What Is Crowdfunding and How Does It Work?

Crowdfunding is a popular method for entrepreneurs, nonprofits, artists, and individuals to raise capital and support for their projects. It can help a startup get off the ground, provide small business owners with enough funding to open their doors, or support nonprofit disaster relief efforts. 

While crowdfunding offers an excellent opportunity for funding and community engagement, it also demands careful planning, strategic marketing efforts, and intentional delivery on promises to maintain trust and credibility. 

Want to know how to incorporate crowdfunding into your fundraising strategy? Below, we cover what crowdfunding is, how it works, and the best crowdfunding websites for running your campaign.

What is crowdfunding?

Crowdfunding is the practice of raising small amounts of money from a large number of people. The total raised typically funds a specific project, goes toward general donations for a worthy cause, or drives support for a time-based initiative. Depending on the campaign’s organizer, it may also support a new business venture or product launch. 

How does crowdfunding work?

A crowdfunding campaign is usually conducted online through a fundraising site to garner support for a set goal. 

Regardless of your goal, the key to crowdfunding success is engaging the right people in meaningful ways. Before you begin, identify your target audience: What are your supporters’ preferences, tendencies, and behaviors? 

Keep these in mind throughout your campaign and as you follow these five steps.

1. Select a crowdfunding platform

Are you unsure which crowdfunding platform to use? Here are three recommendations to consider.

Recommendation #1: Evaluate the fundraising platform’s pricing and fee structure

• Credit processing fees. A small percentage of each monetary gift to a crowdfunding campaign goes to the online platform hosting the campaign’s processing service. The fee covers data transmissions, transaction authorizations, and funding deposits. We recommend looking for a crowdfunding site that offers donors the choice to cover processing fees.
• Percentage platform fees. While the percentage can vary from platform to platform, most services make their revenue by deducting a fee from the total amount raised. Consider how these fees could impact your fundraising goal.

Recommendation #2: Investigate ease of use and customization options

• Ease of use. A fundraising platform should keep things simple. The less time you spend building, updating, and optimizing your crowdfunding campaign page, the more time you have to raise money.
• Customization options. Consistent branding on your crowdfunding campaign helps create an identity for your organization. Advanced customization options allow you to easily communicate your values, clarify your call to action (CTA), and tell your nonprofit brand story to anyone who visits your donation website.

Recommendation #3: Identify available resources and customer service offerings

• Accessible resources. Potential fundraising platforms should offer online tutorials, resource guides, or FAQs. Easy-to-access tools can save you time throughout your crowdfunding campaign.
• Attentive customer service. If you have a problem during your crowdfunding campaign, you’ll want to know someone is there to help. Contact customer support before selecting a fundraising platform to ensure its team is helpful and responsive.

Bonus: Use Classy for customizable, conversion-friendly nonprofit crowdfunding

Thousands of the world’s top nonprofits use Classy from GoFundMe to activate support with flexible, conversion-optimized nonprofit crowdfunding campaigns. Our suite of user-friendly tools, powered by Classy Studio, elevates nonprofit crowdfunding campaigns with:

• Highly configurable pages that tell your story and show progress toward your goal 
• Real-time, responsive metrics to add anywhere on your site or thank-you page
• Highlighted sponsor matching with set minimums and multipliers
• Predictive insights with artificial intelligence (AI) and machine learning (ML) products built on a breadth of data intelligence that other nonprofit technology can’t match
• Flexible payment options through Classy Pay, including digital wallets, ACH, Venmo, PayPal, and more

2. Get accepted by a fundraising platform

While not always the case, some platforms may require you to complete online forms and provide documentation before you’re accepted to host your crowdfunding campaign on their site. This process ensures you’ve met the platform’s requirements and will use it as intended.

Requirements vary from platform to platform, but here are a few examples:

• Must be 18 years of age or older
• Must be a permanent resident of one of the eligible countries
• Must have an address, bank account, and government-issued ID based in the country you create the project in
• Must have a linked bank account that belongs to the person who verified their identity for your project
• Must have a major credit or debit card

3. Pitch your crowdfunding project

Once a fundraising platform accepts you, you may have to pitch your project to their team to ensure it’s a good fit. Be prepared to answer questions, such as:

• What are you trying to accomplish? 
• How much are you hoping to raise? 
• How do you plan to solicit support?
• Why is this initiative so important?

Prepare for this pitch by identifying your campaign narrative and laying out your marketing plan, similar to how you would promote your organization through word of mouth, social media, and paid ads. 

