Crowdfunding is a group investing technique to raise funds for a cause, which is usually a startup business idea. The process entails the individual or company, who is looking for funds, persuading the general public through a crowdfunding platform for a small donation or investment. When thousands of such donors come together, the fund seeker ends up with some good amount of money. In this article, we’ll understand crowdfunding companies, how they work and help make you money.
How Crowdfunding Works
Despite the concept being quite old, the actual idea is catching interest only in recent times. The sector is still in its development process. The donations or investments are usually made via online platforms, who take up the responsibility of coordinating and administering the fundraising and the funds. The projects for which the money is being raised could be community-based for which investors may not expect a financial return, or for pure commercial endeavors that may benefit investors monetarily. CrowdfundSocial will review the process with you in this article.
A middle path can also be drawn – for instance, more lucrative investment options could be offered, stock market shares may be put up for grabs, or pension investment options may come by.
Different Crowdfunding Strategies
The most common variant of crowdfunding is using online platforms such as Kickstarter, GoFundMe, Indiegogo. Here, the donations come through in expectation of special rewards. The reward could be anything – for instance, a free finished product or the chance to be a part of the product design team.
Crowdfunding can also be used for royalty financing and assembling loans. For instance, LendingClub is a crowd financing website that lets its members to indulge in monetary transactions between themselves. This means there would be no banking middleman, resulting in a win-win scenario. Royalty financing, on the other hand, isn’t as widespread. The idea, however, is to connect investors with business owners. The investors benefit from this relationship as they get a specific percentage of the sales proceeds of the business.
Setting a Funding Target and Amassing the Funds
Crowdfunding, as aforementioned, is pitching a business plan to the general public and not angel investors or a financial institution. But the money through crowdfunding doesn’t come through overnight or within a short time.
For a business idea or pitch to be successful, the entrepreneur must tell a story that can persuade people to invest in the idea. Every crowdfunding activity has a specific fundraising goal, which must be met for the funds to reach the entrepreneur’s bank account. For example, if the goal is to raise $100,000, the company or individual seeking the funds won’t get any money if the total funds collected aren’t $100,000 or more. If the activity managed to garner only $50,000 in total, the funds would be returned to the respective investors.
The people seeking funds, therefore, would either get 100 or 0 percent with crowdfunding. This may be a bit discouraging for people who view crowdfunding as a viable way to source money. Quite a lot of budding entrepreneurs have put in their time and energy into crowdfunding activities only to go back home without a penny.
Things may get even bad if the crowdfunding target was achieved but you later realize the funds won’t be enough and that you misjudged how much money you’ll need for the initiative. If you fail to deliver the promised product or service after having raised the money, you could be prosecuted.