What Is Crowdfunding? (thebalancemoney.com)

The basics

By Zack Miller Updated on September 19, 2022

Fact checked by Daniel Rathburn

Crowdfunding is any financing method that involves taking small amounts of money from a large number of individuals.

Key Takeaways

• Crowdfunding occurs when an entity seeks small-dollar funding from a large group of individuals.

• Crowdfunding is typically facilitated by websites that connect fundraising entities with individuals who are willing to contribute to that entity.

• The funders may or may not expect something in return for their funding. It could be viewed as a donation, or they may expect equity, products, or services.

How Does Crowdfunding Work?

Crowdfunding combines the concepts of crowdsourcing and microfinancing, bringing together various individuals who commit small amounts of money to projects and entities they want to support. This is often done through websites that make it easy for entities to find potential funders. Funders could expect something in return for their contributions—such as equity, products, or services—or they may donate the funds.

The people who fund crowdfunding projects and entities may do so without expecting anything in return—they're donations to a cause they support. Others fund projects in exchange for products, services, or equity.

Example of Crowdfunding

One common example of crowdfunding is a creative project a musician you like may use crowdfunding to produce their next album. They make a Kickstarter page for the new album, outlining the basic ideas they have for it. You (along with other fans) contribute $10 to the project. In return, you will receive a digital copy of the album when it's done.

Oftentimes crowdfunding efforts often involve tiered rewards. A $10 donation may earn you a digital copy of the album, whereas a $20 donation gets a vinyl album shipped to your house.

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