Crowdfunding is a method of raising capital through the collective effort of friends, family, clients, and individual investors. This approach leverages the collective efforts of a large group of people, primarily online through social media and crowdfunding platforms, and leverages their networks for greater reach and exposure.
Crowdfunding can be a very viable option to finance your business dream. Why?
• Lets you take advantage of the world’s largest funding resource – everyone around the world.
• It gives you a large group of believers with a very good chance of loyal customers and avid supporters when your business is launched.
• Shares risk among many, which puts less financial pressure on a few individuals.
• Eliminate banks, venture capitalists and professional investors to create a business financing process on their terms.
• Gives you the ability to interact with your believers even before your business starts. Sharing knowledge and challenging each other will make your plan even stronger.
Upside down:
A successful crowdfunding round not only provides your business with the necessary cash, but creates a base of customers who feel they have a stake in the success of the business.
Down:
If you don’t have an interesting story to tell, your crowdfunding offer could be a flop. Sites like Kickstarter don’t collect money until a fundraising goal is reached, so there is still a lot of wasted time that could have been spent doing other things to grow the business.
Types of crowdfunding
Just as there are many different types of capital raising for companies at all stages of growth, there are a variety of types of crowdfunding. The crowdfunding method you select will depend on the type of product or service you offer and your growth goals. The 3 main types are donation-based, reward-based, and equity-based crowdfunding.
The most common type of crowdfunding fundraising is the use of sites like Kickstarter and Indiegogo, where donations are sought in exchange for special rewards. That could mean a free product or even the opportunity to participate in the design of the product or service.
Donation-based crowdfunding
Generally speaking, you can think of any crowdfunding campaign where there is no financial return for investors or contributors as donation-based crowdfunding. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, nonprofits, and medical bills.
Reward-based crowdfunding
Reward-based crowdfunding involves people contributing to your business in exchange for a “reward,” usually a form of the product or service that your company offers. Although this method offers a reward to backers, it is generally considered a subset of donation-based crowdfunding, as there is no financial or capital return. This approach is a popular choice for crowdfunding platforms like Kickstarter and Indiegogo, because it allows business owners to incentivize their contributors without incurring a lot of additional expenses or selling ownership shares.
Stock-based crowdfunding
Unlike donation and reward-based methods, share-based crowdfunding allows contributors to become co-owners of their business by exchanging capital for shares. As stock owners, your contributors receive a financial return on their investment and ultimately receive a portion of the earnings in the form of a dividend or distribution.
Crowdfunding can make it harder for entrepreneurs to commit fraud
Many articles have been written warning us of the dangers of crowdfunding. Naturally, entrepreneurs and investors who choose to transfer capital through crowdfunding must be aware of the risks associated with this form of capital distribution. But despite the risk, the potential for good far outweighs the dangers.
For example, crowdfunded companies will likely be vetted by brokers or finance portals that are as smart and sophisticated as any institutional investor, plus they will have critical scrutiny from the crowd to bolster portals’ initial due diligence. . The bottom line is that crowdfunding companies will be exposed to a greater number of industry-relevant investors, resulting in a more robust and efficient due diligence process than can be done through current funding models. .
