What is Crowdfunding?

“Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. It makes use of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, and has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.” –

 

How Crowdfunding Works?

The best part about crowdfunding is that companies take the money as an advanced booking of the product. This means the fundraising individuals get their products as soon as the company completes the production. If the company doesn’t reach its goal, the platform will return all the money to all the fund-raisers through an automated system.

 

Types of Crowdfunding for Startups

There are many types of Crowdfunding for startups. From crowdfunding that helps with donations to equity-based crowdfunding that helps the backers earn more profit from it. The reason crowdfunding is so popular is because it is easy, secure, and accessible to everyone. Let’s learn about the types of crowdfunding in more detail.

1. Reward Based Crowdfunding

In reward-based crowdfunding, backers contribute to your project for non-financial benefits. This type of reward based funding is popular in creative projects where the backers will receive a token of appreciation or free gifts for funding the project. Sites like Kickstarter, Indiegogo and many others operate on this business model.

2. Donation Based Crowdfunding

Donation-based crowdfunding is for charities that are working for a social cause. One website that’s famous for donations is GoFundMe.

Users just create a cause and then distribute the link of the campaign among their peers. They set a goal and all the amount collected is sent to the account of the person who has created the campaign.

3. Equity-Based Crowdfunding

Equity-based crowdfunding is meant to get a return on the invested amount. It is popular among in the stock market where people buy shares of various stocks and redeem them when the prices rise.

It is also a great way for startups to get money for their initiative. But they will have to sign a contract that they will provide equity to the shareholders or return their money if the project fails.

4. Debt Crowdfunding

Debt crowdfunding is when backers provide money in exchange for interest or higher markup. The debt crowdfunding option is usually practiced by banks and lending companies.

Pros and Cons of Crowdfunding

Like any other funding campaign, crowdfunding also has its fair share of pros and cons. First, let’s discuss the pros of crowdfunding.

Pros of Crowdfunding

  • No-Risk Involved

One of the benefits of crowdfunding for startups is that it doesn’t involve any risks. You simply have to create a compelling campaign and bring it in front of the public. If they like it, they will fund it. Moreover, your product automatically gets exposed to a lot of potential customers.

  • Get As Much Funding As You Desire

Another benefit of crowdfunding is that you can set a goal for your funding amount without paying any equity. This amount can range from $10,000 to $100,000. Since it is the public that is funding your product, you can either give them discount coupons or gift items after the project concludes.

  • Sell Products In Advance

Another great benefit of crowdfunding is that you can sell products in advance against the funding received. For example, your startup promises to sell bags with power banks. Now, each bag costs around $80. You can set a crowdfunding amount per user of $80 and you will give the bag as a gift to them. When you collect the funding amount, you can start shipping the bags to the users. This is how most campaigns on Kickstarter work.

Cons of Crowdfunding

  • Pressure Builds Up

A disadvantage of crowdfunding for startups is that you have to ship the products that you promise to the backers of your campaigns. If you don’t deliver the products on time, the backers are likely to complain to the authorities. Some of them can also file lawsuits.

  • No Payoff If Campaign Fails

There are chances that you will not get a single dollar if the campaign fails. This means all the efforts you put in the campaign will go down the drain. You should note that more than 60% of crowdfunding campaigns fail. Hence, if you want to save yours, then take inspiration from the following campaign examples.

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