What Is Crowdfunding Definition? Wonderful Explanations & Extensive Concepts.
The fundraising technique that entrepreneurs use to finance their projects through websites and social media platforms is called Crowdfunding. When the literature is reviewed, it is seen that the concept of Crowdfunding is related to the concept of crowdsourcing, which means benefiting from mass resources.
Crowdfunding refers to the practice of funding a project by raising money from a large number of people as a group of investors. Crowdfunding is a project which is relevant for a particular cause.
A model for bringing large numbers of people to make small donations to fund your project. Typically, you’ll expect them to support your project in exchange for a little reward or feeling of being a partner to success.
Crowdfunding for business involves campaigning for the participant’s money on a crowdfunding website. It has the benefit of both helping you receive business funding and spreading awareness of your business.
Crowdfunding is expected to be a convenient way to raise funds from a group of people as investors, who get equity in the companies. The main characteristic of Crowdfunding is that the complete process of getting funds via various retail investors happens on the internet base. Therefore, the online community plays a special role in Crowdfunding.
Crowdfunding has emerged to be an effective way for businesses to increase capital. These platforms are finding lots of innovative ways to fund new projects. Crowdfunding gives project owners or new startups the ability to raise funds as a great way to find investment capital. There is a common phrase for expressing difficulties; “You have to knock on a lot of doors to get to where you’re going” No. Crowdfunding helps you to focus on your project without visiting banks.
Crowdfunding brings creative ideas and supporters together. It helps potential entrepreneurs to find donors who are willing to invest their money to assist entrepreneurs. Investors assist a specific project when they see its potential to be a success in the forthcoming future. However, it is sometimes seen that people support projects that are unlikely to be successful because they empathize with entrepreneurs or have a common value.
The reason why a crowdfunding project is supported can be based on an emotional basis sometimes. In short, Crowdfunding is a model of financing a project or initiative by collecting a small amount of money from each supporter, usually from a large number of people, generally over the Internet.
Crowdfunding For Business: The Basics
Crowdfunding has an easy process:
- Just sign up for a crowdfunding platform.
- Explain your project.
- List your funding needs and asking donations to start your project.
For gathering supporters, the process takes place by selecting projects that meet their expectations or with priority and donations.
Before you start crowdfunding for your business project, know that there are distinct types of Crowdfunding. You can direct your project by answering the following questions:
- How can you do it?
- How people support you?
- What are your project promises?
- What you promise to supporters
- What type of crowdfunding strategy should you follow?
- What type of crowdfunding site should you apply to?
A campaign could be prepared like any marketing or fundraising campaign. It requires a creative strategy and solid execution to be successful.
Crowdfunding is not a new concept. For hundreds of years, many religious, ideological, or political groups have used this fundraising strategy. It has been for ages it has been collected for religious festivals. It has also been used in films, social causes, music festivals, etc.
In a successful crowdfunding model, the small contribution margins ensure that many participants can say that I financed the project and who owns the project. Participants embrace the project and its success. Since a crowdfunding project can be implemented with small contributions, the participants do not incur a financial burden. A crowdfunding project ensures that hundreds of thousands of people who support the project are happy to have a share for a project they like and hope to realize.
Statistics show that projects where the project or product is promoted with visuals such as photographs and videos, usually by prototyping the product, are more successful in finding supporters. In other words, the success of a crowdfunding project depends on supporting it with visual materials and objects, not just verbal or on paper.
How Does Crowdfunding Work?
Crowdfunding is an IPO where funds are collected differently. Traditionally, the options for capital building available to startups were few. It comprised mainly of the founder’s network, business angels, venture capital companies. On the other hand, there has been a rise in alternative financing methods over ten years, with crowdfunding becoming more popular day by day.
Back in 2010, crowdfunding was a relatively small industry, valued at around $880 million worldwide. In 2020, estimates the global value of the crowdfunding market is more than $70 billion. The sector is expected to reach $100 billion in near two years.
Crowdfunding is the act of seeking financial support for a project from a number of people. The traditional financing method refers to entrepreneurs seeking large sums from a few investors or institutions like banks. In contrast, the “crowd” in a crowdfunding campaign can comprise much more people as an individual backers. The basic purpose of crowdfunding is not just that find individuals to find capital. crowdfunding is the opportunity to test the market and see an engaged following for a business idea or a new product.
