How Does Crowdfunding Work?

Crowdfunding is different from raising money through friends and family – or applying for a business loan. Though the exact process varies on the platform and funding goals, here’s how crowdfunding typically works:

Choose a Platform

There are a number of crowdfunding platforms that can help you raise capital. Regardless of the one you choose, your first step is to sign up. View the best platforms

Create a Campaign

Once you’ve registered for an account, create a pitch that explains the purpose of your crowdfunding campaign (along with a goal and/or duration). You’ll also need to choose between an “all-or-nothing” or flexible campaign. Learn more

Establish Incentives (If Applicable)

After setting up and explaining the purpose of your crowdfunding campaign, you may also want to establish incentives for contributions. As some campaigns are funded solely by donations, this will depend on the type of crowdfunding campaign created.

Share

Once your crowdfunding campaign has been established, it can be shared on social media, with friends and family, and through various channels to increase the amount of potential contributors.

Best Crowdfunding Sites
Best for: Time-sensitive projects

Kickstarter is one of the largest and most popular crowdfunding websites, making it a great choice for businesses that want to connect with a large pool of potential investors. It offers all-or-nothing style campaigns that are free to set up, but you’ll pay 5% of your total collected funds in fees (on top of the 3-5% processing fees).

Visit website

Best for: Flexible goals with no deadline

IndieGoGo is another popular crowdfunding platform that also offers a marketplace for innovative products. Unlike Kickstarter's all-or-nothing campaigns, IndieGoGo allows you to create flexible campaigns that don’t require goals or deadlines. Just be sure to watch for the 5% fee and various processing fees taken out of your collected funds.

Visit website

Best for: Established businesses

CircleUp specializes in crowdfunding for businesses and aims to help new companies find the capital they need to grow. It operates on an all-or-nothing model, uses AI to help investors and entrepreneurs make informed decisions, and offers multiple funding options. However, it has a highly-selective approval process and requires companies to generate at least $1 million in revenue in order to be eligible.

Visit website

Best for: US-based startups looking to expand

Fundable is a business crowdfunding platform that allows businesses to create rewards-based or equity crowdfunding campaigns, giving them the option to raise funds by selling products or taking pre-orders or through contributions from accredited investors. Equity campaigns are flexible, whereas rewards-based programs are all-or-nothing. It's free to create a profile and there's a flat fee of $179/month plus processing fees (rewards-based campaigns only).

Visit website

What Is Crowdfunding?

The definition of crowdfunding is the process of raising capital through small contributions from a large number of sources. It relies on social media to increase the pool of potential investors, making it easier to raise capital without the need for loans, grants, or angel investors. 

Crowdfunding can be used to fund a wide range of projects, investments, and more. This makes it a useful tool for individuals, entrepreneurs, investors, and businesses alike.

How Does Crowdfunding Work?

Crowdfunding is different from raising money through friends and family – or applying for a business loan. Though the exact process varies on the platform and funding goals, here’s how crowdfunding typically works:
 

1. Choose a Platform

There are a number of crowdfunding platforms that can help you raise capital. Regardless of the one you choose, your first step is to sign up.
 

2. Create a Campaign

Once you’ve registered for an account, create a pitch that explains the purpose of your crowdfunding campaign (along with a goal and/or duration). You’ll also need to choose between an “all-or-nothing” or flexible campaign:

  • All-or-nothing crowdfunding campaign: The creator of the campaign does not receive any funds unless the goal is reached.

  • Flexible crowdfunding campaign: The creator of the campaign receives any funds generated from crowdfunding, regardless of whether the goal is reached.

3. Establish Incentives (If Applicable)

After setting up and explaining the purpose of your crowdfunding campaign, you may also want to establish incentives for contributions. As some campaigns are funded solely by donations, this will depend on the type of crowdfunding campaign created.
 

4. Share

Once your crowdfunding campaign has been established, it can be shared on social media, with friends and family, and through various channels to increase the amount of potential contributors.

