business investment, the backer is not buying a portion of the company in the form of shares.
The funding success rate on the Kickstarter site is a surprisingly high 40.34%. An example of one of the most successful Kickstarter campaigns is the card game Exploding Kittens. Created by Elan Lee, Shane Small and Matthew Inman in 2015, the game was launched on Kickstarter with the goal of raising $10,000. The campaign was a huge success, raising over $8.7 million from over 200,000 backers. The success of the Exploding Kittens campaign can be attributed to a number of factors, including:
- A strong concept – The game was simple to learn but challenging to master, with a unique and appealing art style.
- A well-executed campaign – The campaign video was engaging and informative, and the creators did a great job of building excitement and anticipation for the game.
- A large and engaged audience – The creators of Exploding Kittens had a large following on social media, which helped them to reach a wide audience and generate interest in the game.
This hugely successful Kickstarter campaign has led to the game selling over 18 million units worldwide.
However, sometimes crowdfunding success does not lead to a successful business. An example of this is The Coolest Cooler, a crowdfunding campaign for a cooler that had a built-in blender, speaker and other features. The campaign raised over $13 million from over 62,000 backers. However, the company was unable to deliver on its promises and eventually filed for bankruptcy. The Coolest Cooler failed for a number of reasons, including:
- Overly ambitious goals – The company set out to create a cooler with a lot of features, but it was not realistic to expect that they would be able to deliver on all of them.
- Poor communication – The company did not communicate effectively with backers, which led to a lot of frustration and disappointment.
- Manufacturing problems – The company encountered numerous manufacturing issues, which delayed the delivery of the coolers.
The Coolest Cooler is a cautionary tale about the risks of crowdfunding. It is important to do your research and only back projects from companies that have a proven track record.
Note: Crowdfunding websites are also for-profit businesses, and will usually take between 5% and 12% of all pledges for themselves.