Why it works: The reasons behind the rise of crowdfunding

What is crowdfunding?

Crowdfunding refers to the practice of asking for modest financial contributions from a large pool of individuals in order to raise money for a given project.  Entrepreneurs appeal directly to the masses instead of relying on traditional investors such as banks, angel investors or large corporations.

It’s a high-risk endeavour, and many crowdfunding campaigns don’t reach the instant success they were hoping for.  But there’s no shortage of inspiring crowdfunding success stories, projects that were able to come to fruition thanks to the collective effort of thousands of individual investors.

There are several factors that explain the huge popularity boom that crowdfunding is experiencing today.  Understanding them can help you form an idea of how to leverage the crowdfunding model to your advantage, whether you’re an investor or an entrepreneur.

Worldwide reach

Because crowdfunding is almost always internet-based, projects have the potential to reach a global audience.  The only restrictions come from local laws that might prevent certain types of crowdfunding, such as equity crowdfunding.  But as crowdfunding gets more and more popular, these barriers are disappearing.

This is good news for products that might turn out to be wildly popular in a country that’s not your own – for example, think of the potential for someone from a developing country to raise money from a market in a country whose citizens have more capital to invest.  The possibilities are endless.

Opening up investment possibilities to a larger audience

In the past, artists and innovators were forced to approach huge companies to request funding for their projects.  Many projects that later became successful were initially rejected – Harry Potter was refused by twelve publishers and would have been refused by Bloomsbury were it not for the recommendation of the chairman’s 8-year-old daughter!

This example just goes to illustrate the possibilities that open up when we don’t limit investment choices to a handful of banks, angel investors or CEOs of major corporations.  In giving a voice to a diversity of people, crowdfunding has helped more than one small project turn into an international phenomenon.

Snowball effect: Making a difference with just $10

Much as we would like to, not all of us have thousands of dollars to invest in a worthy cause.  Crowdfunding provides an opportunity for would-be investors with limited capital to still make a small contribution to the project of their choice.  These investors can also feel good knowing that the social proof provided by their investment might inspire others to have confidence in the project and help the project gain market traction.

Cutting out the middle man: Empowering entrepreneurs and investors

Crowdfunding allows entrepreneurs to reach out directly to potential investors.  Part of the reason this model works so well is because people love to feel like they’re a part of something exciting.

Pushing a successful crowdfunding project involves a significant time commitment for the entrepreneur, who takes on the responsibility of raising awareness about the project instead of delegating this task to a marketing team.  But it builds a more personal bond between entrepreneur and investor, strengthening investor loyalty and opening the possibility of finding early adopters for the product to help build credibility.

Wide reach: Crowdfunding as a marketing tool

In a similar vein, crowdfunding is hailed as a great way to raise money, but it serves the equally useful purpose of being a phenomenal marketing tool.  Instead of pitching an idea to the R&D departments of a few specific companies, entrepreneurs pitch their ideas to millions of people, spread the word on social media and sometimes even receive media coverage.  They will already have an enormous advertising base even before the product is launched.

There’s another advantage to this wide reach: many crowdfunding projects have been successful not only because they raised money from a large group of people, but also because they asked for – and received – feedback from their investors.  Asking for advice during the crowdfunding process makes investors feel more engaged and empowered, and might even lead some golden ideas.

Crowdfunding is also a powerful market research tool, as the very nature of crowdfunding allows entrepreneurs to get valuable insight into their target market.  By monitoring how people respond to a pitch and which demographic seems to invest the most, an entrepreneur can ultimately tailor their final product to the kinds of people who are most likely to buy it.

How do the benefits of crowdfunding apply to artificial intelligence projects?

Artificial intelligence is still an up-and-coming market, albeit a fast-growing one.   Dominated by startups, it’s a tricky market to navigate, with a relative lack of blue-chip companies to invest in.  Crowdfunding allows investors to avoid putting all their eggs in one basket, while still giving them the chance to back the projects they’re somewhat confident in.

On the entrepreneur side, crowdfunding is a way to reach investors on a global scale.  We are confident that a platform like Crowdfunding.AI that targets investors with a special interest in artificial intelligence can help boost the success rate.