What Is Crowdfunding?
Crowdfunding is a way for businesses, people, or groups to get money for their projects or companies from many people who each give a small amount. It involves using websites that let people support projects by giving money in return for rewards or a part of the business. Instead of asking for a lot of money from a few places like banks or investors, crowdfunding gets the “crowd” involved by letting lots of people give a little bit. Many people giving a little bit of money can provide enough funds to start a new business.
When crowdfunding, instead of looking for large sums of money from a few big investors or lenders like banks or venture capitalists, the project or business idea is shared with a wide audience or “crowd.” This crowd is then invited to contribute smaller amounts of money towards the funding needed.
Even though each individual contribution may be modest, when combined, these numerous small investments from many different people can add up to the total financing required to launch the proposed initiative. So rather than relying on a handful of major investors, crowdfunding taps into the collective support of many ordinary individuals pooling their resources together.
How Crowdfunding Works?
Let us now find out how crowdfunding process operates:
- A business plan is developed by a person or group of individuals or a specific concept may be created by them, for instance creating a new product.
- A crowdfunding campaign page is then made on websites like Kickstarter and Indiegogo where they give their ‘pitch’. Here they state what the project is about among other things; setting a target figure needed to raise funds, how that money will be used and the different levels at which backers will receive rewards for supporting them financially.
- The next step after creating a business idea and setting up crowd-funding platforms is running these types of projects between 30 – 60 days which are advertised across networks that the creators have access to. This should also be promoted at every part of the internet as well throughout the network.
- People who are interested in the idea can donate money through the project page. Normally the money comes from creators’ friends or family combined with backers around the world who find the project on crowdfunding sites such as Kickstarter, Indiegogo etc.
- When the campaign reaches its goal before time runs out then all funds raised go to the project except for platform fees.
This model enables small business owners or startup companies to secure capital for product development or scale up without necessarily relying on bank loans which would require equity release and interest payments to be made over time. Instead such enterprises offer ownership shares in exchange for financial support from a large number of individuals who may or may not have any form of business acumen but are willing to invest based solely on their personal experience and interest.
Types of Crowdfunding
Crowdfunding can be categorized into four different types based on the nature of the funding and the rewards or incentives offered to backers.
following are the types of crowdfunding:
Rewards-Based Crowdfunding
Rewards-based crowdfunding is a method where individuals or groups seeking funds for their innovative ideas or projects receive financial backing from numerous supporters, known as backers. In exchange for their contributions, these backers are offered various enticing rewards. These rewards can take the form of early access to the finished product, exclusive or limited-edition versions, branded merchandise related to the project.
Equity Crowdfunding
In this model, instead of receiving tangible rewards, supporters are turned into investors who purchase equity in the businesses that they back. Consequently, startups and small companies are able to raise money from numerous people through offering shares of the enterprise to them in exchange for funds.
Debt Crowdfunding
Debt-based or lending crowdfunding is a type of fundraising where people contribute money to support a cause or project but do not expect financial return. Instead, the backers provide loans which must be repaid with interest. The individuals can fund parts of loans for projects, businesses, or personal needs through online platforms.
Donation Crowdfunding
Donation Crowdfunding is a form of raising money where people contribute money to support a cause, project, or individual in need without expecting any financial rewards in return. This method is commonly used for charitable organizations, social initiatives, community projects, as well as personal situations like medical emergencies or unexpected expenses.
Most Popular Crowdfunding Websites
| Crowdfunding Website | Type |
| Kickstarter | Creative Projects |
| Indiegogo | Diverse Projects |
| GoFundMe | Personal & Charitable |
| Patreon | Membership Platform |
| Fundable | Startup Funding |
| Seedrs | Equity Crowdfunding |
Read More
Top 10 Crowdfunding Websites For Startups in India
10 Benefits of Online Crowdfunding for Startups In India
Crowdfunding Advantages and Disadvantages
Here are some of the advantages and disadvantages associated with crowdfunding:
Advantages of Crowdfunding
- Easier funding access for projects or businesses
- It helps to prove that there is demand for an idea
- Backers provide market feedback and insights which can be used to make the final product better
- Creates loyal fans who will champion the item or cause
- Compared to getting shareholders, there is no loss of ownership or control
- It’s cheaper than other methods of raising money and does not require security
- Awareness is raised by successful campaigns and they also generate publicity in the market
Disadvantages of Crowdfunding
- It takes a lot of work and time to market campaigns so people can see them
- This means that other companies may steal your ideas if you show them to the public
- The fees charged by crowdfunding platforms might eat up the money you raised
- If you don’t meet your funding goal, then you won’t get any funds
- Should a campaign succeed, fulfilling rewards may involve extensive logistics
- Additionally, equity crowdfunding dilutes ownership and demands profit sharing
- Certain types of crowdfunding have specific legal obligations regarding disclosure
Final Words
Crowdfunding has become a popular way of raising money through presenting concepts to people at large and benefiting from numerous small donations. Despite some difficulties associated with it, the method offers a chance for business persons, innovators, activists as well as companies to actualize their projects.
Crowdfunding is a way for businesses to raise money from numerous individual investors using online campaigns. Businesses can offer different types of rewards such as giving out products or shares in return for investments made towards them.
These are the 4 different types of crowdfunding:
Rewards-based, Equity crowdfunding, Debt/lending crowdfunding, Donation crowdfunding
The aim of crowdfunding is to raise funds for a project, business, or cause by collecting small contributions from a large number of individuals, typically via an online platform. It allows creators, entrepreneurs, and individuals to access capital without traditional financing methods, such as bank loans or venture capital.
Yes, crowdfunding is legal in many countries, including the United States, the United Kingdom, and India, among others. However, regulations surrounding crowdfunding may vary depending on the jurisdiction and the type of crowdfunding (e.g., rewards-based, equity-based).
Crowdfunding offers several benefits, including access to capital without the need for traditional financing, the ability to validate and market test ideas, increased exposure and visibility for projects or businesses, and the opportunity to build a community of supporters and backers.