Until recently, financing a business involved asking a few people for big sums of money. Crowdfunding is turning this idea on its head, using the internet to help entrepreneurs talk to thousands – if not millions – of potential funders that each contribute a small amount.
Crowdfunding is an efficient, contemporary way to connect entrepreneurs with smaller sources of capital, in the form of individual investors. Investopedia defines crowdfunding as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”
Crowdfunding involves three parties:
Project Initiator – Project initiator can be anyone with a strong idea. If you have an idea and are looking for funds to put that idea into execution, you can easily be a project initiator on any of the crowdfunding platforms.
Contributor – People are now participating in crowdfunding in a pretty significant way. They make contributions to the funding of projects which they find creative and competitive. People love the idea of tying themselves to something they care about and can wed that with financial return.
Crowdfunding platform – The platform, which is usually a website, gives the project initiator a platform to present his idea and the potential investors to contribute to the projects they find viable.
Types of Crowdfunding
Just like there are many different kinds of capital round raises for businesses in all stages of growth, there is a variety of crowdfunding types. Which crowdfunding method you select depends on the type of product or service you offer and your goals for growth. The 3 primary types are:
Donation-Based Crowdfunding – In this type of crowd funding, contributions are selflessly given by the donors who fund the cause and expect no compensation in return. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, non-profits and medical bills.
Rewards-Based Crowdfunding – Rewards-based crowdfunding involves individuals contributing to your project in exchange for a “reward,” typically a form of the product or service your company offers. This is most commonly used by entrepreneurs because it lets business-owners incentivize their contributors without incurring huge extra expenses or selling ownership stake.
Equity-Based Crowdfunding – Contributors are offered shares of the business entity, a stake or a share in its profits in this type of crowdfunding. This lures investments from contributors for lucrative business ideas.
Rewards and Donation based Crowdfunding are the two most popular Crowdfunding types. Within these two types, there are two Crowdfunding models called:
Keep It All – Amount received through each transaction is entered directly into the project initiator’s account immediately.
All or Nothing – If the economic objective is achieved (within a period of time), all contributions are transferred directly to initiator’s account. If the goal is not met, the funds raised will be returned to the contributors and the campaign will receive no funds.
In essence, crowdfunding is an excellent way for entrepreneurs to get the funds and exposure they need in order to verify, execute, and help their ventures grow. With the industry still evolving and becoming more efficient day by day, there is no better time than now to take advantage of the associated benefits!