What is Crowdfunding?
As an entrepreneur, your quest for funding may take on several forms before your app ever reaches market. If you have had any success with the Friends and Family Round, you have likely generated enough of an investment to begin development of your app.
So what do you do once you've used up the relatively small capital generated by the Friends and Family Round?
Crowdfunding is the logical next step in your quest for funding. Born on the web and powered by “the crowd,” crowdfunding is a powerful fundraising tool that has steadily increased in popularity since it's inception. The process generates capital from investments made by users of crowdfunding platforms such as Kickstarter and Indiegogo.
The fundraising process doesn't vary significantly among the competition. There are, however, differences in the way that associated fees are handled, and in the requirements that must be met in order for a campaign to actually receive the generated capital.
What are the benefits?
One thing that makes crowdfunding such a powerful fundraising tool is it's userbase. While your family and some of your friends might not understand your vision, the crowdfunding community is much more likely to.
“Backers pledge money for different reasons. Some backers are rallying around their friends' projects. Some are supporting people they've long admired. Many are just inspired by a new idea. made, a limited edition, or a custom experience related to the project. ” – Kickstarter.
The popularity of the process means that there are a lot of potential investors patrolling the various crowdfunding platforms. This means that your project is likely to get noticed by members of the “crowd.” The vast user-bases of these sites also means that the amount of capital that you are able to generate can be quite large, or quite small, depending on your needs.
What are the risks?
The crowdfunding round is among the least risky fundraising techniques at your disposal. Depending on your choice of platform, there may be no risks involved what-so-ever. Most crowdfunding platforms take a percentage of your earnings when you reach your goal. It would be beneficial to keep this in mind when determining your campaign's minimum investment requirement.
Some campaigns offer you a choice in the way that the funding process is conducted. Indiegogo, for example, gives you two options: flexible funding, and fixed funding. Both options take 4% of your earnings if you reach your goal amount. Should you choose flexible funding, however, 9% of your earnings are kept by Indiegogo if you do not reach your goal. With fixed funding, however, if you do not reach your goal, you keep nothing, and Indiegogo returns all of your earnings to the investors.
This is something you should keep in mind as you plan out your fundraising strategy – you may end up with insufficient funding if you do not reach your goal, and an additional 9% is taken from that amount.