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What is Crowdfunding and how it works for Startup?

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Crowdfunding is the collection of small amounts from a large number of individuals which can be used to finance a new business. Here in crowdfunding, a crowd provides the fund for a business rather than one or two main investors. Nowadays, in the era of social media, it has never been easier to access a vast network of people.

Social media is fundamental in sharing the cause of a project with a social network. It brings investors and entrepreneurs together and expands the pool of investors beyond family, relatives, friends, and venture capitalists.

Although the same methods can be applied to mail-order subscriptions or fundraising events, crowdfunding is mostly done online. Funders can usually expect products or services in return for their contribution or they may donate the funds.

Index:

What are the benefits of crowdfunding?

Crowdfunding has a lot of benefits compared to traditional funding methods. Here are a few of the many possible benefits that a business may acquire just by crowdfunding.

  • Reach:

Sharing the idea behind your fundraising campaign may be a great way of marketing your product and gaining media exposure.

  • Crowdsourcing of brainstorming:

By sharing your idea with the masses, you might also get valuable guidance of feedback regarding your project. It could help you with some aspects of your mention that were previously not thought of. It is a great way to aspire to new ideas.

  • Product Validation:

Crowdfunding lets you know about the market validation of your product. The more people who are willing to invest in your product, the more is its need in the market.

  • Reduces risk:

Crowdfunding reduces the risk of going all into the market with a product that has no need.

  • Loyal customers:

Your investors may also turn out to be loyal customers for your product which works well in the long run.

  • Proof of concept:

A successful crowdfunding campaign may be a great way to convince investors that your venture has received sufficient market validation.

  • Free PR:

A successful crowdfunding campaign may attract the eye of traditional channels or media outlets.

  • Alternative:

It is a great alternative funding method if you have failed to raise funds through bank loans or other traditional funding methods.

What are the disadvantages of crowdfunding?

Every coin has two sides. Even though crowdfunding has a lot of advantages there are a few disadvantages as well. Let’s discuss how can crowdfunding adversely affects your company.

  • Failure to meet the goals of your campaign or not receiving enough results may result in a loss of reputation.
  • Requires a large amount of time and effort
  • Potential for no too little gain
  • If your project is not protected with a patent or copyright, someone might steal your concept.
  • Crowdfunding websites are inflexible regarding their terms and conditions and time completion period.
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How does crowdfunding work?

Crowdfunding platforms allow easy and safe interaction with the crowd and fundraisers. Financial pledges are made and collected through the platform. The platforms charge a fee from the fundraisers in case their campaign is successful.

Most platforms are run by all or nothing funding model. If the funding is successful, the fundraisers receive it in exchange for a fee. But if the fundraiser is not able to collect the target amount, everybody gets their money back.

What are the various types of crowdfunding?

There are various ways of crowdfunding campaigns. Which method you use depends on the type of your product or service or your goals for growth.

  • Donation-based crowdfunding:

In these crowdfunding campaigns where the investors or contributors don’t get any financial return. The most common donation-based crowdfunding initiatives are fundraising for disaster relief, charities, or non-profits.

  • Reward-based crowdfunding:

In this crowdfunding, people contribute in exchange for a reward which might be in the form of any product or service the company offers. Even though a reward is given to the contributors, this is considered a subset of donation-based crowdfunding since no financial return is given to the investors.

  • Equity-based crowdfunding:

This crowdfunding allows contributors to become part-owners of your company by trading capital for equity shares. This is a kind of investment where contributors receive shares in the business depending on how much money they invest.

  • Debt-based crowdfunding:

This is kind of a peer to peer lending. In this model, the money paid by the contributors is a loan and must be repaid-with interest by a certain deadline.

  • Hybrid models:

These fundraisers combine more than one crowdfunding model.

What are the top fundraising platforms?

Top crowdfunding websites are as follows:

Conclusion:

At the end of the day, it’s your choice how you want to fund your company. Crowdfunding is surely a great way to fund your business. It is almost not risky and is a great way to determine the value of your product in the market.

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