Crowdfunding is a method of funding a project or venture by raising money from a large number of people. Nowadays, if some people want to support a particular idea, they perform it via websites created for this purpose – primarily via social media and crowdfunding platforms. Instead of traditional investors, crowdfunding campaigns are funded by the general public.
The Benefits of Crowdfunding
The crowdfunding concept has a long history with more than one root. Books, for example, have been crowdfunded for centuries. Authors and publishers would advertise book projects in enumeration or subscription schemes. In the age of advanced technology, this method received a second life.
Due to crowdfunding, many startups and small businesses become visible on the market. Today, there exists plenty of crowdfunding sites for business. For instance, the entrepreneur can find potential investors through these websites. By using a crowdfunding platform like Fundable or Crowdfunding, they have access to thousands of accredited investors who can see, interact with, and share their fundraising campaign.
Crowdfunding gives a chance to present a particular business. Thanks to a crowdfunding campaign, the entrepreneur can go through the process of creating her or his business – starting from history, traction, offerings and finishing with an addressable market and value proposition.
Although a crowdfunding campaign provides a lot of benefits, it has to be well planned. The basic strategies are utilizing social media, creating email distribution lists before the project launches, and contacting local media.
Another benefit of crowdfunding is the quick feedback from interested parties. By presenting a project to the masses, the founders gain the perfect occasion to validate and enrich their offering.
Last but not least, a great thing about crowdfunding is the efficiency. This method gives an opportunity to centralize and streamline fundraising efforts. Each user builds a comprehensive profile to which he or she can present all the benefits of the project without duplicating efforts from printing documents, compiling binders, and manually updating.
Types of Crowdfunding
Because of a significant amount of crowdfunding platforms available, it can be difficult for an entrepreneur to choose the right one. Each crowdfunding method depends on the type of product or service offered and the specific aim for growth. All kinds of crowdfunding have their pros and cons. The three top types are rewards-based, donation-based, and equity crowdfunding.
The reward-based type has been used for a broad range of purposes, including motion picture promotion, free software development, inventions development, scientific research, and civic projects. Reward-based crowdfunding encourages people to support because of a particular reward that they may find enticing.
Donation-based crowdfunding is a campaign where the individuals offer their money for a particular goal. The investors or contributors don’t have any financial return. Donation-based crowdfunding includes the initiatives like fundraising for disaster relief, charities, nonprofits, and medical bills.
The last-mentioned type is equity-based crowdfunding. In contrast to the donation-based and rewards-based methods, crowdfunding for equity offers the potential investors an opportunity to earn some money through ownership. By becoming part-owners of the particular company, they can trade capital for equity shares. Conversely, both the creator and the contributor will benefit. The entrepreneurs receive an equal financial return on their investment; the equity owners gain the profits in the form of a dividend or distribution.
Crowdfunding is complete contradiction compared to the mainstream approach to business finance. Traditionally, if the entrepreneur wants to obtain capital for a project, he has to prepare a good business plan, do market research, create prototypes, and then spread his idea among affluent investors and institutions. In practice, these funding sources are limited to few key players, e.g. banks, angel investors, and venture capital firms.
Crowdfunding, using a variety of methods, increases chances for success. The entrepreneur creates an attractive profile and convinces potential investors to cooperate. With crowdfunding, it is easier to find financial support.