What does crowdfunding mean and what does it do?

Crowdfunding, in its simplest form means collecting money for our dream project from a large number of people online. It could be a group consisting of family members, friends, customers, individual investors. Even, it also includes anybody who is like minded enough to believe in idea and sponsor it. It opens an avenue to a much bigger platform that is available online. Here social media and its expansive network gives project a much greater outreach and display.

What makes Crowdfunding different?

It is completely different from the conventional ways of raising capital for a project. Generally, before getting investors onboard we need a solid business plan in place. Most of the time it requires an extensive amount of research. Some investors even want to see a prototype to decide,

However with it, we get a platform to create, display and share our thought through which we got the idea. Now, it grants us more options to initiate and grow our project in exchange for some shares in ownership or rewards. But, it depends on the size of the contribution by that investor.

How does it benefit us?

Compared to the old traditional ways crowdfunding offers more benefits now.

Greater Network

It places us in a network consisting of thousands of recognized and approved investors that we can talk to, discuss and share the complete vision behind our crowdfunding campaign.

Clearer Picture

We get to see a clearer picture of the pros and cons of our project in the process of starting our crowdfunding campaign. In order to create a successful campaign we need to look at our project closely. From the first thoughts to the people who we are doing it for or who will benefit, to a detailed plan for execution, ROI, and a lot more. But after giving it all a sincere thought we can create a promising business plan.

Publicity & Hype

There is no such thing as bad publicity. In this type of funding, the hype created through different channels of social media will get our thoughts and progress out to more and more people and potential investors. This will considerably increase our chances of making our campaign successful, as by allowing investors access and an insight to what we are doing and how far we have gotten it will help them in being able to trust us better. From the start till the end we can get more and more individuals interested in believing and investing more in our dream through posts, videos, publications and other various tools of online marketing.  

IDEA Evaluation

On a crowdfunding platform thousands of potential investors will evaluate our idea helping us to fine tune it and have it fully accepted before we give ourselves a go ahead. The investors to show interest in our campaign will ask questions about our project that will help us know if anything is missing or could be worked upon. Once we are done with adding those missing parts of the puzzle our campaign will automatically become more attractive and more rewarding.

Enhanced Effectiveness

The best element of a crowdfunding platform is that it consolidates all our money generating efforts under our profile and connects us in real time with all those involved with us in our campaign. This allows us more time (for our project) as its helps us reach everyone at once for updates, and saves us the hassle of contacting them all separately.

How many types of crowdfunding are there?

All projects require a certain amount of investment in their different stages of their growth. Crowd funding also comes in 4 different types, depending on the project and its growth objectives. The 4 types that are very different but all come under the umbrella of crowdfunding are reward based, donation based, equity based and debt based.

Crowdfunding based on ‘Rewards’

In ‘Reward’ based crowdfunding ‘Backers’ can contribute anything between $1 to &1000 or sometimes more in exchange for small rewards. It could simply be what is being produced, such as a Bluetooth speaker, a copy of our film or music album, etc.

There are many platforms for ‘Reward’ based crowdfunding but the most accepted ones are Indiegogo & Kickstarter.

Crowdfunding based on ‘Donations’

Just like it sounds in donation based crowdfunding ‘Donors’ are generally reward only through appreciation or gratitude shown by the project creator or beneficiary. These donations again range between $1 to &1000 and sometimes even more. The ‘Donors’ may also get a tax deduction and sometimes even a small souvenir.

Donation based crowdfunding is ideal for a non-profit cause. It could be used in disaster management, to educate the unprivileged, provide them clean drinking water, healthcare system or just to pay an individual’s medical bill. Out of the many the most used platforms for this kind of crowdfunding are GoFundMe and Crowdrise. Indiegogo and Kickstarter do donation based crowdfunding also but they all have a different criteria, requirements and limitations. For example Kickstarter does not offer ‘funds’ for donation.

Crowdfunding based on ‘Equity’

In equity based crowdfunding we can generate larger amounts. ‘Investors’ here gives at least $1000 to a lot more. You just need to give a few shares in exchange.

Equity based type is important in generating funds either to start or expand a business. But this form is not good for an art or welfare venture. This is because mostly they take money from angel investors or venture capitalists.

Fundable, EarlyShares and CircleUp are some popular platforms in the United States but AngelList and Crowdfunder top the list. However in U.K. and Europe the most popular equity crowdfunding platforms are Crowdcube and Seedrs.

Crowdfunding based on ‘Debt’

Debt based crowdfunding connects us with ‘Lenders’ and not ‘Backers’ or ‘Donors’. These ‘Lenders’ are sometimes as ‘Investors’, and over here they don’t expect rewards or equity. Instead they give us a loan and want the original amount back with interest. It is similar to a bank loan. But over here we don’t are not dependent on bank for large amount rather we take small amounts from a large number of ‘Lenders’.

Debt based funding is essential to refinance a credit card. For consolidating debt, to renovating our home or buying or fixing our car.

Now a summary for the types of crowdfunding available: –

Reward based crowdfunding: In exchange for a reward ‘Backers’ pay us a small amount.

Donation based crowdfunding: In exchange for gratitude or to support a noble cause ‘Donors’ pay small contributions.

Equity based crowdfunding: In exchange for a small number of shares in business ‘Investors’ put in large amounts of money.

Debt based crowdfunding: In exchange for some interest on top of the principal amount the ‘Lenders’ give out loans.

Crowdfunding has a long history with many origins. It is an alternative finance that combines crowdsourcing with micro financing. Moreover, it is a young and growing market that raised US$34 billion worldwide in 2015. It is changing the way people deal with their money and raise funds for their ventures.