What Is Crowdfunding?

Crowdfunding is the ability to fund a project or business with money raised by a large number of people, typically over the internet. Here are the pros and cons of crowdfunding.

Written by Artem Oppermann
Published on Mar. 07, 2023
What Is Crowdfunding?
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Crowdfunding allows individuals or organizations to bypass traditional sources of funding such as banks, venture capitalists and angel investors. Instead, they can reach out directly to a broad audience in order to secure financial support for their project. Crowdfunding campaigns can serve different purposes, including launching a new product, producing a film or computer game, or funding a charity project.

Do You Pay Back Crowdfunding?

You do not typically pay back money raised through crowdfunding. Those interested in supporting a crowdfunded project or company (known as backers) can contribute relatively small amounts of money. If the project succeeds, their support will usually be rewarded with some sort of“thank you” rather than a financial return since crowdfunded projects are backed by donations and not considered investments or loans. 

The success of a crowdfunding campaign depends on the ability to effectively market the idea and attract enough supporters to reach the fundraising goal. At the same time, crowdfunding allows project developers to test the feasibility of their idea by first presenting their project (or the idea of the project) to a large audience, thereby measuring interest and support for the project. This process can be particularly useful for entrepreneurs and small businesses who want to validate their idea before fully launching a product.

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Advantages of Crowdfunding 

Crowdfunding offers advantages for project developers as well as project backers. 

  • Project developers get access to a large pool of backers.
  • Crowdfunding can be a good alternative to traditional forms of financing.
  • There’s no need to pay backers returns or interest on their donations.
  • Project developers can test the market and validate their ideas.
  • Backers can support great ideas without committing to a major financial investment.

Crowdfunding gives project developers access to a large pool of potential supporters. This access allows them to raise donations for their project from a variety of people. For this reason, crowdfunding can be particularly useful for entrepreneurs, small businesses and non-profit organizations that may struggle to secure traditional forms of financing from institutions like banks or VC firms. Moreover, because crowdfunding programs are based on donations, project developers don’t need to worry about paying out dividends or paying back loans.

In addition, crowdfunding allows project developers to test the market and validate their project idea before fully launching the project. By doing so, project developers can get early feedback from potential customers and reduce the risk of their project failing. Additionally, by building a community of supporters around their project, project developers can benefit from the marketing and networking opportunities that a successful campaign brings.

Crowdfunding can also benefit the project’s backers. Crowdfunding offers backers the opportunity to support projects about which they are passionate without having to make any major financial commitments. At the same time, in exchange for their contribution and support, backers might receive rewards. For instance, if you back a crowdfunded computer game, you might receive early access to a playable version of the game or even have your name mentioned in the credits. 

Your Guide to Understanding Crowdfunding. | Video: SGX Group


Disadvantages of Crowdfunding 

  • Backers have no guarantee that their donation will result in a finished product.
  • There is a great deal of competition for potential backers.
  • The risk of fraud is always present.

One of the biggest challenges with crowdfunding is the lack of guarantee for the backers that the project they’ve supported will actually be finished. After all, many crowdfunding campaigns are typically created by new companies that don’t yet have a proven track record and may, therefore, be more likely to fail. Another risk for backers is that if a campaign doesn’t meet the fundraising goal, backers may not receive promised rewards or receive refunds on their contributions.

Another disadvantage of crowdfunding is the competition for the attention of a variety of projects and campaigns. It can be difficult for a new crowdfunding project to stand out from the crowd and gain enough support. This is especially true if there are similar projects or campaigns running at the same time. 

Finally, there is always the risk of fraud. While crowdfunding platforms only advertise projects that are serious, unscrupulous individuals may nevertheless launch fake campaigns and collect funds from supporters without fulfilling their promises. As a result, it’s important that backers thoroughly research and review the projects they are considering funding before contributing.

More on Crowdfunding Your CompanyVenture Capital vs. Equity Crowdfunding: Which Is Better for Your Business?


Examples of Crowdfunding 

Here are a few examples of some of the most successful crowdfunding campaigns that have taken place over the years. 

  • Oculus VR, a virtual reality company raised over $2 million on Kickstarter. Soon afterward, Facebook (now Meta) acquired Oculus for $2 billion.
  • Pebble Time is a smartwatch that raised over $20 million on Kickstarter.
  • Exploding Kittens, a card game, raised over $8 million on Kickstarter.
  • Kingdom Come: Deliverance, a role-playing video game from Warhorse Studios, raised over  £1 million on Kickstarter, which allowed the developers to complete the game and release it to the public.
  • The Coolest Cooler, a cooler with built-in bluetooth speakers, a blender and other features, raised over $13 million on Kickstarter. The campaign quickly went viral making it one of the most successful campaigns in Kickstarter history at the time. However, the project encountered many production delays and cost overruns. This resulted  in a long delay in delivering the product to backers. The company also faced several manufacturing and supply chain issues which led to increased production costs and further delays in delivery. As a result, Coolest Cooler became one of Kickstarter's largest failures. 
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Crowdfunding vs. Crowdsourcing 

Crowdfunding and crowdsourcing are related but different concepts.

As explained earlier, crowdfunding refers to the practice of raising funds for a project or idea with small amounts of money from a large number of people, typically online. Crowdfunding is a way for project developers to secure funding while building a community of supporters around their idea. In return for their contribution, backers usually receive rewards or gifts.

On the other hand, crowdsourcing is the practice of outsourcing tasks or projects to a large, undefined group of people, usually also over the internet. Crowdsourcing is not about receiving financial support to implement a project, but about securing active input or support for a project from a large number of people. The primary goal of crowdsourcing is to use the collective expertise and creativity of a large group of individuals to gather or implement ideas for a project.

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