Crowdfunding is an appeal for financial assistance, investment in a technological startup or idea for the realization of a social project important to people. Fundraising is implemented on the basis of small contributions from a large number of people. This principle is as follows: a huge number of participants are approached with a request or offer to transfer money. As a result, interested investors contribute assets and financial resources, and the initiators realize the project.
Community and Response - the crowdfunding paradigm
Collective participation allows you to get by without going to a bank or looking for a large investor. People united in support groups are joint owners and are grouped according to the principle of commonality. This democratic business concept gave birth to a number of crowdfunding platforms. Their functioning has become a cause of social change and a catalyst for social improvements.
Three options for participation:
- receiving remuneration from the startup by contributing funds during the startup period (creating a source of passive income);
- deciding to become a shareholder - for those who have non-negotiable capital;
- being a philanthropist, altruistically donating to charity.
Changing the paradigm of getting finances is similar to the Russian proverb where everyone who donates a thread gives a shirt to the naked. An appeal heard is the result of communication with the audience, a response in the form of a generous flow of investment.
Rewards, equity and peer-to-peer lending
The investor makes a contribution, the creator of the idea rewards him with new products, personalized goods, unusual paintings. Privilege implies selectivity, so this form of incentives is offered to creative people and innovators - writers, poets, creators of craft drinks and food.
Raising capital from multiple sponsors in exchange for equity - the offer of start-ups or newly established businesses. Prospectivity of the project means getting constant profit for a long time. Diversification is a way to preserve savings, balance the financial portfolio and ensure a steady income in case of success.
Single peer-to-peer lending is crowdfunding, where multiple borrowers lend funds without strict selection and a package of documents, but with the formation of debt. This option often has a loan rate 2-5 times lower than a bank. The lender frequently offers to receive a percentage of the expected profit instead of the loan rate.
Examples of successful campaigns and projects
To ensure that a crowdfunding project works, besides a good idea, you need to make an advertising campaign, create content in text and video format. The goal is to engage people as much as possible. One example of such a successful idea is the Flow Hive. The essence of the Australians' development was to pump out honey without opening the hive. The proposal was designed for amateurs, as the idea is inconvenient to implement on an industrial scale. Startups for a laser multifunctional 3D printer, a Tile reminder gadget, a smart video intercom and a powerful power bank showed high fees.
A well-designed crowdfunding platform is considered to be an intermediary and an assistant. For fundraising services, the resource owner receives remuneration equal to 3-15% of the amount of contributions or donations. To apply for funding, the initiator is required to:
- create a motivating, detailed and understandable presentation of the project;
- define the purpose of financing (to purchase equipment, to launch a production line, to increase production due to the demand for the product);
- specify direct and indirect, additional costs;
- form and create a comprehensive strategy to reach the target audience - advertising campaigns and mailings, involvement of bloggers, own website, blog, Telegram channel;
- to think over rewards and incentives to motivate project sponsors;
- ensure transparent reporting and communication with contributors to maintain trust.
The project, which is both viable and original, generates trust, gathers support groups, strengthens market positions, and is a trigger for coverage on the Internet and in media resources. The sponsors can be seen as the "fathers" of the idea: they get access to the novelty, interact with people generating ideas, expanding their horizons and business vision of the situation.
Profit: business strategies for the crowdfunding platform owner
Indiegogo and
Kickstarter are examples of successful platforms raising significant funds. You can borrow some details of UI/UX design and solutions from them. But it is better to come up with something unusual yourself, with the expectation that it will be useful to customers and ensure monetization. It is necessary to understand what the customer wants and the purpose of the fundraiser - investment, financial and social rewards, preferential treatment, or help in the medical industry.
The platform owner earns by receiving a benefit:
- in the format of % of the money collected (on average 5%, but can be more or less, fluctuate depending on the amount collected);
- when payments are processed and transferred to the account;
- from the commission tied to each transaction - let's say 2.9% and $0.3 for each action;
- from donors' donations to charity in addition to the amount they plan to give (Indiegogo recommends 15%, but this can turn people away if they don't know the person in need personally - like Generosity and YouCaring);
- from soliciting investors, sponsors and campaign creators;
- from renting out crowdfunding campaign software on an entrepreneur's or charity's website, providing a subscription or license (MobileCause and Tilt Pro do this).
- from offering full campaign management, from marketing strategy, process management, organic promotion and contextual advertising to UI/UX design, content writing and filming promos.