The 4 Types of Crowdfunding

While crowdfunding can be used for a number of different applications, all crowdfunding campaigns fall under one of four categories: debt crowdfunding, equity crowdfunding, donation crowdfunding, and reward-based crowdfunding.

1. Debt Crowdfunding

Debt crowdfunding (also known as peer-to-peer crowdfunding) is used to fund large purchases, debt consolidation, etc. without a traditional bank or lender. Loans are funded by multiple investors/contributors in exchange for monthly interest payments, allowing individuals to act as private lenders.

2. Equity Crowdfunding

Equity crowdfunding involves the sale of securities in exchange for contributions from investors. In addition to encouraging small businesses and startups to raise capital from a large number of sources, it makes it possible for individuals to invest in early stage companies.

3. Reward-based Crowdfunding

Reward-based crowdfunding is a popular crowdfunding method that offers incentives in exchange for contributions. Rewards might include the product or service being funded and discounts on future purchases. They often vary, depending on the amount being contributed.

4. Donation Crowdfunding

Donation crowdfunding occurs when contributors (also called backers) don’t receive anything in exchange for their contributions. It’s often used to raise money for specific causes such as medical bills and humanitarian projects. Backers care more about supporting the cause than earning a return on their contribution.

Crowdfunding for Business

Crowdfunding is an effective way for businesses to raise money, but it can also help them gauge demand, gain exposure, test new products or services, and fund expansions. These types of campaigns can be set up as donation-based, rewards-based, or equity-based and depend on the business’ goals and situation. 

Crowdfunding and venture capital go hand in hand for businesses, as they can help them secure necessary funds without taking on significant debt.

Best Crowdfunding Sites for Business

There are a number of crowdfunding sites for business, but the best one depends on multiple variables like the project being funded and the duration of the campaign. Here are some of the best crowdfunding sites for business.
 

Kickstarter

Best for: Time-sensitive projects

Kickstarter is one of the largest and most popular crowdfunding websites, making it a great choice for businesses that want to connect with a large pool of potential investors. It offers all-or-nothing style campaigns that are free to set up, but you’ll pay 5% of your total collected funds in fees (on top of the 3-5% processing fees).
 

IndieGoGo

Best for: Flexible goals with no deadline

IndieGoGo is another popular crowdfunding platform that also offers a marketplace for innovative products. Unlike Kickstarter's all-or-nothing campaigns, IndieGoGo allows you to create flexible campaigns that don’t require goals or deadlines. Just be sure to watch for the 5% fee and various processing fees taken out of your collected funds. 
 

CircleUp

Best for: Established businesses

CircleUp specializes in crowdfunding for businesses and aims to help new companies find the capital they need to grow. It operates on an all-or-nothing model, uses AI to help investors and entrepreneurs make informed decisions, and offers multiple funding options. 

However, it has a highly-selective approval process and requires companies to generate at least $1 million in revenue in order to be eligible.
 

Fundable

Best for: US-based startups looking to expand

Fundable is a business crowdfunding platform that allows businesses to create rewards-based or equity crowdfunding campaigns, giving them the option to raise funds by selling products or taking pre-orders or through contributions from accredited investors. Equity campaigns are flexible, whereas rewards-based programs are all-or-nothing. 

It's free to create a profile and there's a flat fee of $179/month plus processing fees (rewards-based campaigns only).

Methodology Used to Select the Best Crowdfunding Websites for Business

With so many options available, we used the following criteria to narrow down the best crowdfunding sites for businesses. 

  • Ease of use. Is the platform easy to use? Friends and family may want to contribute, and the platform should not make the process difficult.

  • Fees. What fees are involved and when are they charged?

  • Options. Do you have the option to choose between an all-or-nothing or a flexible campaign? Does the platform have the ability to offer equity, incentives, etc.?

  • Potential reach. How big is the user base? Does the platform make it easy to share on social media or encourage contributions?

  • Timing. How long does it take to create a project? Is there a delay between funding and receiving money?

Crowdfunding for Startups

Raising capital for a new business can be difficult, and without help from angel investors or venture capitalists, crowdfunding can help startups get access to a large pool of capital. Beyond raising capital, crowdfunding can also help raise awareness about newer companies (which may help jumpstart their growth). 

