For starters, crowdfunding projects involve microfinance. By inviting small contributions, crowdfunding lowers the barrier for people to participate. People who perhaps never thought of themselves as investors before can do so now.
Crowdfunding projects must also offer some kind of reward even if it is something intangible like the mere association with the project or a feel good factor. Rewards make the project attractive and having a diverse range of rewards, often based on the amount that an individual pledges, makes it attractive to a larger group of people. Also, all projects must have well-defined targets, which is usually a sum that you want to raise within a stipulated time.
Another key aspect of crowdfunding projects is promotion and marketing. The traditional routes for raising money have been through venture capitalists and angel investors that offer private equity or through plain-old monetary loans from your local bank. An eager entrepreneur approaches these entities with a business plan and has to hope that the person scrutinising every detail of their plan can see that there will be a good financial return for any initial investment.
This is in stark contrast to crowdfunding where, using online social media, the entrepreneur can access hundreds of potential investors through crowdfunding websites, who aren't necessarily interested in making a buck off the back of someone else's talent. This is what makes it one of the most popular non-traditional methods of acquiring funds.
The barriers are down
Unlike the usual funding methods, where the funds come from a single entity or a tightly knit group, a crowdfunding campaign leverages social media to pitch the project to the mass-market for achieving its financial goal. Here modest cash contributions from a lot of people add up to a substantial amount of money.
The most exciting thing about crowdfunding is seeing it in action: "The thing about crowdfunding is that it totally removes all the barriers between the person with an idea and their customer," believes James Carey, designer at Big Robot, developers of Sir, You Are Being Hunted which was funded using a Kickstarter campaign.
"You don't have to convince anyone other than the end user that this thing is worth having. No banks, no focus groups, no grants councils. Because of that, ideas that would never have been seen as viable by 'experts' in a given industry get the chance to exist. In my opinion that's the best thing the internet has done in years," says Carey.
Depending on the type of campaign you are running, people that contribute to a crowdfunding project don't expect a monetary return, shares or even their money back. Instead of treating it as a traditional form of investment, they invest to support a cause or venture they believe in, with the hopes that it will succeed. Carey is of the opinion that one should look at crowdfunding as purchasing, not investment: "People are speculatively shopping. Buying in advance. Pre-ordering."
Another factor that sets crowdfunding apart from the traditional sources for securing funds is the passion of everyone involved. You are pooling funds from people who are passionate about a project or an idea and want to help bring those ideas to life.
In a webinar, one of the oldest crowdfunding platforms, Indiegogo (www.indiegogo.com) advises people to think of crowdfunding as shared enthusiasm and not pan-handling. The whole idea of a successful crowdfunding campaign should be to share the passion that you have for a specific project in order to get the audience excited about it. You are allowing them to look behind-the-scenes and understand why you are so passionate about the project in order to get them onboard and contribute.