What is crowdfunding and how does it work?
You might have heard the word crowdfunding or even if you haven’t heard of it, you definitely saw many examples of it in social media. As you might understand from the word itself, it is something like getting funds from the crowd. Before defining it more explicitly, let’s take a look at the following scenario.
Imagine a bright young individual with a great business idea, which he wants to turn into an actual plan.
What does he need despite the idea and the business plan?
Money; finances to fund his project. However, being young he might not have enough financial resources. So what should he do? Traditionally speaking, he can go to a bank, or try to find with angel investors or venture capital firms who would trust his plan and invest in it. That is hard. Being a startup without an actual product and returns it can be hard to convince those institutions to make large investments.
So, you might ask then what is the modern solution if we referred to the previous one as the traditional? That is exactly what we are going to discuss here. The comparably new method of funding called crowdfunding is financing a business or a cause through the collective effort of donations from the public. To publish a campaign on a crowdfunding website, and if people believe in the value of your project they make donations of any size to help you achieve your goal. An entrepreneur has access to hundreds or thousands of potential investors through crowdfunding websites.
Crowdfunding can be done in several ways
The first, it can be done through donations. Many people can add all amounts of money to a project they trust in. A very famous example of this is GoFundMe.com. As the site itself says, you can fundraise for the people and causes you care about.
The second way of crowdfunding is called the preorder method. When the campaign is in its process people make small pledges and make preorders of the product which will be delivered later. Such kind of a crowdfunding website is Kickstarter.com.
The third crowdfunding method is reward-based. This is a combination of the previous two. The investor funds a project s(he) believes in and as a result, receives satisfaction and a predetermined reward, i.e. a product of value. Many such kinds of projects you can see in the crowdfunding website called indiegogo.com.
The fourth method of receiving funds from wide crowds is equity-based crowdfunding. The entrepreneurs announce about their startups and many investors invest in those startup businesses and receive dividends based on the profits that the business later makes.
To sum up, crowdfunding connects people with talent, ideas, and actual plans to sell with those who have funds to invest. And that is how crowdfunding is using the crowd to raise capital for ideas and businesses.