In recent years, crowdfunding has emerged as popular method for raising capital and funding innovative initiatives. Crowdfunding platform enable people and businesses to collect funds from a large group of investors or donors, typically via the internet.
A crowdfunding platform’s financial model is critical in determining its success. A well-designed financial model can assist the platform in attracting investors, risk management, and income generation. A financial model is, at its heart, a collection of assumptions and calculations that forecast the platform’s income, expenses, and profitability over time.
A crowdfunding platform’s financial model should take into account several important variables, such as the platform’s revenue streams, operating costs, and the number of campaigns it expects to host. Transaction fees, commission on successful campaigns, advertising income, and other sources may all be revenue streams.
Furthermore, the financial model should take into account the platform’s scalability as it develops and hosts more campaigns. The platform should be able to handle growing transaction volumes while still providing an excellent user experience. (Read also about “IDO Launchpad Business Model”)
Overall, the success of a crowdfunding site is dependent on a well-designed financial model. It contributes to the platform’s long-term viability, profitability, and ability to satisfy the needs of its users, investors, and stakeholders.
Financial Model of Crowdfunding platform
Model 1: Fixed Percentage Fee
Assumptions:
Calculation:
Year 1 revenue = $1 million x 5% fee = $50,000
Year 2 revenue = ($1 million x 1.2) x 5% fee = $60,000
Year 3 revenue = ($1.2 million x 1.2) x 5% fee = $72,000
Year 4 revenue = ($1.44 million x 1.2) x 5% fee = $86,400
Year 5 revenue = ($1.728 million x 1.2) x 5% fee = $103,680
Total revenue over 5 years = $372,080
This crowdfunding approach is predicated on the platform charging a fixed % fee on all monies generated through it. The set percentage fee in this scenario is 5% of the total cash raised by the campaigns.
Assuming the platform is still in its early stages, the model forecasts it will facilitate $1 million in fundraising during its first year of operation. It also anticipates that the platform will expand at a 20% annual rate over the following five years.
To compute the money generated by the platform each year, we simply multiply the quantity of funds raised by the platform’s fixed % fee. In year one, for example, the platform will earn $50,000 in revenue ($1 million x 5%). The platform is intended to facilitate $1.2 million in fundraising ($1 million x 1.2), resulting in $60,000 in income ($1.2 million x 5%).
Using the same computation for years three through five, we can see that the platform’s revenue grows each year as more funds are raised. The platform is planned to facilitate $2.36 million in fundraising and create $103,680 in income ($2.36 million x 5%) by year five.
The platform is estimated to generate $372,080 in revenue over a five-year period. This money will be produced only through the fixed % fee imposed on monies raised via the platform.
Indiegogo is a real-world illustration of a crowdfunding site with a Fixed Percentage Fee model. Indiegogo charges a 5% platform fee on all funds collected by successful campaigns, in addition to a 3% + $0.30 per transaction processing fee.
If a campaigner raises $100,000 on Indiegogo, the platform charge is $5,000 (5% of $100,000), and the processing fee is $3,300 (($100,000 x 3%) + $0.30 per transaction). The campaigner would earn a total of $91,700.
Over the last five years, Indiegogo’s revenue has consistently increased. Indiegogo’s income in 2017 was $43.7 million, and it is expected to be $56.4 million in 2021. Since the platform’s inception in 2008, more than 17 million individuals have contributed to campaigns.
Based on this rate of growth, it is reasonable to expect Indiegogo to continue to expand in both revenue and user base over the next five years. Assume a 10% annual growth rate for the sake of this illustration.
We can compute Indiegogo’s expected revenue in 2023, 2024, 2025, 2026, and 2027 using this growth rate:
2023: $75.7 million ($56.4 million x 1.10)
2024: $83.3 million ($75.7 million x 1.10)
2025: $91.6 million ($83.3 million x 1.10)
2026: $100.8 million ($91.6 million x 1.10)
2027: $111.0 million ($100.8 million x 1.10)
We can determine the anticipated platform fees for each year by assuming Indiegogo continues to charge a 5% platform fee on all funds raised:
2023: $3.8 million ($75.7 million x 0.05)
2024: $4.2 million ($83.3 million x 0.05)
2025: $4.6 million ($91.6 million x 0.05)
2026: $5.0 million ($100.8 million x 0.05)
2027: $5.6 million ($111.0 million x 0.05)
Indiegogo generates income from sources other than platform fees, such as advertising and partnership programmes. These new revenue streams may have an effect on Indiegogo’s total revenue and growth rate over the next five years.