While using websites and social networks to attract investors with profiles of investors looking for investors to raise funds for their projects. From entrepreneurs to scientists, from sportsmen to artists, anyone can create a crowdfunding campaign to raise their projects’ capital.
It works by presenting a pitch on the platform to people and allowing them to invest or to donate by promising small rewards or attractive profits in return. Nevertheless, this phenomenon works in different ways for different people and also rewards them differently. Some donors support crowdfunding projects simply out of empathy or emotionally, and some of them do it for any capital grants.
How Crowdfunding Works For Entrepreneurs
For entrepreneurs, crowdfunding is the shortcut to raise money for their startups. Some entrepreneurs believe that they have an innovative idea but cannot find capital with the traditional ways and standard financial methods. So many of them present their idea on a crowdfunding platform.
Crowdfunding platforms not only to raise money ground. You can also make your business more visible. In this way, by attracting the media, companies, and banks’ attention, it can more easily find financial support within the scope of a well-known and well-known project.
A crowdfunding project should be announced with a presentation in which the project content is clear and clearly explained and includes detailed information on the project’s objectives and achievements. It should be explained that the amount of capital required for the realization of the project and that this money is needed. If you say, you need 10,000 USD for this project. With a clear financial statement, you must show what kind of products or services you will purchase for USD 10,000.
A crowdfunding project can seek out volunteer supporters without promising a response. It may offer small rewards or promise financial gain. For example, if you are promising to make a movie as a crowdfunding project, you can promise supporters a movie ticket or a percentage of the film’s revenue. Your first promise is a small reward, but your second promise can be a profitable investment promise if the movie is a serious box office success. You can offer your investors different kinds of rewards or send your regards and say thanks.
How Crowdfunding Works For Investors
Crowdfunding could be a modern way to make donates or a way to make a small investment. Maybe your intention is only to support. Perhaps you want to get a share from a successful project.
Crowdfunding websites have a wide range of projects. Many of them depend on social causes. They ask for a small donation, so you don’t need to make a big investment or give significant capital. The main motive for some of the crowdfunding participants is to help people, but they prefer people who struggle to achieve something while doing so.
How Crowdfunding Works For Social Causes
Crowdfunding is not just a medium for raising funds for business ideas. It is also using to raise donations for social causes as well.
Many charities use crowdfunding platforms to raise donations. Besides, charities announce the reason for the charity campaigns and the purposes of the collected donate.
How Crowdfunding Works For An Individual
Apart from entrepreneurs, those who seek aid because of their financial problems and charities use crowdfunding platforms.
People crowdfund their education fees or even pay their hospital bills. This is how patients collect donations to pay for the treatment costs. Crowdfunding also serves humanity to help people via using the internet.
Types Of Crowdfunding
Crowdfunding platforms don’t generally label themselves as one type of crowdfunding or another, yet we can differentiate between four fundamentally different types of business crowdfunding.
Although this system, which is implemented in four models based on donations, awards, shares, and debt, has handicaps that need improvement; it has shown remarkable growth all over the world due to the significant benefits provided by the system to three parties: investors, entrepreneurs and the platform.
1) Rewards Crowdfunding:
This is what most people think of when you talk about crowdfunding for business purposes. It’s how Kickstarter works – you solicit funding from would-be backers, and in exchange for money, you reward the backer with a tangible product. It’s how countless board game designers funded their projects.
Sites like Kickstarter and Indiegogo are called rewards-based crowdfunding platforms because companies or people who fundraise on them provide rewards to donors who donate their money to projects or companies.
When we think about crowdfunding for business projects, generally, we are thinking about rewards-based crowdfunding platforms. It’s related to “Kickstarter” because crowdfunding has almost become synonymous with Kickstarter in the public memory. Rewards crowdfunding seems like a ticket for entrepreneurs and small businesses that need to raise money and stay out of debt, mainly if the crowdfunding venture involves the tangible goods they can offer to backers as rewards.
Kickstarter is a reward-based crowdfunding website that primarily focuses on small-scale disruptive startups and creative projects such as many artist’s works and books.
