What is Crowdfunding – Understanding the Basics

Crowdfunding, just like crowdsourcing, has become a major factor in modern product design. Raising substantial finance for any business has always been a difficult proposition for entrepreneurs. Only a minuscule number of enterprising people have the personal financial resources to start a new business on a large scale without needing external finance. Various methods of raising finance have been used by individuals and firms to raise the much-needed finance and crowdfunding is one of the popular methods currently. Crowdfunding resources can be made use of by budding entrepreneurs, inventors, and designers alike

What is Crowdfunding?

Though crowdfunding has been around for some time, it has gained a fresh momentum in the recent past with the rapid expansion of digital technology. Crowdfunding may be defined as raising substantial finance by collecting small amounts of money from a very large number of investors from the general public using the Internet. It is often resorted to for raising finance for a new business, and has been very successful at getting projects off the ground that may not have been appealing to conventional investors and venture capitalists.

Typically, the initial fundraising to the extent of say 25-40% of the total projected amount is from close family, friends, acquaintances, business associates and the like. Once the project gets going, funds often start pouring in from the general public and people not known to the promoters but who, somehow, feel that they have reason to invest a small amount in the business venture promoted by the entrepreneurs.

How Does Crowdfunding Work?

While each crowdfunding effort has its own unique style to raise the requisite funds, the broad idea or concept remains the same. Social media and various crowdfunding platforms are also widely used for crowdfunding purposes. The fundraisers or project creators prepare a profile containing an introduction to their project or business plan. Very much unlike traditional fundraising presentations, crowdfunding also involves detailing the rewards for a given contribution by a prospective investor. Because there are no financial dividends for contributing to a crowdfunding project, supporters must be wooed by a combination of personal affinity for the project, plus the desire for some sweet prizes.

In any crowdfunding exercise, efforts are made to have a separate community of like-minded people who contribute small amounts in their individual capacities. Each such campaign is designed to be operative for a fixed number of days or for a given goal amount. As each day passes, the total amount collected is shown to the visitors to the crowdfunding platform so that they can monitor for the success of the endeavor as it progresses. In fact, this serves as an incentive or motivating factor for more and more people to join the campaign and contribute funds.

Why Would the General Public Support an Unknown Project?

Why any member of the general public may feel inclined to join or support an unknown person or project is a very pertinent question and must be viewed in its entirety. The main reasons why people who are not connected to a project or business would like to support it are:

• They are able to connect to the greater objective or vision behind the campaign.

• They can see a link between their individual goals and the rewards that they see upon joining the campaign.

• They connect to the creative presentation of the campaign.

It is important for every project creator to distinctly identify the reasons as to why they think that people will feel inclined to associate themselves with the project or business and part with their hard-earned money. Having a deep insight in this regard will go a long way in designing a successful campaign for crowdfunding.

Steps in Crowdfunding

Creating and launching a successful crowdfunding campaign is no child’s play. It takes planning, investment, and effort to successfully manage. It does not just happen that you launch a crowdfunding project and it goes viral and funds start pouring in. A lot of hard work is involved at every stage of crowdfunding. Right from the conceptual stage, meticulous planning and execution are required at every step.

Both before and after the launch of your crowdfunding campaign, smart use of social media and email list management will likely make the difference between boom or bust. You cannot expect people to come in hordes and join your campaign just because you asked nicely. You will need to sell your concept and crowdfunding idea to the prospective investors using the Internet to the hilt. But if done properly, your efforts will yield the desired results.

Types of Crowdfunding

The type of product or service that you intend to offer determines which type of crowdfunding you ought to use. The main types of crowdfunding are:

• Donation-based crowdfunding – Any crowdfunding campaign where there is no financial return or gain to the investors would fall into this category. Fundraising for charity, disaster relief or medical emergencies are some examples of donation-based crowdfunding. People invest in such crowdfunding simply because they are concerned and they believe in the cause.

Sometimes, a nominal reward such as tickets to a charity event or an acknowledgment on the cover is also given and it is then called Reward crowdfunding. Basically, here too, it’s just the feel-good factor which is playing its part.

• Debt crowdfunding – Here, the investors get their money back along with interest. The returns are financial but without any equity stake. The investors have the satisfaction of contributing to a cause they believe in. Crowdfunding for microfinance in developing countries is an example of debt crowdfunding.

• Equity-based crowdfunding – Inequity-based crowdfunding, investors are looking at having a stake in your business or company. In such crowdfunding, investors become part-owners of your company by getting a share in the equity of the company. If the company earns profits, they get a return on their money by way of dividends or distribution of profits. The market value of their equity in the company also goes up, thereby also giving them a capital gain. However, if your company runs into losses, the investors also lose their money.

Crowdfunding taps into a very wide investor pool running into millions of prospective investors and has some unique benefits when compared to the traditional methods of fundraising for businesses and projects.

Do you need help launching your crowdfunding campaign?Cad Crowd works with inventors and entrepreneurs of all stripes, heling them bring their products to market. Get in touch, and let us know about your project.