It is essential to note, however, that these calculations are based on assumptions and projections and may not represent Indiegogo’s actual revenue and growth rate over the next five years.
Model 2: Tiered Fee Structure
Assumptions:
Calculation:
Year 1 revenue = ($100,000 x 3%) + ($500,000 – $100,000) x 5%) + ($2 million – $500,000) x 7%) = $97,000
Year 2 revenue = ($100,000 x 3%) + ($500,000 – $100,000) x 5%) + ($2 million x 1.25 – $500,000) x 7%) = $128,750
Year 3 revenue = ($100,000 x 3%) + ($500,000 – $100,000) x 5%) + ($2.5 million x 1.25 – $500,000) x 7%) = $166,750
Year 4 revenue = ($100,000 x 3%) + ($500,000 – $100,000) x 5%) + ($3.125 million x 1.25 – $500,000) x 7%) = $212,125
Year 5 revenue = ($100,000 x 3%) + ($500,000 – $100,000) x 5%) + ($3.906 million x 1.25 – $500,000) x 7%) = $266,625
Total revenue over 5 years = $871,250
The Tiered Fee Structure crowdfunding model is a method in which a platform charges different fees according on the amount of money raised by campaigns hosted on its platform. This model estimates a 3% fee on the first $100,000 raised, a 5% fee on funds raised between $100,000 and $500,000, and a 7% cost on monies raised over $500,000.
Let’s look at an example to better grasp how this concept works. The platform anticipates raising $2 million in its first year of operation and growing at a 25% annual rate over the next five years.
Using the charge structure described above, the revenue for the first year can be computed as follows:
3% fee on the first $100,000 raised: $3,000
5% fee on funds raised between $100,001 and $500,000: (($500,000 – $100,000) x 5%) = $20,000
7% fee on funds raised over $500,000: (($2 million – $500,000) x 7%) = $74,000
Therefore, the total revenue for the first year would be $3,000 + $20,000 + $74,000 = $97,000.
The income for succeeding years can be determined by applying the same fee structure to the expected money raised for each year, while accounting for the platform’s expected growth rate of 25% each year. As a result, the revenue for the next four years would be as follows:
Year 2: $128,750
Year 3: $166,750
Year 4: $212,125
Year 5: $266,625
Over the course of five years, the total revenue earned would be $871,250.
To summarize, the Tiered Fee Structure crowdfunding model is a revenue model that charges different fees dependent on the amount of money received by the platform’s campaigns. The platform’s revenue can be determined by applying the appropriate charge percentage to the expected money raised for each year, taking into account the platform’s expected growth rate.
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Kickstarter is the best example of a crowdfunding platform with a Tiered Fee Structure model. In addition to payment processing fees that differ by nation, Kickstarter charges a 5% platform fee on all funds raised by successful campaigns. Kickstarter’s fee structure, on the other hand, is tiered, which means that projects that collect more money are charged a higher platform fee.
Campaigns raising less than $100,000, for example, are charged the standard 5% platform fee, whereas campaigns raising more than $100,000 are charged a 3% platform fee on the sum raised above $100,000, in addition to the standard 5% platform fee. In addition to the standard 5% platform fee, campaigns that collect more than $1,000,000 are charged a 2% platform fee on the amount raised above $1,000,000.
If a campaigner raises $200,000 on Kickstarter, the platform charge is $9,500 (($100,000 x 5%) + (($200,000 – $100,000) x 3%) + $0 payment processing fee). The campaigner would earn a total of $190,500.
Over the last five years, Kickstarter’s revenue has also consistently increased. Kickstarter’s income in 2017 was $140 million, and it is expected to be $200 million by 2021. Since its inception in 2009, the platform has assisted in the funding of over 200,000 creative initiatives.
