Crowdsourcing vs Crowdfunding for Startups
Startups face a lot of challenges, including standing out from the competition with fresh, unique ideas and obtaining enough capital to bring those ideas to life.
So when startup leaders are feeling a little stuck, they may turn to crowdsourcing and crowdfunding to help move their business forward. These two terms are often used interchangeably, but there are major distinctions between crowdsourcing vs. crowdfunding.
So what is the difference between crowdsourcing and crowdfunding? Learn how they differ, plus find out the benefits of each for startups.
What is Crowdsourcing?
Crowdsourcing is when an individual, organization, or business taps their audience or a large group of people for ideas. The process involves collecting information and feedback from the audience, or crowd, to influence a business decision, whether that’s choosing a new company logo or deciding what product or service to offer in the future.
The crowdsourcing process can be done in several different ways, from sending out surveys and feedback forms to hosting a competition or allowing the audience to vote on their favorite ideas. These opportunities may be unpaid, or businesses may offer incentives or monetary prizes to participants.
What is Crowdfunding?
Crowdfunding is when an entrepreneur or company asks their audience for funding to help start the business or further a project. Unlike going through series funding to secure funding from angel investors, venture capital firms, or bans for larger amounts of funding from fewer sources, crowdfunding involves raising funds in smaller individual amounts from a larger number of sources. This can be a good option for the two in three startups that don’t make it to Series A funding or later stages.
With crowdfunding, a startup may offer certain perks and incentives or even equity to supporters in exchange for the funding. For example, a company may offer early access to a new product or service that the funding is helping launch.
[Learn more about Dawn Dickson’s crowdfunding story in more detail as she was featured in season 2, episode 1 of “Spiraling Up.”]
What is the Difference Between Crowdsourcing and Crowdfunding?
Although both of these terms involve drumming up support from a crowd, the biggest difference between crowdsourcing vs. crowdfunding is the type of support you’re seeking. With crowdsourcing, you’re looking for ideas, while crowdfunding is the process of raising money from supporters.
Because of this distinct difference, crowdsourcing and crowdfunding may work best for different businesses or organizations.
Who Uses Crowdsourcing?
Any company, new or long-established, can use crowdsourcing to get feedback and inspiration for their business.
For instance, Lay’s has grown a popular “Do Us a Flavor” campaign, where they have customers submit new flavor ideas in a contest where the winners have their customizations made into Lay’s newest potato chip flavor, in addition to winning money. In the first year alone, the new flavor led to an 8% increase in sales after the contest ended.
Who Uses Crowdfunding?
Crowdfunding is common for startups that need to raise money to get the business off the ground. Charitable organizations may also use crowdfunding to raise donations for a specific cause.
One successful crowdfunding case study is for GoSun, a solar appliance company. Founder Patrick Sherwin has used the platform Kickstarter to crowdfund for several GoSun products, such as its solar ovens and solar coffee maker. For their investments, supporters have received gifts ranging from recipes and T-shirts, to the company products, to events with the GoSun team. Now, the Ohio-based company has partnerships with retailers like REI and Home Depot, and sells products internationally. According to PitchBook, the company’s latest crowdfunding deal earned $2.8M.
Benefits of Crowdsourcing vs. Crowdfunding
For startups, there are several potential benefits of both crowdsourcing and crowdfunding. When you need to improve a product before launching it or you want to raise funds to start developing your next big idea, crowdsourcing and crowdfunding can help you launch existing ideas, develop new products or services, and even grow your audience.
Crowdsourcing Benefits
Crowdsourcing can be used in so many ways for a business, from collecting referrals when hiring new employees, to hearing feedback from customers on new products.
If you’re preparing to launch a new product or service, you can offer early access to certain customers—for example, those who are part of your newsletter list, in exchange for feedback. This can help refine the product or service and make it as good as it can possibly be before hard-launching it to the general public.
Startups can also use crowdsourcing to get entirely new ideas. For instance, a candle company might ask audiences what types of scents they’d like to see from the brand. When you tap into an audience of people with different experiences and preferences, you can get broader, more diverse perspectives and ideas.
Looking to generate some excitement and buzz for your brand? Crowdsourcing can do that, too. Launching a contest with prizes that doubles as a way to generate new ideas from the audience can pique the interest of more people, which will help get your brand’s name out there.
Once you do see audience growth, it’s probably time to start looking for talent to help maintain day-to-day operations. While you can put out job postings, you can also ask your audience for referrals. Not only may you find top talent—you can also find candidates that are likely also big fans of your company already.
Crowdfunding Benefits
In North America alone, about $17.2B is generated each year from crowdfunding campaigns. Clearly, this method is beneficial financially, as it offers an alternative method to raising funds rather than pitching to venture capital firms or applying for small business loans. But crowdfunding can help your business in more ways than one.
