What Is Crowdfunding? Definition and Guide

Crowdfunding is the process of raising money for a business, project, or charitable cause from many individual donors – the crowd. Today, online platforms like Kickstarter, Indiegogo, and Crowdfunder make crowdfunding easier by serving as virtual matchmakers.

by Shopify Staff

Last updated Nov 11, 2022

How crowdfunding works

On crowdfunding websites, companies in search of financial support advertise their campaigns and offer rewards to backers – people who are willing to provide some level of funding - for various levels of support. Businesses looking to fund the introduction of a new product typically offer the product itself as a reward for donors who give at a certain level. Higher levels of financial support might net multiple products, a higher-end version, or public recognition.

Most platforms require organizations to set a financial goal for their crowdfunding campaign. They are given 30-90 days, typically - depending on the platform - to achieve that goal. Some platforms transfer all the money raised at the conclusion of the campaign, whether or not the goal has been reached, whereas others, such as Kickstarter, use an all-or-nothing model that returns funds to the individual donors if the goal is not met.

The rationale for that approach is that if the business states that it needs, say, $25,000 to successfully launch its new product, then anything less than $25,000 is not going to be enough. Releasing the amount raised would not make it possible for the project to be successful, so the money is returned to donors.

Ways to get funded

There are two major approaches to funding business ventures through crowdfunding: donation-based and equity crowdfunding. The more common form is donation-based, where individuals chip in a few bucks to support a new product or company in exchange for a perk of some sort. Equity crowdfunding sells equity or debt in the company.

Crowdfunding is an increasingly popular tool for businesses to use to get the financing they need to grow or to introduce new products and services.

Crowdfunding FAQ

What is crowdfunding and how does it work?

Crowdfunding is a form of fundraising that involves raising money from a large number of people, typically via the internet. It can be used for a variety of purposes, such as starting a business, launching a new product, or funding a charitable cause. The process typically begins with the creator of the project, or “campaigner,” setting up a profile on a crowdfunding website, such as Kickstarter or GoFundMe. The campaigner then shares their project’s story, outlining what they are hoping to accomplish and how much money they need to do it. Then, people can make donations to the project, and the campaigner reaches out to their network of friends, family, and social media followers to ask for support. If the project meets its funding goal, the campaigner can receive the donations and use them to fund their project. If the goal isn’t met, the donations are returned to the donors.

Do you pay back crowdfunding?

No, crowdfunding is generally not a loan or an investment, it is simply a way of raising money from many individuals. There is no obligation to pay back the money.

What is an example of crowdfunding?

Crowdfunding is a way of raising money by asking a large number of people to each contribute a small amount. A popular example of crowdfunding is Kickstarter, which is an online platform where people can pledge money to help fund creative projects. Other examples of crowdfunding include GoFundMe, Indiegogo, and Patreon.

How do you make money with crowdfunding?

Crowdfunding is typically used to raise money for a particular project, cause, or venture. Money is typically raised through donations, either in the form of a one-time donation or a recurring donation. Money is also raised through rewards, such as offering exclusive products or unique experiences in exchange for a donation. In some cases, equity crowdfunding is used to raise money in exchange for an ownership stake in the venture.