Crowdfunding – Meaning, Types, Working, Pros & Cons , Examples, FAQs

Crowdfunding – Meaning, Types, Working, Pros & Cons , Examples, FAQs

What Is Crowdfunding?


Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists.

 

 

Types of crowdfunding

 

 

Basically, there are three types of crowdfunding. Namely;

  1. Equity-Based Crowdfunding
  2. Reward-Based Crowdfunding
  3. Donation-based crowdfunding

 

Now let’s explain them one by one

 

1. Equity-Based Crowdfunding:-

 

Equity crowdfunding allows contributors to become part-owners of the company by trading capital for equity shares. The equity owners receive a financial return (share of the profits in the form of a dividend or distribution.) in the proportion of their contribution. This is the most popular form of crowdfunding.

 

2. Reward-Based crowdfunding:-

 

Reward-based crowdfunding involves individuals contributing to a business in exchange for a reward typically a form of the product or service which the company offers.

In this type of funding distance between the creator and investor does not matter. Many characteristics of rewards-based crowdfunding known as non-equity crowdfunding.

This type of funding is used in many cases like; funding for free software development, motion picture promotion, scientific research, civic projects, and new inventions, etc.


3. Donation-based crowdfunding:-

 

It is a way to source money for a project by asking a large number of contributors to individually donate a small amount without any expectation of return.
This type of funding is done mainly for social causes and nothing is expected in return for such funding. Common initiatives for such funding include; natural calamities, disaster relief, charities, and medical bills.

 

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How does Crowdfunding Works?

 

  1. Crowdfunding is collecting small sums of money from multiple people for a specific project, business venture, or social cause.
  2.  It uses a web-based platform or social networking sites to solicit funds for the fundraiser by showcasing the story to potential donors or investors.
  3. According to the rules in India, equity-based crowdfunding is illegal, whereas peer-to-peer lending is regulated by the RBI.
  4. Community crowdfunding which includes donation-based and rewards-based crowdfunding is legal and is quite popular to raise funds for social causes.
  5. Crowdfunding websites typically charge a fee for using their platform and services to bring money for the cause.

 

Pros & Cons of Crowdfunding

 

Pros of Crowdfunding

 

1. There’s not much financial risk


Crowdfunding enables you to test the waters to see whether your idea has merit without taking on a ton of financial risk. You can test the market and get some reactions before spending money on expensive inventory, materials, or development. That beats funding an unproven business idea out of your own pocket.

 

2. Your campaign could go viral


You never know if your campaign will spread quickly across social media, exposing your product to a number folks you’d be unable to otherwise reach.


3. A successful campaign validates your business idea


Reaching or exceeding your fundraising goal proves that there’s demand for your product or service. Doubt is removed from the equation.


4. You keep all of your equity


If your campaign succeeds, you’ll have to deliver rewards to your backers—but you won’t have to give up any equity or lose any control of your company.

 

5. You can tap into an existing community—and build your own


Crowdfunding allows you to leverage an engaged community that’s already looking to support ideas like yours. Create a successful campaign and you’ll build a large community of your own. Together, they’ll provide critical feedback you can use to make your idea stronger.

 

Cons of Crowdfunding

 

1. It takes time and money

Successful crowdfunding campaigns require a lot of effort. You’ll likely also have to invest several thousand dollars—if not tens of thousands of dollars—to build prototypes, create appealing videos, write persuasive content, and market it all effectively.

 


2. Your campaign might not succeed


Less than one-third of all crowdfunding campaigns meet their goals. If yours doesn’t succeed, you may have to deal with some bad press or embarrassment—and you won’t get the time or money you invested back.

 

3. Someone could steal your idea

 

Unless your idea is protected—with patents, copyrights, or trademarks—there’s a chance someone could stumble across your campaign and decide to try to mimic what you’re building. Keep your fingers crossed that they can’t build your idea better or faster than you can. Even if you hold a patent or trademark, if your idea is attractive, someone might try to copy you, anyway, and you could be faced with the challenging decision of whether, or how, to fight a legal battle.

 

4. You have to pay several fees

 

Kickstarter, for example, takes 5% of every successful campaign. Those who meet their goals on the platform will also have to pay credit card companies 3% plus $0.20 on each transaction over $10. If, for example, you raise $100,000 on Kickstarter from 100 people who all put in $1,000, you’d end up with a little less than $92,000 to get to work with. That may not be the worst thing in the world, but it’s something to consider.

 

5. It doesn’t work for all businesses

 

You may be able to crowdfund enough money to build a consumer-facing product—like a card game, a jacket, or a smartwatch. If you’re thinking about starting a catering or painting business, you’ll likely have to look elsewhere for capital.

Crowdfunding may be the best path forward for some businesses. Unfortunately, a significant majority of small businesses that go this route never meet their fundraising goals

 

 

Example of Crowdfunding

 

One of the many examples was back in 2013 Oculus Rift, which was a great success. Its aim was to take virtual reality into the accessible home gaming dimension. More than $2.4 million was raised for their $250K campaign.

Another example is MATE, which is a smart bike that has a 3-step folding system that is an affordable but innovative bike. Which raised $3 million dollars on Kickstarter.

 

FAQs Related To CRowdfunding:

Why Crowdfunding?

 

Crowdfunding is for people or organizations who have few direct means to fund their initiatives that benefit the community or amplify their goals. Crowdera aims to bridge this gap and help organizations reach out to an even wider audience so as to gain support for their mission. By crowdfunding online with Crowdera, organizations can connect to people around the world who share a passion for their cause.

Who are the people that fund my campaign?

 

Your funders will consist of your existing supporters, volunteers, friends, family, fans, and extended circle of friends on the social network, or just call them all collectively ‘crowd’ who like your work and believe in your cause or mission.

What is the difference between product crowdfunding and equity crowdfunding?

 

PRODUCT crowdfunding is stuff like Kickstarter and Indiegogo where you pay in advance for the GOOD or SERVICE. Product crowdfunding is alive and well and totally legal under current rules. EQUITY crowdfunding is when a company offers the chance to buy a chunk of ownership in the company to the public. At the moment it is not currently permitted except (i) to accredited investors or (ii) solely inside of a given state if you are in a state where it is permitted. The SEC may broaden that, but its rules will include disclosure, limits, and other investor protections.

 

 

Conclusion:

 

Crowdfunding provides funding to many new ideas, It provides incentives to many new startups in the country.

Crowdfunding is helpful in promoting the social causes at the time of natural calamities.

It is also helpful in arranging money for those poor people who can’t afford the expenses of severe diseases like cancer and kidney transplant etc.

One of the best things about online crowdfunding is its ability to centralize and streamline fundraising efforts.