Well as the name suggests, crowdfunding is basically the practice of gathering smaller funds or investments from a large number of people for any upcoming business venture or startup. Unlike going with the traditional way of asking funds from banks, angel investors, few wealthy individuals, or capital venture firms, it takes the fund seeker to a large number of people, crowd, that is willing to provide funds. Though this may seem a novel concept to many, it is totally not a new concept. People and businesses have been using crowdfunding for a long time ago. For example, in 1985, Paul Hogan and John Cornell collected funds from over 1400 investors to produce that time blockbuster movie, Crocodile Dundee.
Crowdfunding is commonly done through it’s websites, such as fundable and CircleUp. Generally, the business idea or the campaign idea is posted onto the website with the description of the proposed project. People on the website go through the description and if they like what they see and want to support the campaign, they can donate money to the person seeking funds. In crowdfunding terms, these supporters are termed as backers. There are four major types of crowdfunding types or models
-Donation Based CrowdFunding
These crowdfunding campaigns are the ones where there are no financial returns and investors do not seek any monetary benefits from their investment. The donation crowdfunding is usually done to carry out charities, disaster relief work, help nonprofits and Non-Governmental Organizations (NGOs).
This type of crowdfunding involves businesses or people selling shares of their company. According to the California Management Review, this type of funding represents only a small amount of all it’s activity. This is because of the legal and practical constraints associated with this type of funding.
-Debt Based CrowdFunding
This funding involves investors lending money to a person. People lend small amounts and these then accumulate into a substantial capital for the person seeking the funding. After the agreed timeline, the business or the one who sought the funds, return the money back to the investors. This way the huge interest rates and complex loan programs of banks can be avoided.
-Reward-Based Crowd Funding
Reward-based it is one of the most adopted models nowadays. Platforms like Kickstarter provide funders with the campaigns that interest them with a promise of a reward at the end. Usually, the reward includes a copy of whatever is produced, or special mention of funders on the product,sometimes discount coupons. This type of crowdfunding has been used to produce music albums, short films, 3d printers, smart gadgets, and many amazing things.
Crowdfunding is considered by many as the future of new businesses. This is because it provides certain benefits that traditional funding lacks to supply. With crowdfunding, the reach of a person needing funds improves multifold. Just on a single website platform, if not millions, thousands of potential investors can be approached. Also, with the help of the crowdfunding campaign, valuable time and money spent on going after investors are saved. Also, since everything in online, keeping the transparent track of all the progress and money movement is done quite easily. Reports and progress can be shared on social media to attract more funding and invaluable suggestions for improving the campaign. On the other hand, if something goes wrong in the business, and it fails to establish itself, investors only lose very small investments, unlike the case in traditional funding.
Now you know..thanks to Cousley&Co