Crowdfunding can help you earn capital quickly compared to pitching to investors or applying for loans. While a Series A round can take about 1 year to 18 months, and securing a small business loan takes a few months, successful crowdfunding campaigns last about 30 to 40 days. Additionally, startups may not need to provide credit history or credit score information to start a crowdfunding campaign, which can be helpful if this is a barrier to other funding options.
With a crowdfunding pitch, you’re not just laying out a business plan to potential investors. At the same time, you are marketing the products and the brand. The investments you make to prepare to crowdfund can pull double-duty as part of your marketing campaign, too, since you’ll be pitching to potential customers.
As such, crowdfunding can also help you grow your audience as you try to reach more potential supporters. Because they’ve contributed some of their own money to your business, they may also feel a stronger connection to the brand. This can lead to stronger audience engagement.
How to Crowdfund as a Startup
If you want to try crowdfunding as a startup, you’ll need to plan out what you’re fundraising for, the type of crowdfunding you need, and which platform works best for your goals. From there, you’ll need to prep a campaign, communicate with supporters, and follow-up after the campaign ends.
1. Choose a Crowdfunding Type
There are four common types of crowdfunding:
- Donation
- Equity
- Rewards
- Debt
Depending on what you are raising funds for, that will determine the type of crowdfunding you want to pursue.
Donation crowdfunding is when supporters offer funding and do not expect returns. This type of crowdfunding is commonly done by charitable organizations. Equity crowdfunding offers supporters a small share of equity in the company in exchange for their financial support, much like securing investments from investors or venture capital firms.
Rewards crowdfunding is when a startup offers exclusive perks, like discounts, products, or “swag” merchandise, to supporters in exchange for their donations.
Debt crowdfunding refers to collecting funds from supporters with the expectation you will pay back the supporters, plus interest. This is similar to getting a bank loan for your business.
You need to know the crowdfunding type in order to choose the right platform, as different crowdfunding platforms may only support specific types of funding.
2. Find the Right Platform
When you know what type of crowdfunding you’ll be pursuing, you can better find the platform that works for you. Some popular crowdfunding platforms today include Kickstarter, Indiegogo, Fundable, GoFundMe, Patreon, and StartEngine.
Kickstarter, Indiegogo, and Patreon are popular platforms that support rewards crowdfunding. GoFundMe is often used for donation crowdfunding, while Fundable is a startup crowdfunding platform offering rewards or equity crowdfunding.
There are over 1,468 crowdfunding companies in the U.S. alone, and these offer varying functions and success rates. Make sure to research and check reviews to find out which platforms work best for your mission.
3. Set the Time Frame and Goal
Successful crowdfunding campaigns are usually about 30 days, but different crowdfunding companies may have more information about the best time frames for their specific platforms. You’ll also need to set a financial goal, keeping in mind that the average successful crowdfunding campaign raises about $28,656.
Many platforms refund donors if you don’t hit the monetary goal within your target time frame, while some platforms let you keep the funding if you pay a fee. Either way, you want to do research in advance to determine a realistic financial goal that is attainable and will help you with your mission.
4. Keep an Active, Updated Campaign
With the campaign up and running, make sure to stay active during the time frame. Be sure to post updates on your progress on the campaign page, and answer any questions that supporters may have. The more active and transparent you can be during this time, the more supporters can trust you.
5. Follow-Up Promptly
Once the campaign ends and you meet your goal, make sure to start sending out product or offering services by the deadline you agreed upon. If you delay, or worse, avoid following up at all, your brand will lose trust and could fail to raise sufficient funding in the future.
How to Crowdsource as a Startup
Crowdsourcing can look like many different ways. You can utilize surveys, research groups, or feedback forms to get into the heads of your audience and help inform future business decisions. Or, you can organize a bigger marketing campaign that calls for people to share their ideas on social media or send in ideas as part of a competition for prizes.
Aside from collecting ideas, feedback, and data through crowdsourcing, startups can also use crowdsourcing for talent acquisition. For instance, you can offer referral bonuses to employees that refer you to new hires. You can even use social media to let your loyal followers know you’re seeking talent, which could land you not only qualified candidates but also brand enthusiasts.
Grow Your Startup Business with Crowdfunding and Crowdsourcing
Crowdfunding and crowdsourcing aren’t the same thing, but they can both be beneficial to your startup. When you need inspiration to come up with new products or find a brand logo that suits your business, you can use crowdsourcing for help. This method can even help you acquire top talent in your industry or gather audience data to track trends and inform future business decisions.
Crowdfunding is a funding option for startups. While you may not make millions by crowdfunding, it can help supplement your capital and help you raise money for specific goals, like developing your next product.
From growing an audience to expanding the company’s offerings, crowdfunding and crowdsourcing are both useful tools for startups to consider when they’re ready to level up.