You’ll use this same information to drive donations to your campaign. Think of this pitch as an opportunity to sell your story and gain support from donors, accredited investors, family members, or others who feel passionate about your initiative.

4. Conduct your campaign

Once you’re approved and ready to go, it’s time to run your campaign. Start by building an attractive campaign page. Use compelling imagery, engaging video snippets, and a detailed narrative to tell your story and build your case for donors. When people land on your page, you want to quickly draw them into your cause and streamline the giving process.

After you’ve built your site, pair its launch with effective marketing strategies to get as many eyes on your page as possible. Share the crowdfunding project on social media, run an email campaign, and collaborate with any partners who can help spread the word further. If you’re a nonprofit on Classy, you can leverage our nonprofit social sharing integration with Meta to make it easier for donors to find, share, and support your cause on their preferred channels. 

Throughout the campaign, track your progress and share updates with your audience. A fundraising thermometer is a great way to motivate donors to help you meet your goal.

5. Receive payout from your crowdfunding campaign

It’s critical to know that some platforms will pay out all the money you raised regardless of the final total, while others may only offer a payout if you reach your fundraising goal. 

The pricing and fee structure will also affect the percentage of funds that land in your organization’s bank account. To raise as much money as possible, ensure the platform you select doesn’t have fine print that could interfere with your success.

What are the different types of crowdfunding?

While all crowdfunding efforts aim to collect donations toward a set goal, there are crucial distinctions to understand.

Rewards-based and equity-based crowdfunding

When someone contributes funds in exchange for something, it falls into the rewards-based crowdfunding bucket. This is typical for startups that might offer free swag or a discounted service. Similarly, equity-based crowdfunding, or equity crowdfunding, allows small businesses and startups to give away a portion of their business in exchange for funding.

Donation-based crowdfunding

The simplest type of crowdfunding is donation-based crowdfunding, which means someone gives money for nothing in return. While seemingly lackluster for the donor, this type of crowdfunding can be extremely rewarding. It attracts loyal supporters who are passionate about your work and may choose to give again.

What are the most common use cases for crowdfunding?

Small businesses, research institutes, nonprofits, and individuals are just some of the groups that may choose to run a crowdfunding campaign. Below, we look at the most common applications of crowdfunding and how to successfully bring each strategy to your organization.

Philanthropy

Demonstrated by global giving initiatives like Giving Tuesday, crowdfunding has proven its impact on the long-term health and sustainability of nonprofits worldwide.

A nonprofit crowdfunding campaign inspires support for your cause with a robust narrative to drive people to make a gift. It consists of a campaign landing page that highlights your impact and draws people in, as well as a donation form to facilitate the transaction process.

Crowdfunding campaigns create a sense of urgency with your target audience and motivate immediate action. Common nonprofit crowdfunding applications include:

• General donation fund
• Time-bound project
• Disaster relief

These crowdfunding examples do a great job of showing how nonprofits leverage crowdfunding campaigns to achieve their goals.

Science

Early-stage scientific research can be challenging to fund, as many foundations or government agencies want to see a proof of concept before awarding a grant. Crowdfunding can fill this gap, supporting impactful experiments that may otherwise be impossible. 

To do so, researchers or other interested parties pitch a proposal to gather support through a crowdfunding page. Patients, medical professionals, and individuals with a strong belief in the topic can then donate online to the project. This broad support allows scientists greater intellectual freedom and independence and provides them with an opportunity to build credibility.

Experiment is a crowdfunding platform that specifically focuses on fundraising for scientific causes. In one instance, the site helped researchers raise 121% of a $5,000 goal to support an effort to study how plastic-metabolizing bacteria could create the next generation of probiotics and therapies to combat microplastics in the human bloodstream.

Startups

Rather than depending on traditional funding sources, startups can get their businesses off the ground by leveraging crowdfunding investments from friends, family members, entrepreneurs, and venture capitalists.

Crowdfunding makes it easier for startups to amass capital and market their new business to larger audiences. Investors that involve their finances want to see a company well, making them eager to spread the word about your new products and initiatives.

Startups typically offer investors something in return, most commonly through rewards-based or equity-based crowdfunding. They use social media and crowdfunding websites to educate primary and extended networks about the opportunity to fund the emerging business.

Oculus, a virtual reality headset, began on a crowdfunding site. Within two hours of launching the campaign, the startup exceeded its $250,000 goal and ultimately raised over $2.4 million.

What are the top crowdfunding sites?

When looking for people to help fund a new project or business venture, it’s crucial that the transaction process is as seamless as possible. Below, we summarize four of the best crowdfunding sites to help you understand what makes each unique.

