A business, regardless of its nature or scope, needs fund to operate. However, capital does not always come easy to businesses and entrepreneurs these days. Also, when you are just a startup, focusing on establishing your brand and attracting customers, you might not be able to afford all the attention and time required to pursue traditional financing.
You might think that you can only raise capital from banks, venture capitalists and accredited investors to raise capital. However, this is not true. Crowdfunding is another incredible alternative to fund a venture without having to accumulate large debts or give up equity.
But, what exactly is Crowdfunding?
Crowdfunding[as per Wikipedia] can be defined as a method of funding a venture or project by raising a lot of small amounts of money from a large number of people, often via online. It is a rapidly growing industry that’s changing the way that many new ventures receive fund. Also check [Infographic] What is crowdfunding, How Does It Work?.
In essence, it uses the easy accessibility of huge networks of people through crowdfunding websites and social media to bring entrepreneurs and investors together. It provides the opportunity to increase entrepreneurship through expending a pool of investors from whom the funds can be raised beyond the circle of relatives, venture capitalists and owners.
“Crowdfunding as an idea itself isn’t new bands have been doing it since the dawn of time.”
– Amanda Palmer
How Crowdfunding is Different than Traditional Fundraising & Business Financing?
Before, the only way to obtain the much-needed fund for a business was to get apply for a bank loan. Entrepreneurs also used to organize a networking party where guests will be likely to contribute and provide your project the opportunity to succeed.
However, with the technological advancements these days, crowdfunding has been found to be an innovative way to collect fund. It allows people to create online campaigns and collect money through the internet and a variety of crowdfunding platforms.
With the traditional fundraising and business financing, it often requires a huge investment of money, time and other resources that lower-income individuals or groups cannot summon. Also, in order to get a loan, you have to prove that you will be able to give the bank to the bank.
Crowdfunding is a new method that stems from the traditional fundraising, but only with a twist. This method trades upon the power of a pre-existing community or groups of individuals to start a project or a cause and initiate its success.
How Crowdfunding Works?
This alternative way to raise funds has created unique opportunities for entrepreneurs to collect hundreds or millions of dollars from those who have money to invest. A lot of crowdfunding websites abound, such as Indiegogo and Kickstarter, attracting thousands of people from all industries who hope to invest in a big thing.
Crowdfunding offers a forum to anyone to pitch it in front of investors who are just waiting for great opportunities to invest their money.
Crowdfunding offers a forum to anyone to pitch it in front of investors who are just waiting for great opportunities to invest their money. Crowdfunding websites generate revenue from a portion of the money raised through it.
People invest because they believe in the project or cause. There are rewards that can be offered, such as tickets to an event, free gifts, regular new updates and more. Donors have a personal and social motivation to put their money in and don’t expect to have the money back.
Investors obtain their money back with the associated interest. Also regarded as lend-to-save or peer-to-peer lending, it enables for the lending money while avoiding traditional banks. However, if the raised money is lent to the very poor, there’s no interest paid on the money loaned, and the lender is rewarded.What is Crowdfunding? A Comprehensive Guide for Crowdfunidng Click To Tweet
Advantages of Crowdfunding
- Easy and Simple: The simplicity and ease of launching a fundraising campaign is one of the main advantages of crowdfunding. All major platforms will help you with the process step by step. There’s no need to prepare a long business plan with a detailed financial forecast.
- Finance your Project without going through the long application process of bank loans. Crowdfunding can help you raise the money you need to develop or launch a brilliant project without going through the daunting process of borrowing money from the bank.
- Have direct access to Potential Clients. This method of raising fund for your project or cause allows you to have a direct access to your potential clients who give valuable feedback on how a service or product can be improved. You can also continue receiving feedback at every stage of the process that will allow you to further improve.
- Have a large network of funders
- Increase awareness of your cause or project
- Obtain immediate validation for your idea.
- Provides access to capital
There are a lot more benefits of crowdfunding that you can identify as you delve deeper into this industry. But overall, it provides wonderful opportunities for you to effectively launch or develop your project.