Donation-based, rewards-based, and equity-based campaigns are common for startups looking to crowdsource their next steps. That said, investors looking to earn a return on their contribution may gravitate towards crowdfunding campaigns for startups. 

In the event of an equity crowdfunding campaign, investors can make contributions in exchange for shares that could eventually be very valuable, assuming that the startup is successful.

Best Crowdfunding Sites For Investments

If you want to invest in a promising new company, consider crowdfunding websites for investments. The following websites were created to help individuals invest in startups.
 

TruCrowd

Best for: Investors new to crowdfunding

TruCrowd is an equity crowdfunding platform that operates under Regulation Crowdfunding. It connects small businesses and startups with accredited and non-accredited investors, allowing them to invest in early-stage companies in exchange for equity. It has a minimum investment requirement of only $100, making it a great option for investors looking to diversify their portfolios while supporting growing startups.
 

Nextseed

Best for: Investors who want to support local businesses

NextSeed is a Houston-based crowdfunding platform that allows investors to support small businesses through the purchase of debt investments. By investing in vetted companies (mostly restaurants and retail), investors receive returns in the form of monthly payments. It has low minimums and is open to non-accredited investors, allowing individuals to crowdfund the capital that small businesses need to thrive.
 

MicroVentures

Best for: Experienced investors looking for the “next big thing”

MicroVentures is a crowdfunding platform that helps individuals and institutions invest in startups and private market opportunities. Non-accredited investors can take part in equity crowdfunding, whereas accredited investors have access to early- and late-stage investments – along with secondary trading of late-stage private stock. It is a full-service investment bank that has helped fund big brands such as AirBnB, Slack, and Uber.
 

Wefunder

Best for: Passionate supporters

WeFunder is another equity crowdfunding platform that connects startups with a pool of over 150,000 investors. Home to a wide variety of startups in tech, AI, and retail, WeFunder allows investors to become part of the communities behind each company. Free to sign up and without management or transaction fees, only administrative fees are charged to investors. 

While it can be lucrative, it is considered high risk. Investors are encouraged to support companies because they believe in them – not because they want to get rich.
 

SeedInvest

Best for: Experienced, committed investors

SeedInvest is an equity crowdfunding platform that connects startups with high-net-worth individuals, institutional investors, and venture capital firms. It has a lengthy and complicated application process and only features highly-vetted startups. Therefore, it’s best suited for experienced investors and extremely promising companies looking to raise a significant amount of capital.

Methodology Used to Select the Best Crowdfunding Websites for Investors

There are a number of crowdfunding websites that are designed with investors in mind, so we used the following criteria to select the top few:

  • Ease of use. Is the platform easy to use? The website should be easy to navigate and straightforward for investors to contribute.

  • Fees. What fees are involved and when are they charged?

  • Investment Options. How do individuals invest through the platform? Does it offer debt investments, equity investments, or other options?

  • Selection. How many startups or small businesses are available to invest in? Is there a vetting process?

  • Commitment. What is the minimum investment amount? How long does it take to earn a return on investment?

Real Estate Crowdfunding

Real estate has long been considered an attractive investment vehicle, but the time and capital requirements serve as steep barriers to entry. Real estate crowdfunding aims to make real estate investing more accessible by pooling together funds to purchase residential or commercial properties.

Best Sites for Real Estate Crowdfunding

If you want to invest in real estate but are unsure where to start, real estate crowdfunding can be a great starting point. We’ve outlined some of the best websites for real estate crowdfunding below
 

FundRise

Best for: Low-fee real estate investments

FundRise is a real estate investment platform that allows individuals to invest in residential and commercial properties. It offers investments in both debt and equity, and its approach is centered around stability and long-term growth. Its low-fee model claims to make real estate investing more accessible and affordable by eliminating intermediaries. 

Investors don't pay any sales commission, but they do pay an annual service fee of 0.15% and an annual management fee of 0.85% (for a total annual fee of 1%).
 

