When you are looking to launch a business, project, or product, one critical thing you need is financing. Without the required amount of money, you cannot bring your plans to life and in most cases, you might not have such capital just sitting around. This means you have to develop a strategy to get the money.
In recent times, this is usually where the thought of crowdfunding comes in. Keep reading if you’ve ever asked what is crowdfunding, and learn why you should start now.
The word crowdfunding comprises two words – crowd & funding. Crowdfunding is a way to raise money from a crowd or a large number of people.
Crowdfunding didn’t exist as it does now until around the early 2000s. Many believe that the first crowdfunding project occurred in 1997. It was carried out by American fans of the Rock band Marillion. The fans used the internet to put up $60, 000 for the band to tour and be able to play in the United States. Seeing how the project succeeded, the band took interest in the model and used the same strategy to fund the production of their next 3 albums.
Unlike traditional means of sourcing finance, where you would ask a few people to each provide large sums of money, crowdfunding makes it easier by increasing the number of people and each person can contribute a small sum.
Crowdfunding uses the internet to give you access to millions of potential funders. These funders could contribute funds as investors expecting returns in form of products, services, or equity or donate freely.
While crowdfunding remains a great way to finance your business and allow others to make an investment, it is also used for non-profit organizations and individuals. It is carried out easily on specific platforms.
Different types of crowdfunding
- Investment based crowdfunding
This is also known as equity crowdfunding. Here people can invest by contributing funds for equity. This means they have a stake in the business or shares in the project. The amount of equity or shares a backer (investor) has depends on how much money they invest. Equity crowdfunding is not as common as other types of crowdfunding and has its downsides too. Like any business involving shares, the value goes up or down depending on the business’s success. For investors looking to make an investment, you can invest a small part of your income yearly on equity-based crowdfunding.
- Rewards-based crowdfunding
Rewards-based crowdfunding is exactly what it sounds like. Here contributors give money in return for a reward but usually for a project or cause they believe in. The rewards offered may vary by the size of the donations made to motivate people to contribute higher amounts. Rewards often associated with a reward-based crowdfunding campaign include t-shirts, gifts, tickets to an event, product or service at a discount, and so on. It always ties directly with the project. Like most online crowdfunding campaigns, this type thrives on using social media and crowdfunding platforms.
- Donation-based crowdfunding
When it comes to donation-based crowdfunding, people give money and expect nothing in return. Even though some donation-based crowdfunding campaigns might offer small rewards, the major reason for giving is to show support and help the person in need. The donors can give for social or personal reasons. They could also be part of a community. Charity organizations using sites like GoFundMe are a good example of donation-based crowdfunding campaigns.
- Debt crowdfunding
This type of crowdfunding has other names like peer-to-peer lending, p2p lending, peer p2p, or loan-based lending. You can lend money to individuals or companies at a set interest rate while bypassing the traditional methods of using banks. It’s similar to equity-based crowdfunding in that angel investors can use this crowdfunding campaign to invest. The return on the loan or peer-to-peer lending is financial. However, donors or contributors may also give funding while expecting no interest on the loan and taking joy in knowing they helped with something. The money usually has to be repaid within a set deadline. If you are wondering if p2p lending isn’t a tad risky, it does present risks to both business owners or campaign organizers and investors.
Why should you start crowdfunding?
For the benefits which include;
It’s safe to say that no other method of raising money can give you access to thousands and millions of investors or backers like crowdfunding. Through the use of crowdfunding platforms, you can enjoy maximum exposure, interact with others, and share your campaigns. It also provides various opportunities to invest or even gain a reward in return.
- It helps you validate your idea
Regardless of if you are raising capital for a business or project, it’s important to validate your idea and perform necessary adjustments. When you launch on crowdfunding websites, you will meet potential investors or customers who show an interest in your offerings. Their comments or questions can help you know if you are headed in the right direction.
- It can clean up your presentation
Crowdfunding projects force you to look at the presentation on every aspect of your campaign or business. This saves you time and trouble of missing any details in your positioning, target market, and so on.
- You can take advantage of efficiency for funding
Using any crowdfunding platform, social media, and other outlets, you can build a cohesive profile that makes raising capital efficient. The best sites act as a financial conduct authority that secures your money, assures investors, and saves you time on fundraising.
- It’s easier to get capital
Raising capital for your business is hardly easy when you are a start-up company. It’s not strange to struggle with being passed over by venture capital firms, banks, or even rich family members. A pool of small investors may not be your best option, but many investors give you what you need faster.
- It drives engagement
What if you could build buzz around your brand/business, product, or service? What if you could secure early adopters and raise awareness before your business or idea becomes a reality? Not every startup company gets this chance, but crowdfunding allows you to achieve this and more for success.
Are There Any Risks?
No endeavor is without risks, they say, and since crowdfunding is very much a new concept, there are some risks to it for both investors and organizers.
- The business may fail
It’s exciting that you can raise money from crowdfunding as an investor or organizer. But studies show that many new businesses fail in the first year, and both parties could lose all the funding.
- The crowdfunding platforms may fail
When you want to invest through crowdfunding, you will have to pay the crowdfunding website. If these crowdfunding websites, go broke or fail before the business gets the money donated, both parties lose.
- Selling shares might be tough
It’s not far-fetched to want to sell shares gained in an investment. However, since shares gotten through crowdfunding businesses are hardly listed, you may not sell them easily, as with a big company already listed.
Risks or not, people continue to raise the money they need through crowdfunding every day. Make sure to start by finding a platform that suits your goal and build your campaign from there.