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Home | Blogs | Crowdfunding A New Opportunity for Business Funding
Wed Aug 14 09:36:05 UTC 2019

Crowdfunding A New Opportunity for Business Funding

What is Crowdfunding?

Crowdfunding is the process of raising funds and money in order to fund a project or business venture with the help of donors using an online platform, like Kickstarter and Indiegogo. The time frame for raising the funds is usually set and the rules, regulations and fees for donations tend to vary across different platforms. There are many Crowdfunding Websites in the world, that have benefitted a lot of businesses and individuals by supporting their causes.

In other words, it is about persuading businesses and other individuals to make a donation to you, regardless of the amount that is being donated. Also popularly known as the social media version of fundraising, crowdfunding has become quite prevalent in the recent years which allows individuals as well as non profit organisations and companies to raise money.

As of now, there are more than 600 platforms of Crowdfunding all across the world, which has helped to raise funds worth billions of dollars annually.

The Mechanism of Crowdfunding:

Crowdfunding is becoming increasingly prevalent in the last few years, especially due to the way it works. Not only is it easy to follow and generate funds, it is also economically viable when it comes to dealing with different suppliers.

Typically done via an online platform and Crowdfunding Sites, this method of fundraising allows the fundraiser to set up a public campaign that would allow donations to be accepted. Furthermore, this campaign will advertise some major details like the nature of the venture or project, the approximate amount of money that the business or individual hopes to raise as well as the deadline of the fundraiser.

Once done, people can make donations of certain specified amounts as per their wish through the campaign?s website and in turn receive an acknowledgement or return for their donation.

The most common type of Crowdfunding fundraisers uses Crowdfunding Sites like Indiegogo and Kickstarter, where the donor receives special rewards for their help. This means that they could get a free product or even a chance to be involved the designing process of a product or service.

People can also use Crowdfunding to get loans and financing. Some banks allow individuals to directly invest in or borrow funds from each other, like Monzo Crowdfunding, wherein both parties tend to benefit from the transactions they make. 


     

Crowdfunding Implementations and Executions:

Crowdfunding is a type of fundraiser that caters to a wide range of projects and ventures, from educational to charitable and even creative projects, like the funding of films, in addition to start-ups and businesses. Every Crowdfunding Website and platform covers specific categories, such as Kickstarter, for example, which has its focus more on creative projects. Yet another platform called Crowdfunder is an equity-based platform which caters to businesses only.

 The Different Types of Crowdfunding:

Crowdfunding has 4 distinct types, namely Rewards Crowdfunding, Equity Crowdfunding, Donation Crowdfunding and Lending. Each of these have their own different benefits and associated risks. These types are mentioned below:

1.      Rewards Crowdfunding:

Known as one of the most common forms of crowdfunding, Rewards Crowdfunding campaigns and Crowdfunding Websites set different level of rewards as incentives for backers which encourages them to donate more money. 

Sites with rewards crowdfunding can easily help companies to pre-sell their best products and thus get an audience of early, premature backers. These companies can then raise staggering amounts of funding for their venture in the subsequent crowdfunding rounds. This type of crowdfunding is the strongest when it comes to providing interest in an idea, instead of a finished product or company.

2.      Equity Crowdfunding:

Equity crowdfunding enables the backers and donors to take an equity stake in the business. crowdfunding done in this form is only a meagre six percent, which has made Equity Crowdfunding the slowest developing forms. It could, however, be the next frontier of crowdfunding, with equity investments now being available to funding by a wide range of people, instead of just accredited investors and private equity firms, etc.

Equity crowdfunding tends to offer a wide range of investors to businesses. These are investors who are specialised and knowledgeable about the different industries and only invest if they are interested in the company. Moreover, in this type of crowdfunding, all of the collected funds are combined into a single fund pool which is then treated in the same way that traditional investments are treated.

3.      Donation Crowdfunding:

In this type of crowdfunding, backers do not receive anything in return for their donations. It is very common for indicial who require funds for their immediate, personal need or for charities that tend to support causes that seem worthy. There are many Crowdfunding Sites made specially for Donation Crowdfunding.

4.      Lending Crowdfunding:

Money raised through lending crowdfunding is paid back to the backers within a specified time period, along with interest. This has given investors the opportunity to earn revenue on a wide range of loans. Additionally, many lending platforms, like Monzo Crowdfunding, and Crowdfunding Websites also serve as currency transfer platforms, where the lenders can execute foreign exchange when they lend money to people of different countries.

The Different Pros and Cons of Crowdfunding:

Pros:

Crowdfunding offers start-ups and early stage companies with strategies to expand, grow and get to the next level. In earlier times, business or start-up owners had to depend on help from investors or banks for loan and financial help. With crowdfunding, it has become easier for them to arrange finances and pitch their business ideas to the people.

A successful round of crowdfunding tends to provide businesses with the much-needed financial help, along with a customer base which can help the business to generate profitable returns.

Cons:

Every individual and business needs to have an engaging story to pitch to the donors, failing which would result in the crowdfunding bid to be a major fail. Crowdfunding Sites like Kickstarter do not collect any funds until the set goal of fundraising is reached. This means that a lot of time is wasted in trying to collect funds when that time could be used to take other steps to expand the business.

Moreover, when individuals and business owners turn to the crowds instead of traditional investors like bank officers and investors, they lose out on the much-needed advice and mentorship that the latter offers.

How Does Crowdfunding Help Businesses?

Also cited as a way of being able to get direct feedback from the public on how new or existing ideas can be removed, Crowdfunding, and its types, be it Equity Crowdfunding, or Donation Crowdfunding, are all done for different projects with different goals. It can save a businesses thousands of dollars by testing products or service for public demand rather than simply releasing the project.

Businesses also sometimes use a crowdfunding campaign as a tool of marketing. many a times, these campaigns can become viral on social media platforms and thus can be seen by millions of people all around the world. This can also bring exposure to the business and help it to generate funds.

Choosing the Right Platform:

As of now, there are two main models of crowdfunding being used. First, there is Rewards Crowdfunding, which uses Crowdfunding Sites and platforms like Kickstarter and Indiegogo, where people who donate money get rewards in return. Then there is Equity Crowdfunding, where investors simply invest capital for the projects or ventures.

While both of these are singular approaches, they can also sometimes work together. According to experts, before choosing either, businesses need to decide which of the two types caters to their core goals and objectives. While Rewards Crowdfunding can work well as a stepping stone to reaching consumer demand without risks, Equity Crowdfunding would be a good choice for businesses that require feedback as well as connections for the future.

The Takeaway:

Crowdfunding, thus, is an opportunity for businesses and individuals that is still in development phases, but has a number of promising opportunities for success and growth for the same. Every business, at some point of time, might have a use for crowdfunding. Not only do crowdfunding campaigns offer marketing and proof-of-concept for new ideas, they also allow public feedback and reduced costs when dealing with different suppliers.  

Regardkess of all the campaigns that have failed on the way, crowdfunding is here to stay for the future, and will most likely grow immensely, especially as a source of capital for early stage businesses and start-ups. This is also because it is something that goes above and beyond the general processes to help make new ideas come to life.

Additionally, crowdfunding is also being used for Business-to-Business or B2B commerce and for the marketing of the already existing businesses and products in different industries. All this is done by using crowdfunding platforms, like Monzo Crowdfunding, for example.

Most new innovations, technologies, projects and even businesses have been getting funded on the various available Crowdfunding Websites. While the need for a source of traditional funding methods for all these has been strong, crowdfunding has seemed to fill in the void and has been slowly overshadowing traditional funding methods in recent years.

 

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