Crowdfunding started small but in a short time has grown into a big business in its own right and has achieved great things. So how does a funding platform that raised US$30 billion in funds in 2015 really work?

Quick takeaways if you’re in a hurry

• Crowdfunding is a growing industry and connects those who need funding with those who have funds to offer
• Although crowdfunding grew to raise over US$30 billion in funds, recent research of five major crowdfunding sites shows that only one third of campaigns actually reach their targets
• Angel investment and banks still play an important part in the investment world, from both a financial and business advice perspective.

Read on: Crowdfunding insights for business owners

[estimated reading time: 8 minutes]

The investment market has changed. With the continuing evolution of crowdfunding comes even more ways to raise money and start a business. But is crowdfunding a start up solution for everyone?

What is crowdfunding?

If you are a non-profit organisation, musician, artist, or business, you may have explored or benefited from crowdfunding. Crowdfunding makes it possible to raise funds by accepting small donations from a large number of people – the ‘crowd’.

For businesses, crowdfunding can support various stages of development. From exploring the initial idea through to funding for manufacturing or expansion. Everything takes place online through a crowdfunding website – of which there are many. Some media sources predict a range of over 2000 crowdfunding websites to choose from by the end of 2016.

In 2015, crowdfunding raised funds of over US$30 billion, a staggering increase on the US$16.2 billion in 2014. The 2014 funding level was itself a 167% increase on 2013. There is no doubt that crowdfunding as a business is on a path of exponential growth.

Crowdfunding is effectively the social media of the investment world. It builds connections between those who have money to invest and those who require investment. Investors may previously have been perceived as difficult to access but crowdfunding has broken down the barriers.

Crowdfunding vs traditional investment: cultivating a pitch

Different sites specialise in different types of crowdfunding. Certain products and services experience greater success with funding on some portals over others. Crowdfunding has grown into a diverse and productive industry. And with it it has brought changes to the way that funding is sought. Where previously seeking angel investment or bank support required a one-to-one pitch, now there is an art form being cultivated in pitching to the masses.

Gaining investment has always been a matter of presenting a need, a strong idea to meet the need, and an opportunity to build a business upon it. Increasingly it includes pitch videos, smart communication tools, and the ability to build appeal across diverse groups and characteristics.

The real results of crowdfunding

Get it right and those seeking funds could be facing equity well beyond their wildest dreams. This is the much publicised face of crowdfunding: the success stories and the businesses who exceed their equity targets.

But those who get it right are in the minority. A report from UK-based research company The Crowdfunding Centre showed that less than a third of crowdfunding campaigns actually reach their goals. The report – which focuses on the activity of five major crowdfunding websites in 2015 – demonstrates the importance of quantity of appeal over the size of individual contribution. Average number of backers per campaign ranges from 20 to over 100, while the average pledge ranges from $91 to $113.

The considerable investment in building an effective pitch does not guarantee success. For some crowdfunding platforms such as Indiegogo it’s still possible for a business to take away any funding raised, even if targets haven’t been achieved. However Kickstarter and others like it only release the funding once targets are met: falling short means that funds are returned to the donators and the pitch returns to square one.

Of course the process itself does yield valuable information regarding the levels of interest of investors (or customers) in the potential of the business whether the pitch is successful or not.

A valuable investment in getting it right

For those keen to fine tune their pitch there are numerous crowdfunding events and summits available. These create a forum where entrepreneurs talk about their own success and share their insights into building effective pitches. This includes not just how to structure a pitch and what information to focus on, but also which platform to use for different types of pitch. Attendees can benefit from networking opportunities and shared insight into regulatory restrictions or new legislation.

A key disadvantage of crowdfunding is the loss of expertise that comes from the switch to mass investment. A common benefit of investment from banks or angel investors is the expertise and mentorship that comes with it. Crowdfunding may be giving many start ups access to the cash they need to function in business, but it’s happening in isolation from valuable advice.

There are many stages of business where capital investment is required. Those who are smart and informed will choose carefully which type of investor they pitch to for each stage, in order to maximise the intellectual and financial input into their business.

Crowdfunding is about building connections between those who seek money and those who are looking for investment. It’s not successful for everyone, but there are certainly lots of opportunities to learn the tips and tricks of manipulating this relatively new fundraising space. For businesses who are looking to test their ideas and encourage investment, crowdfunding offers an excellent forum within which they can build the equity their business needs. And for those who succeed in this space, there is great potential to go far beyond their fundraising goals.

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