Based on this rate of growth, it is fair to expect Kickstarter to continue to grow in both income and user base over the next five years. Assume a 10% annual growth rate for the sake of this illustration.
We can compute Kickstarter’s expected revenue in 2023, 2024, 2025, 2026, and 2027 using this growth rate:
2023: $280.0 million ($200 million x 1.10)
2024: $308.0 million ($280.0 million x 1.10)
2025: $338.8 million ($308.0 million x 1.10)
2026: $372.7 million ($338.8 million x 1.10)
2027: $410.0 million ($372.7 million x 1.10)
We can compute the expected platform fees for each year assuming Kickstarter continues to charge a tiered platform fee on all funds raised:
2023: $15.3 million (($100 million x 5%) + ($80 million x 3%) = $5 million + $2.4 million)
2024: $16.8 million (($100 million x 5%) + ($90 million x 3%) + ($18
million x 2%) = $5 million + $2.7 million + $0.6 million)
2025: $18.5 million (($100 million x 5%) + ($100 million x 3%) + ($38.8 million x 2%) = $5 million + $3 million + $0.8 million)
2026: $20.4 million (($100 million x 5%) + ($110 million x 3%) + ($62.7 million x 2%) = $5 million + $3.3 million + $1.1 million)
2027: $22.5 million (($100 million x 5%) + ($120 million x 3%) + ($90 million x 2%) = $5 million + $3.6 million + $1.8 million)
In addition to platform fees, Kickstarter earns revenue from other sources, such as partnerships and sponsored campaigns. However, for the purpose of this example, we will only focus on the revenue generated from platform fees.
Assuming the above-calculated platform fees for each year, we can determine Kickstarter’s total revenue for each year as follows:
2023: $295.3 million ($280.0 million + $15.3 million)
2024: $324.8 million ($308.0 million + $16.8 million)
2025: $357.3 million ($338.8 million + $18.5 million)
2026: $393.1 million ($372.7 million + $20.4 million)
2027: $432.5 million ($410.0 million + $22.5 million)
Kickstarter’s revenue is expected to grow by $137.5 million over the next five years, from $200 million in 2021 to $432.5 million in 2027, assuming a 10% annual growth rate. This expansion is the result of a growing user base and higher average funds collected per campaign.
Finally, Kickstarter’s tiered fee structure model charges campaigns a platform fee based on the amount of funds collected, with higher fees charged on more successful campaigns. Despite this fee structure, Kickstarter’s revenue has been gradually growing over the last five years and is expected to grow at a 10% annual rate over the next five years, driven by a combination of an increasing user base and higher average funds generated per campaign.
Model 3: Subscription Model
Assumptions:
Calculation:
Year 1 revenue = (500 x $50) + (200 x $100) = $35,000
Year 2 revenue = ((500 x 1.15) x $50) + ((200 x 1.15) x $100) = $45,500
Year 3 revenue = ((575 x 1.15) x $50) + ((230 x 1.15) x $100) = $55,800
Year 4 revenue = ((661 x 1.15) x $50) + ((266 x 1.15) x $100) = $67,675
Year 5 revenue = ((760 x 1.15) x $50) + ((306 x 1.15) x $100) = $81,225
Total revenue over 5 years = $285,900
Patreon is a well-known crowdfunding platform that enables creators to receive recurring monthly payments from their followers or patrons in exchange for exclusive content and other benefits. Patrons pay a monthly fee to access the creator’s content on Patreon, which works on a subscription model.
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How does the Subscription Model work?
Patrons pay a monthly subscription fee to Patreon, which they can cancel or change at any moment. Subscription levels are set by the creator and can vary from $1 to $100 or more per month, based on the creator’s popularity and the value of their content.
Patreon charges a platform fee of 5% to 12% of the creator’s earnings, based on the subscription level and the creator’s total earnings. Patreon also costs payment processing fees, which range between 2.9% and 30 cents per transaction.
