Fund is needed for startups and businesses and in most of the cases individuals are not capable of funding their businesses form their own pocket. In that scenario, fundraising becomes crucial. There are various methods of raising fund for your business. Crowdfunding is one of them. Let us explore more about ‘crowdfunding’ in this post.
What is Crowdfunding?
Crowdfunding is a method of raising fund for financial projects or businesses from a large number of people through online platform. This method is mostly used by the start- up companies or the businesses which are at their growing stage and need fund. There may be other purposes of crowdfunding, such as, medical emergency or a social cause. The purpose of crowdfunding is to collect money from friends, family, customers and individual investors primarily online through social media and crowdfunding platforms and leveraging their networks for greater reach and exposure.
How Does Crowdfunding Work?
There are many crowdfunding websites which interact between the fundraiser and the crowd. The finance is collected online from the crowd through the crowdfunding platform.
These crowdfunding platforms charge a nominal fee if the fundraising campaign becomes successful. In return, the fundraising platforms deliver a safe and secure service. Many platforms operate on all-or-nothing funding model. It means that if the target is reached then the fundraiser will get the money otherwise everybody gets their money back.
Types of Crowdfunding Platforms
There are various types of crowdfunding platforms, some of which are described below:
Donation Based Crowdfunding
The basis of this type of fundraising is donation. In this type of crowdfunding, no financial return or any type of gain is given to the investors or contributors. This type of crowdfunding is used for social cause like disaster relief, charities, collecting fund for medical bills, etc.
Rewards Based Crowdfunding
The contributors or investors are given reward in exchange of fund in this type of crowdfunding. The award may typically be in the form of service or product of the company offers to customers. As there is no financial gain to the contributors therefore this type of crowdfunding is similar to the donation based crowdfunding.
Equity Crowdfunding
In this type of crowdfunding, contributors become part owners of the company raising funds as they are given equity in exchange of the fund. As equity owners, the contributors receive a share of the profit in the form of dividend.
Peer to Peer Lending
This type of crowdfunding is similar to the traditional borrowing from the bank. The contributors or investors make investment with the understanding that their investment will be returned with interest.
Profit Sharing/ Revenue Sharing
In this type of crowdfunding, the investors expect profits or revenues in future.
Debt- Securities Crowdfunding
The contributors invest in securities issued by the company, such as bonds, etc.
Hybrid Models
This crowdfunding comprises of a combination of different types of crowdfunding described above.
The Advantages of Crowdfunding
Many fundraisers are turning to this method of fundraising now a day. The reason being, this is different from traditional methods, where you have to go through a lot of formalities to convince the investors. Some of the advantages of crowdfunding are as follows:
- This method is very simple. There is no application process.
- Crowdfunding leverages the power of social media, therefore, you can have access to people outside of your networks.
- The find is received very quickly and there are no long waiting periods as in the case of traditional fundraising methods.
- This method takes the fear out of asking financial help. You just have to share your fundraising platform with the friends and relatives.
- A lot of effort is saved in this method as the fundraising platform leverage the network of your friends, relatives, etc.
Steps to be Followed for Crowdfunding
Below are given some tips to be followed for successfully running a Crowdfunding Platform:
- Come up with an idea of a high quality product or service. This is crucial for successfully raising the fund through crowdfunding. There are many other start-ups or businesses in this space with ideas of excellent products & services and you have to compete with them. Therefore, you should come up with the idea which is unique and makes a difference.
- Select the appropriate crowdfunding platform. The type of platform should match the nature of your project. The crowdfunding platform should be trustworthy. You should carefully check their management system, their success rate, terms of contract, service fee and the policy on which they receive funding and choose the platform best suited for your project.
- Once you have selected a platform, prepare a project profile to showcase your capabilities and experience. The most important thing is to build a trust among investors. You also need to interact with potential investors, provide updates and answer their feedback, to show that you care for them. Most crowdfunding investors are laypeople and they don’t know much about your project. Therefore, they rely on the first hand information provided to them through webpage instead of conduction a comprehensive assessment of your project.
- Your online campaign should be supported by offline events also. Face to face interactions with the investors are very effective as when the investors find personal connect with you, they trust you more.
- After the campaign, keep updating the investors about the progress of the project. A good relationship is important for the future projects. Most of the investors are serial investors and if they find you trustworthy, then they will be willing to invest in your projects again and again.
- Whatever you have promised to the investors, deliver that. It will help you build your reputation. Respect the feedback of investors and incorporate them to modify your idea.
Some Crowdfunding Platforms
Below are given some popular crowdfunding platforms:
- Kickstarter
- Wishberry
- Indiegogo
- FuelAdream
- Fundable
- Crowdera
- Ketto
Conclusion
Crowdfunding is a different way of raising fund where the fundraiser trusts the kindness of the crowd. This method is becoming popular because of many advantages. It is a simple method with no application process. This method enables you to leverage the networks of your family and friends through crowdfunding platform and hence reaching to a huge crowd of investors is possible by this method. Another advantage is that the fund is received quickly and you need not to wait longer as in case of traditional fundraising methods. However, you have to constantly interact with investors and deliver what is promised to maintain the trust of investors in your project.
Also read: Corporate Bond Funds, their Features and Benefits