RealtyMogul

Best for: Investors who are new to real estate investing

RealtyMogul is a real estate investing platform that helps individuals invest in commercial real estate properties. It offers multiple investment opportunities such as real estate investment trusts (REITs), individual properties, and 1031 exchanges. Its website advertises the potential for investors to earn passive income, grow their portfolio, and diversify their holdings, though the actual outcome depends on risk tolerance, investment goals, and available capital.
 

Peerstreet

Best for: Real estate investors seeking passive income

PeerStreet is an alternative investing platform that helps individuals invest in real estate backed loans. It offers debt investments in which investors crowdfund loans made to borrowers in exchange for monthly payments. Investors can choose from a number of product offerings with flexible terms, fixed-income returns, asset classes, and more.
 

CrowdStreet

Best for: Accredited investors

Crowdstreet connects experienced investors with professionally-managed commercial real estate. It allows investors to choose from various funds and vehicles, individual real estate deals, or tailored portfolios, and comes with access to a suite of exclusive resources. It is free to join but is only available to accredited investors who are willing to invest at least $25,000.
 

Groundfloor

Best for: Beginner real estate investors looking for short-term returns

Groundfloor is a real estate investment platform that offers short-term debt investments to the general public. Investments are pooled together to fund home loans, which are then used to purchase and flip property. In exchange, investors receive monthly payments or a lump sum payment at the end of the loan. With a minimum investment of $10, it’ss free to use for investors, and is available to both non-accredited and accredited investors.

Methodology Used to Select the Best Real Estate Crowdfunding Websites

There are many real estate crowdfunding platforms that you can use to get involved in real estate investing. But with so many options available, we used the following criteria to hand pick some of our favorites.

  • Ease of use. Is the platform easy to use? The website should be easy to navigate and straightforward for investors to contribute.

  • Fees. What fees are involved and when are they charged?

  • Investment Options. How do individuals invest through the platform? Does it offer debt investments, equity investments, or other options?

  • Selection. How many properties, funds, or other products are available? Is there a vetting process?

  • Commitment. What is the minimum investment amount? How long does it take to earn a return on investment?

Crowdfunding for Personal Use

While crowdfunding is great for funding business ventures and startups, it’s also useful for raising money for personal uses. Medical bills, personal projects, and large purchases are just a few of the many reasons people start personal crowdfunding campaigns.

Crowdfunding to Start a Nonprofit

Crowdfunding can be used to start nonprofits or fund specific causes. These types of campaigns are typically flexible, as any amount of funds can be beneficial. Funding can go towards elements like establishing and maintaining nonprofit organizations, paying for labor costs, covering the costs of marketing or public relations.

Best Crowdfunding Sites for Personal Use and Nonprofits

There are a number of crowdfunding websites available for both personal use and nonprofits, but the best one will depend on your goals, timeline, and situation. Explore some of the best crowdfunding sites for personal use and nonprofits below.
 

Honeyfund

Best for: Newlyweds

Honeyfund is a personal crowdfunding platform that helps newlyweds raise money for large expenses such as a first home, honeymoon, and charity support. Rather than asking for wedding gifts from guests, this platform allows newlyweds to collect cash. It also offers discounts on travel packages through its partners, allowing guests' contributions to go even further.
 

Fundrazr

Best for: Individuals and nonprofits seeking low fees

FundRazr is a crowdfunding platform for individuals and organizations looking to make a positive impact. Offering mobile-friendly micro-websites and social sharing options, the site is designed to increase your reach and attract potential backers. This platform can be used for a wide variety of causes and has a 0% platform fee, making it an effective way to raise funds for both individuals and nonprofits.
 

LendingClub

Best for: Individuals looking to pay down high-interest debts

LendingClub is a peer-to-peer lending company that offers debt investments in the form of personal loans. Borrowers can apply for loans that are funded by individual investors, in exchange for monthly payments. It is most often used for paying down high-interest debt but also comes with options for small businesses and auto refinancing. It’s free to sign up but interest rates on loans can vary.
 