Fundraising Expectations and Growth Rate
The amount of patrons and the typical subscription fee are used to calculate Patreon’s fundraising expectations. With a $10 monthly subscription charge, a creator with 1,000 patrons would make $120,000 per year ($10 x 1,000 patrons x 12 months).
The amount of creators and patrons who use Patreon, as well as the typical subscription fee, drive the platform’s growth rate. Patreon had over 200,000 active creators and over 8 million active patrons in 2021, according to financial statistics from the platform, with a total of $2.2 billion paid out to creators since the platform’s launch in 2013.
Calculations and Revenue Projections
If we assume Patreon’s platform fee is around 8%, we can calculate the company’s income as follows:
2023: $352 million ($320 million + $32 million in platform fees)
2024: $415 million ($376 million + $39 million in platform fees)
2025: $488 million ($441 million + $47 million in platform fees)
2026: $573 million ($518 million + $55 million in platform fees)
2027: $671 million ($607 million + $64 million in platform fees)
Patreon’s revenue is projected to increase by $319 million over the next five years, from $33 million in 2021 to $671 million in 2027, assuming a 15% annual growth rate. This expansion is being driven by an increase in the amount of creators and patrons who use the site, as well as higher average subscription fees.
Finally, Patreon’s subscription model charges patrons a monthly fee in exchange for access to exclusive content and rewards from their favourite authors, with Patreon taking a portion of the creator’s earnings as a platform fee. Despite this fee structure, Patreon’s revenue has been steadily increasing in recent years and is expected to grow at a 15% annual rate over the next five years, driven by an increasing number of creators and patrons using the platform, as well as higher average subscription fees.
Model 4: Equity-based Crowdfunding
Assumptions:
Calculation:
Year 1 revenue = $10 million x 5% fee = $500,000
Year 2 revenue = ($10 million x 1.3) x 5% fee = $650,000
Year 3 revenue = ($13 million x 1.3) x 5% fee = $845,000
Year 4 revenue = ($16.9 million x 1.3) x 5% fee = $1,099,500
Year 5 revenue = ($21.97 million x 1.3) x 5% fee = $1,427,050
Total revenue over 5 years = $4,521,550
The Equity-based Crowdfunding model assumes that the platform operates as a crowdfunding platform where users can invest in early startups in exchange for equity. In other words, investors might contribute cash to startups in exchange for a part of the company’s ownership or shares.
The platform charges a 5% commission fee on all successful funding rounds, which implies that the platform earns 5% of the total cash raised by the firm for each successful funding round.
According to the plan, the platform will facilitate $10 million in investment rounds during its first year of operation. This means that throughout the first year, firms on the platform are projected to raise a total of $10 million from investors.
The model also forecasts that the platform will expand at a 30% annual pace over the following five years. This means that over the next five years, the amount of financing raised by companies on the platform is likely to climb by 30% per year.
Based on these assumptions, the model calculates the platform’s revenue over a five-year period. The revenue is computed by multiplying the platform’s total money raised each year by the platform’s 5% commission fee.
For example, in year one, the platform is intended to enable $10 million in investment rounds, with the platform generating $500,000 (5% of $10 million). The platform is intended to enable $13 million in investment rounds in year two (30% growth from year one), with income of $650,000 (5% of $13 million).
Over a five-year period, the platform generated $4,521,550 in revenue.
SeedInvest
SeedInvest is a well-known equity-based crowdfunding platform that enables investors to put money into startups and small businesses in exchange for equity or ownership in the company. SeedInvest is a registered broker-dealer that works under US regulatory authority. SEC is the Securities and Exchange Commission. (SEC).
How Does Equity-Based Crowdfunding Work?
Startups and small businesses can use SeedInvest to launch a fundraising campaign and give equity or ownership in the company in return for investment. Investors can peruse the available campaigns and invest in those that pique their interest. SeedInvest charges a fee for each investment made via the platform, which usually ranges between 7.5% and 10% of the total investment amount.
All campaigns must also satisfy certain eligibility requirements and adhere to SEC regulations in order to be accepted by SeedInvest. This includes submitting all required paperwork, such as Form C, which contains information about the business and the terms of the investment.