1. GoFundMe

GoFundMe is the trusted leader in online fundraising, connecting more than 150 million people and organizations through its mission of helping people help each other. Since 2010, GoFundMe and Classy from GoFundMe have enabled more than $30 billion of generosity for individuals and nonprofits.

Complete with a 0% platform fee, GoFundMe can help individuals reach their fundraising goals by offering support in difficult times.

2. Classy from GoFundMe

Classy’s fundraising platform, built for nonprofits, allows charitable organizations to raise more with compelling crowdfunding websites that inspire generosity through connection. Powered by Classy Studio, nonprofits can easily:

• Customize campaigns for consistent branding and communicate a clear, compelling mission to supporters through impact tiles, videos, text, and images.
• Motivate donor action through real-time, responsive metrics to add anywhere on your site or thank-you page.
• Amplify giving by showcasing matching opportunities and employing match multipliers and qualifying minimums.
• Acquire predictive insights with AI and ML products built on a breadth of data intelligence that other nonprofit technology can’t match.
• With mobile-optimized campaign pages, preferred payment methods, and Intelligent Fraud Protection, you can make fundraising easy and secure for supporters.
• Foster connection and viral support with a live list of donation activity, comments, and reactions.

3. Indiegogo

Indiegogo offers the tools to set up a 60-day campaign to help raise funds and garner support from potential investors. By giving entrepreneurs a platform to introduce clever or unconventional products to the world, Indiegogo fuels innovation.

Indiegogo’s crowdfunding campaigns allow entrepreneurs to get curious and creative while providing early backers and angel investors a place to discover groundbreaking products before mainstream availability.

4. Kickstarter

Kickstarter is a place for creatives to share their business plans with communities that will support them. No matter how big or small, Kickstarter wants to help creators of all kinds, including filmmakers, artists, musicians, designers, and more. Crowdfunders can easily spread the word about their new projects and welcome individual investors to join.

Crowdfunding FAQs

Here are a few answers to frequently asked questions about crowdfunding to help with planning your next fundraiser.

1. How much money can you make through crowdfunding?

Crowdfunding campaign revenue varies from hundreds to millions of dollars depending on multiple factors, such as goals, causes, and platforms. 

One source found that the average amount raised for a successful crowdfunding campaign for an individual was $568, with an average donation amount of $99. The source also reported that the average amount a nonprofit raised through crowdfunding was $9,237, with an average donation amount per individual of $66.

As the popularity of crowdfunding campaigns continues to expand, these averages are likely to fluctuate.

2. What’s the difference between peer-to-peer fundraising and crowdfunding?

While crowdfunding campaigns and peer-to-peer fundraising both involve raising money to achieve a funding goal, the primary difference is how the funds are solicited. The main CTA for a crowdfunding initiative is to donate, while the purpose of peer-to-peer fundraising is to ask supporters to fundraise on behalf of an organization.

With crowdfunding vs. peer-to-peer fundraising campaigns, each includes the option to complete a one-time donation, but the goal of a peer-to-peer page is to recruit individuals who will appeal to their personal networks.

3. What is the difference between crowdfunding and a loan?

Private companies may take out a business loan to cover various expenses when getting started or needing an influx of cash for expansions. Businesses typically secure a loan through a bank after completing an application process to assess the company’s creditworthiness. The business must repay the loans over a set period, including an interest rate on the borrowed amount of money.

Crowdfunding is another way businesses can secure startup money or otherwise fund new initiatives. Individuals interested in investment opportunities provide venture capital to the company through a crowdfunding site. In return, they often receive incentives like the company’s new product or an equity share. 

Crowdfunding can also support peer-to-peer lending, where investors eventually get paid back, similar to a loan. The Securities and Exchange Commission regulates crowdfunding investments.

4. How do I tell a good story for a crowdfunding campaign?

Nonprofit storytelling is a huge part of creating meaningful connections with supporters. Rather than simply informing people about why your campaign is critical, use sensory, descriptive language to create a felt experience.

Keep your text short and include compelling imagery, like photos or videos. Clarify the tangible impact of each contribution and focus on one clear CTA that will drive conversions.

Start crowdfunding today to rally support around a good cause

Crowdfunding is a central fundraising model worldwide. These campaigns serve as a tool to bring personal projects to life and a powerful way for impactful organizations, creators, and businesses to share their stories. It can help fund programmatic and operational initiatives with the support of an extended network.

Copy Editor: Ayanna Julien