Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. This approach taps into the collective efforts of a large pool of individuals-primarily online via social media and crowdfunding platforms and leverages their networks for greater reach and exposure.
Crowdfunding can be a very viable option to fund your business dream. Why?
• It allows you to take advantage of the biggest global funding resource: All people from all over the world.
• It brings you a large group of believers with a really good chance on loyal customers and avid supporters when your business launches.
• It shares the risk among many, putting less financial pressure on just a few individuals.
• It cuts out banks, venture capitalists and professional investors to create a business funding process following your terms.
• It gives you the possibility to engage with your believers even before your business launches. Exchanging knowledge and challenging each other will make your plan even stronger.
A successful crowdfunding round not only provides your business with needed cash but creates a base of customers who feel as though they have a stake in the business’ success.
If you don’t have an engaging story to tell, then your crowdfunding bid could be a flop. Sites such as Kickstarter don’t collect 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 like there are many different kinds of capital round raises for businesses in all stages of growth, there are 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, rewards-based, and equity crowdfunding.
The most common type of crowdfunding fundraising is using sites like Kickstarter and Indiegogo, where donations are sought in return for special rewards. That could mean free product or even a chance to be involved in designing the product or service.
Broadly speaking, you can think of any crowdfunding campaign in which there is no financial return to the investors or contributors as donation-based crowdfunding. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, nonprofits, and medical bills.
Rewards-based crowdfunding involves individuals contributing to your business in exchange for a “reward,” typically a form of the product or service your company offers. Even though this method offers backers a reward, it’s still generally considered a subset of donation-based crowdfunding since there is no financial or equity return. This approach is a popular option for crowdfunding platforms like Kickstarter and Indiegogo because it lets business owners incentivize their contributors without incurring much extra expense or selling ownership stake.
Unlike the donation-based and rewards-based methods, equity-based crowdfunding allows contributors to become part-owners of your company by trading capital for equity shares. As equity owners, your contributors receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution
Crowdfunding may make it more difficult 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 via 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, crowdfunded companies will likely be screened by broker-dealers or funding portals who are just as savvy and sophisticated as any institutional investor, plus they’ll have the critical scrutiny of the crowd to reinforce the portals’ initial due diligence. The bottom line is that crowdfunded companies will be exposed to a higher number of industry-relevant investors, resulting in a more robust and efficient due diligence process than can be effected through current funding models.