Rewards Crowdfunding Strategies
a) Set funding goals: Announce how much money you need to raise to finish your project. This is a very strategic decision because many platforms function as all-or-nothing fundraising. It means if you can’t hit your fundraising goals, the project is canceling and the funds collected are returned to donors.
b) Devise a reward strategy: If you can promise more than one reward, classify it by donation amount. For example, you can promise to send a digital participant certificate to donors between $5-100 Still, to open the “thanks donors list” section on the company’s website to be established as a result of your project and write the donor names to those who donate more than $100 rated promises can convince your investors for higher investments.
c) Post your campaign to a crowdfunding platform: Shoot a video describing your project’s content, your products, or what you want to do. Crowdfunding videos are very popular nowadays. Your investors want to watch what you promise with your voice and your presentation. Crowdfunding projects supported by such presentations are more successful.
d) Get social: Do not settle for announcing your project on the crowdfunding platform, just telling those who visit this platform. Statistics have shown a direct correlation between the strength of your social media outreach and success in crowdfunding. So use social media channels to introduce and market your crowdfunding project.
Rewards-based crowdfunding is the best choice for startups and businesses with exciting products or services like games, gadgets to offer the public.
2) Equity Crowdfunding:
Equity crowdfunding is a niche field than rewards crowdfunding. Equity crowdfunding, instead of backing a project in exchange for any reward, the backer becomes an investor who receives an ownership stake in the business doing the crowdfunding. Equity crowdfunders are providing you with working capital in exchange for a piece of your company.
The share-based crowdfunding system is based on the entrepreneurial firm seeking funds to give shares from its earnings to investors in return for the fund it requests. The system functions the same as the stock market.
Equity crowdfunding is best for companies with exponential growth potential. In a sense, you promise donors a company share that will increase in value as much as your success. AngelList is one of the most popular crowdfunding platforms for equity-based crowdfunding.
Pros of Equity Crowdfunding: It’s smart Money, There are potentially larger sums of fundraising, Easier investor relations.
Cons of Equity Crowdfunding: Increased transparency, Expensive “fundraising.
3) Debt Crowdfunding:
A P2P (Peer to Peer), lending-based crowdfunding model, a peer-to-peer lending transaction, investors take out traditional banks and lend each other at lower interest rates through a platform. Actually, instead of borrowing from a bank, you’re borrowing from a large number of investors.
“Crowdlending” is a good option for a business with a defined need for money, a strategy for what to do with it, and a plan to pay it back.
This system, which operates on a debt-based basis, is mostly used by investors who aim to obtain a certain fixed income and have a low-risk appetite. As a frequently used method in this model, since the entrepreneur provides an asset to the platform in return for borrowing, the risk of not getting a return for the investors’ financing is shallow.
Debt crowdfunding is best for startups and stable businesses that need cash for a defined purpose. Prosper, FundingCircle, and Lending Club are among the most well-known crowdfunding platforms of this model.
d) Donation Crowdfunding:
This is how most GoFundMe campaigns work. The campaigner raises money from backers and does not give anything to the backer in return. In the donation-based crowdfunding model, fundraising investors’ motivation is the spiritual pleasure of helping an entrepreneur invest in a project they believe in, rather than earning any return.
Donation crowdfunding is best for nonprofits, businesses devoted to a philanthropic cause, businesses struggling to recover from hardship, or other businesses that can appeal to donors’ sense of compassion.
“GoFundMe” and “Crowdrise” platforms stand out as the most well-known donation-based crowdfunding platforms in the world.
Crowdfunding For Your Business
While just about any business can try its hand at crowdfunding, there are certain types of companies that may be better positioned to succeed at it than others. Here are some examples of such businesses:
- Businesses producing a tangible product to offer
- Business startups with exponential growth potential
- Businesses with a substantial/passionate following on social media
- Businesses that attract attention by being unique/unusual
- Businesses with a humanitarian mission and a touching origin story
- If your business project exhibits none of these qualities, your crowdfunding campaign may have a hard time gaining traction.
- Individuals aged 24 between 35 years are the most engage group in crowdfunding campaigns.
- $34 Billion have been raised through crowdfunding worldwide.
- An individual crowdfunding campaign raises an average of $568
- North American generates $17.2 billion every year through crowdfunding campaigns. Asia generates $10.54 billion Europe generates $6.48 billion through crowdfunding campaigns per year.
- The estimated future growth of the crowdfunding market is estimated to be at $300 billion by the year 2030.
- Kickstarter has the overall most completed projects under its belt with 355,956
- The platform with the highest average amount of funds raised is Indiegogo at $58,045