The brighter the promotion campaign is and the more people know about it, the better the platform's reputation will be. Let's summarize the key aspects: "important and necessary for people", "there are prototypes", "convenient and promising". A successful solution involves working out values and needs. Let's consider this below.
Psychological and practical rules of crowdfunding
The idea has to speed up the process, saving time and effort. The consumer gets satisfaction in the end, raises his status, feeling respect from others. Supplement - pleasant feelings from the game or entertainment, satisfaction of aesthetic preferences and ethical principles of the individual, improving spirituality. These are included in objective and subjective values.
Components of customer satisfaction - hopes and pleasant expectations, mutually beneficial and psychologically comfortable cooperation, results of the transaction and the resulting partnership. The innovative potential of the idea determines the emergence of symbolism and significance for the consumer.
In order to attract business flows, they use mutual affiliate advertising, cooperation through social networks,
messaging apps and forums, work with a direct manufacturer and use subscriptions to the closed sector with the novelties of the online store. If the crowdfunding plan includes the issuance of shares, it is necessary to profile them with an assessment of possible growth in value.
Streams, taxonomy and interviews
As the results of the Asian segment of investment attraction have shown, investors respond to streamlines, so they can be applied when there is a need to quickly expand a business project or production and maintain liquidity. This is one of the techniques based on heuristic logic with the disclosure of the value of the invention or technology being introduced. Taxonomy is used, briefly and succinctly describing the essence and meaning of cooperation, the formation of a business network and the configuration of processes from producer to consumer.
In addition to streams, it makes sense to involve participants and initiators of the project in interviews, to show which hubs provided the results of collecting millions of dollars. This is especially important for partners who care about their reputation and the profitability of the project at the same time. Analysts take into account the charity index ranking of the country where the fundraising project is to be launched. Thus, in 2023, the USA was ranked 5th in the world.
Plugin licenses, hedonism with altruism, and commercialization
Additionally to providing virtual solutions and plug-ins, the crowdfunding site coordinates donors with initiators, making it possible to achieve not a simple business pipeline with the principle of "will work - won't work", but a multifactor complex solution. Transparency of information about sponsors, monetization of less than 5%, improvement of interaction with clients - these are the tasks facing the creators of the crowdfunding platform business model. For example, after
starting a real estate crowdfunding platform on WordPress, developers connect plug-ins to it and then sell licenses for them, renting them out for a year or other time.
The hedonic type of crowdfunding or AON model does not involve receiving rewards in the form of fiat money. This includes benefits, innovative products,
if the goal of the project is achieved. Otherwise, the investor forfeits everything. The obligations of the donor and the remuneration scheme are prescribed by the inventor and the initiator of the collection. In this case, the final value is considered in terms of benefit to the whole society.
Indexis |
$ |
Financial goal |
120750 |
Required fee amount |
105000 |
Platform commission |
5250 |
SEO |
10500 |
Implementation of an idea (business) |
78750 |
Additional expenses |
15750 |
Remainder |
10500 |
The altruistic version of KIA involves saving everything with a transfer to those in need, whether the goal is achieved or not. The commercial type can apply the principles of both the hedonic model and the altruistic model, but with
the investor making a profit. Therefore, logical design of the platform structure, connecting data libraries, applying an evidence base for the investor, and visualizing costs with expenditures constitute the essence of the strategy.
Two-way interaction and network effect
The five-element concept of a crowdfunding platform's business model includes the bottom line, the provision of needs, the form and type of revenue generation, the place among competitors, and the terms and conditions for providing goods or services. The flexible architecture of process organization and fund flow includes several different, dynamically changing assumptions, customer needs and competitor responses.
Two-way interaction, where demand-side issues and rational proposals are equally put forward by the consumer and the producer, shows that this option is more efficient than the one-way format. Increased transactional activity triggers the network effect. The dominant player in a two-sided market is a platform that acts as an intermediary but not as a conveyor.
A positive network effect means that the number of people using a product or service grows exponentially or "loops"; a negative network effect means that the number of people using the product or service decreases. When positive network effects overlap with each other, they increase cross-impacts within the business ecosystem.
