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 the business of your dreams. Because?
• Allows you to tap into the greatest global funding resource: All the people around the world.
• Gives you a large group of believers with a very good chance of gaining loyal customers and avid supporters when your business launches.
• Share the risk among many, putting less financial pressure on a few individuals.
• Bypasses banks, venture capitalists and professional investors to create a business financing process on your terms.
• Gives you the ability to engage with your believers even before your business launches. Sharing knowledge and challenging each other will make your plan even stronger.
The other way around:
A successful crowdfunding round not only provides your business with the cash it needs, but also builds a customer base who feel they have a stake in the success of the business.
If you don’t have a compelling story to tell, then your crowdfunding offer could be a flop. Sites like Kickstarter don’t raise money until a fundraising goal is reached, so that’s 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 rounds for companies at all stages of growth, there are a variety of types of crowdfunding. The crowdfunding method you select depends on the type of product or service you offer and your growth goals. The 3 main types are donation-based, reward-based, and equity crowdfunding.
The most common type of crowdfunding fundraiser 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.
Generally speaking, you can think of any crowdfunding campaign where there is no financial return to investors or contributors as donation-based crowdfunding. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, non-profit organizations, and medical bills.
Reward-based crowdfunding involves people contributing to your business in exchange for a “reward,” usually a form of the product or service your company offers. Although this method offers a reward to backers, it is still 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 backer without incurring a lot of additional expense or selling the ownership stake.
Unlike donation-based and reward-based methods, equity-based crowdfunding allows contributors to become co-owners of their company by exchanging equity for equity. As stock owners, your contributors receive a financial return on their investment and ultimately receive a portion of the profits in the form of dividends or distributions.
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 should 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, crowdfunding companies are likely to be vetted by broker-dealers or funding portals that are as savvy and sophisticated as any institutional investor, plus critical scrutiny from the crowd to bolster initial due diligence of crowdfunding. the portals. The bottom line is that crowdfunding companies will be exposed to a greater number of relevant industry investors, resulting in a stronger and more efficient due diligence process than can be accomplished through current funding models.