Crowdfunding by Tim Smith

TL;DR - Definition, explanation, and examples of crowdfunding

Helpfulness - 5

Tags - crowdfunding, investment, financing, initial capital, startups, successful crowdfunding projects

Questions answered:

  • What is crowdfunding?
  • How does crowdfunding work?
  • How do investors benefit from crowdfunding?
  • What are some examples of successful crowdfunding projects?

Summary:

  • Crowdfunding is a fundraising method in which founders raise capital from a large pool of individuals using social media and crowdfunding websites.
  • Restrictions apply to who can fund a startup and how much they can invest, to prevent unsophisticated/non-wealthy investors from putting too much of their savings at risk.
  • Crowdfunding provides a forum to anyone with an idea to pitch in front of waiting investors.
  • Crowdfunding sites generate revenue from a percentage of the funds raised.
  • Popular crowdfunding websites include: Kickstarter and Indiegogo.
  • There are two crowdfunding models: fixed and flexible.
    • Flexible model: allows founders to receive funds as they come (easier and less risky for founders).
    • Fixed model: releases funds only after the campaign has reached its funding goal (less risky for investors).
  • Rewards-based crowdfunding means investors may get to participate in the launch of a new project or receive a gift for their investment (e.g. advance copies of a new video game to those who invested in the video game startup)
  • Equity-based crowdfunding allows startups to raise capital without giving up any control to VCs and also offers investors the opportunity to earn an equity position in the startup (regulated by the SEC in the US).
  • Examples of successful crowdfunding projects:
    • Oculus VR (an American VR hardware and software startup) raised $2.4 million (ten times the original goal of $250,000) to make VR headsets in 2012 and was acquired by Facebook, Inc. in 2014 for $2.3 billion.
    • M3D (3D printer startup) raised $3.4 million for their Micro 3D printer in 2014 and currently has sales ranging between $10 and $15 million.
    • Critical Role (a weekly live-streamed tabletop roleplaying game) raised $4.7 million in 24 hours.

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