Disadvantages of Crowdfunding
While crowdfunding is a highly beneficial method of receiving financial support for your cause, there are also some drawbacks you have to keep in mind.
- If you do not reach your target funding, any finances that’s been pledged will often be returned to your investors and you won’t receiving anything
- Stealing your concept may happen if someone sees your business idea on a website, so make sure to protect it with copyright or a patent.
- You may be giving away to much of your business to your investors with getting wrong returns or rewards
- Not every project that apply to crowdfunding platform gets onto it
- Without network, it would be impossible for you to raise funds
Types of Crowdfunding
There are 4 main types of crowdfunding methods you can choose from to achieve your goals for development and growth. These include:
This is a method to source money for a cause or project by asking different contributors to donate a small amount to it. They will then receive token rewards that will grow in prestige as they increase the size of their donation. Donation-based based crowdfunding can be used to raised funds for a charitable cause.
This type of crowdfunding involves people who contribute to a business in exchange for a reward, which is often in the form of a service or product the company provides. It may offer backers a reward, but it is still considered as a subset of the first type of crowdfunding. It allows business owners to give their contributors incentives without incurring much additional expense.
This method of crowdfunding allows contributors to be part-owners of the company through trading capital for equity shares. The contributors obtain financial ROI and receive a share of the generated profits in the form of a distribution or dividend. In essence, it is any crowdfunding campaign that enables contributors to become the co-owner of the company.
This crowdfunding type involves requesting resources and support from other investors in exchange for interests. Also known as ‘crowd lending,’ debt-based crowdfunding has proven to be a valuable alternative for startups. Although it’s quite the same with acquiring a traditional loan from the bank, it is often with lower and competitive interest rates, with more options and flexibility to secure resources.
Applications of Crowdfunding
Crowdfunding has been used by different organizations and entrepreneurs from different industries as a valuable funding mechanism. Such industries also include those in the media and entertainment field, including independent films, music, journalism, blogging and for funding startup businesses. Groundbreaking new platforms have emerged, combining tradition funding for creative work, helping entrepreneurs and artists unite with brands without requiring a middle man.
Some of its applications include:
- Real Estate – Crowdfunding campaigns have been used in the real estate industry to obtain capital from investors in order to fund mortgages. This method is also used to raise money for the acquisition of a huge variety of distressed mortgages, abandoned properties, equity for residential and commercial projects and more. Real estate crowdfunding platforms have emerged in the last few years and were created all over the world, including France, Middle East and China.
- Food & Agriculture – Crowdfunding platforms have also emerged to allow people to donate and invest in opportunities related to agriculture and food industry. Many online platforms have provided institutional and individual investors an access to venture capital investments.
- Civic and Philanthropy Projects – Many different platforms have also emerged to enable ordinary online users to support certain philanthropic projects without requiring large amounts of money. Many have even allowed individuals to browse through different small projects proposed by a lot of non-profit organizations from all over the world.
- Science – This allows scientists to communicate comprehensively and clearly to a broader public to alleviate issues about the established funding systems. This provides the public a say in the science funding.
Small businesses often struggle to get to where they want in the industry. With the competition today, it became more daunting than ever for them to stay afloat. With crowdfunding, small business owners and entrepreneurs are given a chance to succeed by showcasing their projects and business to the entire world.
Crowdfunding – A method of funding a venture or project by raising a lot of small amounts of money from a large number of people, often via online.
Donation-Based Crowdfunding – A method to source money for a cause or project by asking different contributors to donate a small amount to it without financial return.
Reward-Based Crowdfunding – A type of crowdfunding involves people who contribute to a business in exchange for a reward, which is often in the form of a service or product the company provides.
Equity-Based Crowdfunding – A method of crowdfunding allows contributors to be part-owners of the company through trading capital for equity shares to obtain financial ROI.
Debt-Based Crowdfunding – A crowdfunding type involves requesting resources and support from other investors in exchange for interests. Also known as ‘Crowd Lending‘ and ‘Peer to Peer Lending‘.