Crowdfunding: What is it?
Crowdfunding is the process of raising funds online, through social media. Crowdfunding is referred to as “the financing of a project by the crowd, a group of people, without even considering taking funds from professional institutions such as finance houses, banks or venture capitalists (Mitra, D. 2012). That is, it is a way of increasing the number of people (investors) from where funds can be raised aside the traditional way of raising funds. Crowdfunding is the best combination of crowdsourcing (i.e. attempt to raise finance from the crowd) and microfinancing (i.e. contributing small amounts without collateral) which entails bringing people of various background together for the main purpose of aiding.
Crowdfunding provides the avenue for raising money by individuals, businesses and charities and investors are rewarded for investing in crowdfunding projects. It is still new but growing rapidly as it is changing peoples’ behavioural pattern when it comes to funds and changing the processes that are used in raising capital by businesses. What started small is now in high demand as individuals and companies have raised funds through crowdfunding, which as at 2016, in the United States, funds have been raised to $738.9 billion USD and is projected to be raised by $300 billion USD in 2025.
How did it all Begin?
Crowdfunding started in the United States through the creation of a website for musicians seeking to raise donations through their fans in order to produce digital recordings. The first ever crowdfund took place in 1997 where the fans of Marillion, a British rock band were successful in raising money for their tour. The development of crowdfunding has evolved over time to accommodate other projects ranging from local community projects to startups and small businesses that need to expand. Crowdfunding is gradually gaining prominence all over the world helping individuals, businesses and charities who need money for their various projects even if there is the risk aspect of raising funds through the internet.
How does Crowdfunding works?
A fundraising campaign allows businesses to create a fundraising campaign through online crowdfunding platforms by creating an avenue where entrepreneurs provide a business plan which furnishes the investor with the details of the business. The investors are provided with the required information of what they will benefit from contributing capital. The campaign is the means through which investors pledge funds and some online crowdfunding platforms do not benefit fundraisers who have not achieved their fundraising objectives; hence, no investor provides the money for the investment. Crowdfunding platforms provide a convenient way of exchanging funds through the internet for all crowdfunding transactions (Mitra, D. 2012).
Platforms for Crowdfunding
- Donation-based crowdfunding refers to funds donated to charities and non-profit organizations. Examples include Indiegogo and Crowd rise. Indiegogo engages in fundraising campaigns except for investment and has grown internationally due to their early start in the industry and flexibility. Crowd rise is a charitable Crowdfunding platform that attracts people who are willing to show kindness through inspiring needs of others.
- Reward-based crowdfunding has some level of similarity to donation-based crowdfunding except that the investors do get rewarded for funding the campaigns. These rewards are usually based on the amount of money given to businesses. An example is kick-starter which is the earliest form of campaign platform and have experienced strong growth.
- Equity-based crowdfunding entails investing in a campaign in exchange for shares which enables them to have a percentage in the profit made by the business or venture. The value of shares rises if it is profitable or reduces, if otherwise as conversant with other businesses. Seedrs and Crowdcube are crowdfunding platforms for equity purpose where, in exchange for funds, a business owner sells its company’s shares which is like a venture capital investment.
- Debt-based crowdfunding is the platform where people borrow money and such funds will be able to recover their loan with interest. That is, funds given in exchange for financial interest on their investment. An example is Somolend who provides debt-based investment funding to businesses who have been in existence and to provide assistance to small businesses.
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How to achieve success on a crowdfunding platform
In order to be successful in raising funds on a crowdfunding platform, the following needs to be done:
- A detailed business plan is necessary to show information about the project that needs the fund from investors.
- The right platform for raising these funds must be carefully selected as a platform can affect the project’s expectation. Though a crowdfunding platform is for getting investors, the platform peculiarity matters to know if the model is run on the platform is what is required.
- The project should be adequately communicated properly because getting the right investors is determined on this. The early stage of raising funds is very crucial and once that is not delivered properly, it becomes difficult raising funds.
- It is advisable to have a large social network as this will in the success of the fund-raising project. This can be achieved by contributing to discussions on the platform, be active and talk to investors on the platform.
- Rewards and goals should also be set depending on the model of crowdfunding to be adopted.
The development of a means of raising funds to help individuals, businesses and charities through the crowd raising platform is serving its purpose. This brings about an easier way of raising funds for projects rather than through banks depending on the model of crowdfunding being adopted. It is an Internet-based means of raising money but needs a strategic plan and good marketing skills, because it is like a marketing project, to make it a success.