Fundraising Prospects and Growth Rate
The quantity of funding raised by startups and small businesses on the platform determines SeedInvest’s fundraising expectations. According to SeedInvest data, the platform has helped over 300 businesses raise over $200 million in funding since its inception in 2012.
The number of startups and small businesses using the platform, as well as the amount of money received, drive SeedInvest’s growth rate. According to financial data from SeedInvest, the platform had facilitated over $100 million in funding in the first half of the year alone, and was on pace to surpass the previous year’s total funding amount of $56 million.
Revenue Estimates and Calculations
Assuming an average fee of 8.5% per investment, we can calculate the company’s income as follows:
2023: $54 million ($50 million + $4 million in fees)
2024: $66 million ($60 million + $6 million in fees)
2025: $80 million ($72 million + $8 million in fees)
2026: $97 million ($87 million + $10 million in fees)
2027: $118 million ($106 million + $12 million in fees)
SeedInvest’s revenue is projected to increase by $64 million over the next five years, from $12 million in 2021 to $118 million in 2027, assuming a 25% annual growth rate. This expansion is being pushed by an increase in the number of startups and small businesses using the platform, as well as increased funding amounts.
Finally, SeedInvest’s equity-based crowdfunding model enables investors to make investments in startups and small businesses in return for equity or ownership in the firm. SeedInvest charges a fee for each investment made through the platform and guarantees that all campaigns are in compliance with SEC regulations. Despite the fees and regulations, SeedInvest’s revenue has steadily increased in recent years and is expected to grow at a rate of 25% per year over the next 5 years, driven by an increasing number of startups and small businesses using the platform, as well as higher funding amounts.
Model 5: Donation-based Crowdfunding
Assumptions:
Calculation
Year 1 revenue = $5 million x 3% fee = $150,000
Year 2 revenue = ($5 million x 1.2) x 3% fee = $180,000
Year 3 revenue = ($6 million x 1.2) x 3% fee = $216,000
Year 4 revenue = ($7.2 million x 1.2) x 3% fee = $259,200
Year 5 revenue = ($8.64 million x 1.2) x 3% fee = $311,040
Total revenue over 5 years = $1,116,240
The Donation-based Crowdfunding model believes that the platform will function as a crowdfunding platform, allowing users to donate to charity causes and non-profit organisations. In other words, the platform enables users to donate to a variety of philanthropic causes and organisations.
All donations are subject to a 3% transaction fee. This means that the platform earns a fee of 3% of the total amount donated for each gift made on the platform.
According to the plan, the platform will facilitate $5 million in donations in its first year of operation. This means that throughout the first year, individuals are expected to donate a total of $5 million to various philanthropic causes and organisations.
The model also forecasts that the platform will expand at a 20% annual pace over the following five years. This means that over the next five years, the total amount of donations made on the platform is likely to climb by 20% per year.
Based on these assumptions, the model calculates the platform’s revenue over a five-year period. The revenue is computed by multiplying the total amount of donations made on the platform each year by the 3% processing fee charged by the platform.
For example, in year one, the platform is planned to facilitate $5 million in donations, with the platform generating $150,000 (3% of $5 million). In year two, the platform is planned to facilitate $6 million in donations (20% increase from year one), as well as $180,000 in revenue (3% of $6 million).
Over a five-year period, the platform generated $1,116,240 in revenue.
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Model 6: Real Estate Crowdfunding
Assumptions:
Calculation
Year 1 revenue = $20 million x 2% fee = $400,000
Year 2 revenue = ($20 million x 1.25) x 2% fee = $500,000
Year 3 revenue = ($25 million x 1.25) x 2% fee = $625,000
Year 4 revenue = ($31.25 million x 1.25) x 2% fee = $781,250
Year 5 revenue = ($39.06 million x 1.25) x 2% fee = $976,563
Total revenue over 5 years = $3,283,813
The Real Estate Crowdfunding model proposes that the platform will function as a crowdfunding platform where users will be able to invest in real estate properties and development projects. To put it another way, the platform enables individuals to invest in real estate projects by combining their funds with those of other investors.