GoFundMe

Best for: Funding major personal expenses

GoFundMe is a massive crowdfunding platform that allows individuals, groups, and organizations to raise money for various causes. It is often used for medical bills, major life events, accidents, and other significant expenses that would otherwise be difficult to cover. It's free to sign up and there is a 0% platform fee (though processing fees of 1.9% + $0.30 per donation apply).
 

Fundly

Best for: Groups and organizations

Fundly is an online crowdfunding platform that is designed for non-profits, charities, schools, and other organizations. It helps them raise money for various causes such as scholarships, politics, education, and more. While it’s a versatile way to raise money, the platform fee of 4.9% also comes with a credit card processing fee of 2.9% + $0.30 per transaction.

Methodology Used to Select the Best Personal and Nonprofit Crowdfunding Websites

If you’re planning to start a personal or nonprofit crowdfunding campaign, you’ll have many websites to choose from. We used the following criteria to select some of the better options available.

  • Ease of use. Is the platform easy to use? Friends and family may want to contribute, and the platform should not make the process difficult.

  • Fees. What fees are involved and when are they charged?

  • Options. Do you have the option to choose between an all-or-nothing or a flexible campaign? Does the platform have the ability to offer equity, incentives, etc.?

  • Potential reach. How big is the user base? Does the platform make it easy to share on social media or encourage contributions?

  • Timing. How long does it take to create a project? Is there a delay between funding and receiving money?

Is Crowdfunding Investing Risky?

Like all investments, crowdfunding investing does not offer guaranteed returns. It has the potential to pay off if the company you funded becomes successful, but you risk losing your contribution if it doesn’t. Like all investments, do your research and weigh your options before investing.

At InvestingAnswers, we're proud to be an independent, unbiased source of information. We never profile a product or service unless we believe it's in your best interest to learn more about it.

Keep in mind that our site does not feature every financial product available in the marketplace, and we may receive compensation from posts that feature our partners. Visit our advertiser disclosure to learn more.

Ask an Expert
All of our content is verified for accuracy by Mark Herman, CFP and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about The Best Crowdfunding Options for Investors and the Campaigner.

What Happens When Crowdfunding Fails?

It depends on the type of crowdfunding campaign. If an all-or-nothing crowdfunding campaign fails, the creator will not receive any money and all contributions are returned to the owners. If a flexible crowdfunding campaign fails, the creator of the campaign receives all funds that were raised (even though the goal wasn’t reached).

Are Crowdfunding Receipts Tax Deductible?

While the IRS doesn’t directly address crowdfunding, some major crowdfunding websites mention that funds raised through crowdfunding are taxed as regular income.

Can Crowdfunding Make You Rich?

It’s possible, but – like any investment – there are no guarantees. As the creator of a crowdfunding campaign, you could get rich if your campaign is funded and your project, company, or product is successful. As an investor, you could get rich if you receive equity in exchange for your contribution and the company becomes successful.

What Is Regulation Crowdfunding?

Regulation crowdfunding is a way for small businesses and startups to raise money by crowdfunding the sale of securities. Since smaller companies aren’t generally listed on stock exchanges, regulation crowdfunding allows smaller investors to invest in startups. For more information, you can visit the SEC’s resource on regulation crowdfunding.

Where to Post Crowdfunding Links?

Beyond your friends and family, crowdfunding can help you harness the power of social media to fund your project. Consider sharing links on your personal social media accounts (like Instagram or Pinterest) or posting on message boards such as Reddit and Facebook groups.

Mark Herman has been helping friends with financial questions since serving as an Army helicopter pilot. Since then, he’s gained valuable experience in the corporate world before moving on to become a CERTIFIED FINANCIAL PLANNER™.

If you have a question about The Best Crowdfunding Options for Investors and the Campaigner, then please ask Mark.

Ask a question Read more from Mark
Mark Herman, CFP - profile
Ask an Expert about The Best Crowdfunding Options for Investors and the Campaigner

By submitting this form you agree with our Privacy Policy

Editorial Disclosure

All of the opinions expressed herein are the author's alone, and not those of any bank, brokerage, credit card issuer, lender, insurance company, outside financial institution, or any other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post or any other third parties.