Business Holdings, registration and payment gateway functions
The business idea cycle of a crowdfunding platform. There can be 3-5 or more aspects in it, where each consists of 1-3 business canvases depicting variables and dependent values, factors. Each part of the canvas is painted on both sides. On the top contour, analysts and developers write the goals and market, competitors, demand and prospect, business formed, coming out with a product for sales. The lower outline spells out needs (components, fixed and working capital, assets), digital solutions, benefits and deficits, MVP format, team composition and control. The bottom line is a description of the conditions for sustainability.
Simplified investor registration by phone number or e-mail, or in other convenient ways is mandatory to attract people. Optimized payment gateways conduct transactions of various kinds using bank cards and accounts, through settlement and money transfer systems, payment with cryptocurrency or
tokenization for real estate crowdfunding project. Sometimes it is important to introduce the possibility of micro-donations - conventionally "the price of a cup of coffee". In order to determine how many people will contribute, it is advisable to conduct surveys and studies. For example, in Indonesia, the number of donors reaches 65%, so up to 20% of people can come to the platform with investments.
Remuneration, CFP performance and popular platforms
As far as commercial remuneration is concerned, contributors are offered cooperation on the basis of crowdinvesting (equity), royalties and % (crowdfunding). A CFP with financial and social strategy techniques improves the marketing situation and prevents information asymmetry. Proper financial planning includes selecting the best among asset gatherers, stimulating the interest of responsible sponsors in the IPO, which influences the achievement of a minimum fundraising threshold.
The CFP's tasks include rejecting risky projects, introducing a market mechanism for monitoring investments, attracting business angels, venture capitalists, and institutional funds. Specialists of this level work well in real estate projects - construction, reconstruction, commercial facilities - where there is an opportunity to enter long-term projects with minimal buy-in.
In the U.S., the RegCF is in place, limiting the amount of money collected per year to a limit of $5 million. The SEC is responsible for these processes, obliging you to hire your own intermediary or broker and use a special portal. All platforms operate under this rule, from Kickstarter and StartEngine for startups to Indiegogo, conceived to realize ideas and Patreon, where content creators seek help.
GoFundMe donations are intended for victims of war, fires, natural disasters, and those in need of medical care.
Creating a custom platform and open source option
Thoughtful UI/UX design, creation and
start a crowdfunding platform with subsequent updates, functionality for the administrator's work, providing competent project management, separation of dashboards for backers and admins - key provisions of platform development based on written program code. The easier it is to register users - the better. It's a good idea to consider updating accounts in AppMaster. The sponsor should be able to add a photo or video to the project too.
MVP budget starts from $60,000, a full-fledged platform costs $230,000, which depends on the functionality, complexities in solving issues. So, Theme Forest Fundrize open source template supports JavaScript and CSS scripts, uses PHP and MySQL. It has page editors with built-in elements, software for sliders and fundraising projects, multi-language support is included, communication forms and plugins from the directory work. Adaptation for mobile version and optimization for SEO-promotion, integration via social networks, lack of programming knowledge makes this version preferable and significantly cheaper than custom development.
The budget depends on the stack and the application of White Label
The architecture and stack of Back-End solutions, if the choice is made in favor of
creating a crowdfunding platform with code writing, should have a solid foundation with a marketing budget 2-3 times the cost of the software being developed. Take into account the status of MVP developers: price tags on freelancing and outsourcing are $45,000-60,000, in-house team - up to $180,000, agency - $225,000. Contractors from Asia and Eastern Europe will charge up to $60,000 for 1500 hours of work, Western Europe, Australia and the USA - on average $225,000.
In addition to KYC, the manager and analysts clarify the essence of the UTP (unique selling proposition) and the specifics of raising money, compare it with peers and the software they use, look for growth drivers, and predict in which markets the marketing campaign will work. Attention should be paid to the business model and technical requirements of the interactive prototype. During design development, code is written with mind maps, UX framework and user interface in mind. After that, a web application is created and tested.
White Label crowdfunding platform simplifies the task, when the customer selects the necessary features, scales them and after verification supplements them with new functionality for the client, investor and administrator. Calculator and notifications are among the useful ones. The team should have skills in setting up stacks like Laravel, MySQL and MongoDB, adjusting them, being able to add a link to PayPal or UnionPay, American Express or Payoneer, cryptocurrencies.
The concept of crowdfunding was originally based on the responsiveness and kindness of people, and then the commercial component was added. To be heard, to get access to assets, to realize an idea that benefits humanity - this is the task of a
crowdfunding business. That is why psychological techniques, hedonism and altruism, and their incorporation into business models along with financial rewards are the paradigm of fundraising campaigns.