Crowdfunding is the use of small sums of money from a huge number of people to fund a new business initiative. Crowdfunding assists the easy accessibility of vast networks of people via social media and crowdfunding websites to connect investors and entrepreneurs, with the potential to increase entrepreneurship by increasing the number of investors beyond the conventional circle of owners, relatives, and venture capitalists.
How does it work?
There are certain limits on who can fund a new firm and how much they can give in most of the jurisdictions. Similar to the restrictions on hedge fund investing, they are intended to safeguard naive or non-wealthy investors from putting too much of their funds at risk. Since, so many new enterprises fail, investors run a great risk of losing their money.
Crowdfunding has enabled firms to raise hundreds of thousands or millions of dollars from anyone who has money to invest. Crowdfunding allows everyone with an idea to present it to a group of eager investors.
One of the most interesting initiatives that received financing was from a person who wanted to develop a new potato salad recipe. His objective was to raise $10, but he ended up raising more than $55,000 from 6,911 backers. Hundreds of projects are available for investment, and investors can start with as little as $10. Crowdfunding websites make money by taking a portion of the funds raised.
Advantages of Crowdfunding
- Reach – By using a crowdfunding platform like Fundable, you will have access to thousands of accredited investors who will be able to see, interact with, and share your fundraising campaign.
- Presentation – By launching a crowdfunding campaign, you go through the invaluable process of distilling your company’s history, traction, offerings, addressable market, value proposition, and more into a polished, readily consumable package.
- Public relations and marketing – From start to finish, you can share and promote your campaign via social media, email newsletters, and other internet marketing plans. As you and various media outlets cover the development of your fundraise, you can boost traffic to the website and other organizational resources.
- Concept Validation – Presenting your concept or business to the audience provides a wonderful opportunity to validate and refine your offering. As potential investors express interest and ask questions, you’ll immediately notice if there’s anything missing that would entice them to invest.
- Efficiency – One of the best aspects of online crowdfunding is its ability to consolidate and streamline your fundraising efforts. You eliminate the need to approach each prospect and possible investor individually by creating a single, comprehensive profile to which you can funnel all of your prospects and potential investors. Rather than duplicating efforts by printing documents, compiling binders, and physically updating each one when there is an update, you may provide everything online in a much more accessible fashion, giving you more time to manage your business rather than fundraising.
Various types of Crowdfunding
- Crowdfunding Based on Donations
Donation-based crowdfunding, in general, refers to any crowdfunding effort in which there is no financial return to the investors. Donation-based crowdfunding campaigns are commonly used to pay for disaster relief, charities, organisations, and medical expenditures.
- Crowdfunding with Reward
People contribute to your business in exchange for a “reward,” which is often a form of the product or service your firm provides. Even though this technique provides a reward to backers, it is still considered a subset of donation-based crowdsourcing because there is no cash or equity return. This strategy is popular on Fundable, as well as other popular crowdfunding platforms like Kickstarter and Indiegogo because it allows business owners to incentivize their contributors without incurring significant additional costs or surrendering ownership stake.
- Crowdfunding Based on Equity
Unlike donation and reward-based crowdfunding, equity-based crowdfunding allows contributors to become part-owners of your firm by exchanging funds for equity shares. Your contributions will receive a financial return on their investment as well as a portion of the profits in the form of a dividend or distribution as equity owners.