All successful investment transactions are subject to a 2% commission fee. This means that the platform earns a charge of 2% of the total amount invested for each investment made on the platform.
According to the plan, the platform will facilitate $20 million in investments in its first year of operation. This means that throughout the first year, investors are expected to invest a total of $20 million in various real estate projects.
The model also forecasts that the platform will expand at a 25% annual rate over the following five years. This indicates that over the following five years, the total amount of investments made on the platform are likely to climb by 25% per year.
Based on these assumptions, the model calculates the platform’s revenue over a five-year period. The revenue is computed by multiplying the total amount of investments made on the platform each year by the 2% commission fee charged by the platform.
For example, in year one, the platform is intended to facilitate $20 million in investments, with the platform generating $400,000 in income (2% of $20 million). The platform is intended to facilitate $25 million in investments in year two (a 25% increase from year one), with income of $500,000 (2% of $25 million).
The platform’s overall revenue for the last five years is $3,283,813.
Model 7: Royalty-based Crowdfunding
Assumptions:
Calculation
Year 1 revenue = $8 million x 7% fee = $560,000
Year 2 revenue = ($8 million x 1.15) x 7% fee = $667,200
Year 3 revenue = ($9.2 million x 1.15) x 7% fee = $746,640
Year 4 revenue = ($10.58 million x 1.15) x 7% fee = $848,082
Year 5 revenue = ($12.17 million x 1.15) x 7% fee = $982,259
Total revenue over 5 years = $3,804,181
Model 7 is a royalty-based crowdfunding model in which investors can invest in creative projects such as films or music albums in exchange for a share of future income. All successful fundraising rounds are subject to a 7% commission fee. In its first year of operation, the platform aims to facilitate $8 million in funding rounds and to grow at a 15% annual rate over the next five years.
Revenue estimates for the platform can be calculated using these assumptions. The platform’s revenue in the first year would be $560,000, which is the sum of $8 million and the 7% commission charge. The platform’s income in the second year would be $667,200, which is the product of $8 million multiplied by 1.15 (growth rate) and then multiplied by the 7% commission fee.
Similarly, revenue projections for the platform over the next three years can be calculated by multiplying the anticipated funding rounds by the growth rate and commission charge for each year. The platform’s total revenue over the next five years is anticipated to be $3,804,181.
Conclusion
Crowdfunding platforms have grown in popularity as a means for startups and small businesses to generate capital. Crowdfunding platforms use a variety of financial models, including set percentage fees, tiered fee structures, subscription models, and equity-based crowdfunding. Each model has its own set of benefits and drawbacks, and companies should carefully consider which model is best suited to their requirements. Crowdfunding platforms must also consider their own financial projections and growth rates, taking into consideration variables such as campaign number and total funding raised.
FAQs
1. How do crowdfunding platforms make money?
Crowdfunding platforms generally generate revenue by charging a fee for each transaction completed on the platform. This fee can be either a fixed percentage of the overall amount raised or a tiered system depending on the amount raised.
2. What are the advantages of using a crowdfunding platform?
Crowdfunding platforms can help startups and small businesses raise capital swiftly and efficiently, while also exposing them to a large audience of prospective investors. Crowdfunding can also assist companies in validating their product or service and building a supportive community.
3. Are there any disadvantages to using a crowdfunding platform?
One disadvantage of using a crowdfunding platform is that the platform charges fees, which can deplete the funds collected by the company. Furthermore, crowdfunding can be a competitive area, and businesses must have an engaging story and value proposition to differentiate themselves from other campaigns.
4. What is equity-based crowdfunding?
In exchange for investment, businesses can give equity or ownership in their firm through equity-based crowdfunding. This can be an appealing choice for investors looking for a potential return on investment, but it also necessitates compliance with regulations and filing the necessary paperwork with the SEC.
5. How do businesses choose which crowdfunding platform to use?
When deciding which crowdsourcing platform to use, businesses should consider factors such as the platform’s fees, the type of crowdfunding model used, the platform’s track record of successful campaigns, and the size and engagement of the platform’s audience.
