What Is Crowdfunding? Types, Benefits and Tips

By Indeed Editorial Team

Updated July 12, 2022 | Published May 17, 2021

Updated July 12, 2022

Published May 17, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Crowdfunding is a method of gaining capital that relies on many small donations to reach a funding goal. Many organizations, businesses and individuals use crowdfunding to support charities and entrepreneurial endeavors. If you're seeking donations for a nonprofit or business, you may want to learn more about crowdfunding to decide whether it's the right option for you. 

In this article, we discuss what crowdfunding is, list the various methods you can use, explain the benefits and disadvantages of crowdfunding and provide tips for doing it effectively.

Key takeaways:

  • Crowdfunding allows businesses to secure funding by appealing to a large number of donors who usually contribute small amounts.

  • There are three main types of crowdfunding: donation-based, equity-based and reward-based crowdfunding.

  • Crowdfunding can provide a number of attractive advantages over traditional fundraising, but comes with some drawbacks.

What is crowdfunding?

Crowdfunding is a method of raising money for a cause by appealing to many individuals for contributions. Crowdfunding usually relies on small amounts of money from many people rather than large amounts from a few investors.

Many business people or entrepreneurs who use crowdfunding depend on the efficacy of their idea or product to sway people into supporting it. Many organizations and individuals can benefit from using crowdfunding, including entrepreneurs, nonprofits, and those in need.

Related: 14 Entrepreneur Resources for Starting a Successful Business

3 types of crowdfunding

Depending on the organization or individual conducting the crowdfunding, they may use different methods. Here are some of the types of crowdfunding you can use to raise money for a product, project, mission or service:

1. Donation-based crowdfunding

This type of crowdfunding asks the donor to contribute to the fund without offering an incentive in return. Charities and individuals in need often use this method of crowdfunding. An example of this form of crowdfunding would be a donation box at a school event to help fund a summer camp for students. Another example would be a person using an online platform to raise funds for their teacher's surgery.

Related: How To Create a Crowdfunding Campaign Plan in 9 Steps

2. Equity crowdfunding

Equity funding is a form of crowdfunding in which the people who contribute to the fund gain part ownership of the enterprise. Equity funding is better suited for organizations with a few wealthy investors, so it's not as common as other crowdfunding methods. An example of this kind of crowdfunding would be where the donors gain a 0.1% stake in the company for a contribution of $10.

Related: 25 Ideas To Try When Fundraising for a Nonprofit Organization

3. Reward-based crowdfunding

When a crowdfunding campaign offers the donors perks or rewards for contributing, it's a reward-based campaign. Often, entrepreneurs offer early access to the product or a special membership to the service when it's available as a reward for investing. There are many online platforms that facilitate this kind of crowdfunding, assisting donors in placing orders and organizers marketing their campaigns.

For example, an entrepreneur might use this type of crowdfunding for a product they developed, such as a solar-powered, water-purifying water bottle that can connect to smartphones and remind you to stay hydrated. If you contribute $25 to the campaign, you'll receive a sticker with the company logo.

If you contribute $50, you'll receive a water bottle when they are ready. For $110, you'll get three bottles and a lifetime subscription to the paid version of the hydration app. By offering better incentives for each tier of contributions, the entrepreneur encourages the donor to contribute more.

Related: 5 Types of Funding for Businesses

Benefits of crowdfunding

Here are some of the potential benefits of crowdfunding:

  • Business flexibility: Traditional investors may expect to have input for business decisions, and crowdfunding allows entrepreneurs to source their funding elsewhere. This may offer them the opportunity to take more unconventional business routes for faster growth.

  • Large donor pool: Because crowdfunding draws monetary support from many sources, your organization may have a better chance of finding support and reaching its funding goals.

  • Marketing: Many crowdfunding platforms provide advertising for campaigns, which can help you use crowdsourcing to market your company, product or service.

  • Fast funding: If many people are interested in your product or service, and the public invests in your project, you may receive sizable sums quickly. Fast funding allows organizations to scale their operations and increase production or development speed.

Related: 10 Steps To Plan an Effective Fundraiser

Disadvantages of crowdfunding

Here are some potential drawbacks of crowdfunding:

  • The campaign needs a compelling story. Your product, mission or service must appeal to the public to gain support. Investing in professional help to tell your story or create persuasive campaign material can make your campaign successful amidst the competition.

  • Crowdfunding is more independent. Traditional investors may be able to offer guidance and support for entrepreneurs and small businesses. You may want to invest in business guidance elsewhere when using crowdfunding.

  • It requires constant activity. When crowdfunding, it's important that you can stay online frequently to promote your campaign, thank donors and engage with potential contributors. If you are working with a team, consider assigning shifts to these duties to reduce burnout or lapses in online presence.

  • Specific rules and regulations. Depending on the state you live in and the crowdfunding platform you use, there may be regulations limiting the amount of funding you can receive or rules about how you can use it.

Related: The 8 Stages of Startup Funding

Tips for crowdfunding

You can use some of these tips for effective crowdfunding:

  • Create campaign material. Consistent branding and aesthetically appealing campaign materials are crucial to gaining your donors' interest and support. By creating interesting and informational campaign material, you can promote your campaign and fund your project.

  • Include a call to action. Whether in an advertisement, social media post or flyer, be sure to include a call to action with contact or donation information. Once your contributors know they want to add to your fund, it's important to make the process as simple as possible.

  • Ask for extra help. Depending on the size and purpose of your crowdfunding campaign, it may be a good idea to ask your friends and family for help. A motivated and persuasive group of supporters can positively impact a campaign's success.

  • Create a business plan. If you are an entrepreneur, consider creating a business plan to show your potential donors that you're serious about scaling your business before asking for monetary support. Having a comprehensive business plan may convince potential supporters to invest in your product, service or project.

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