What is crowdfunding?

A new venture is funded by obtaining funding from many individuals via the concept of crowdfunding. Crowdfunding enables entrepreneurs to reach out to large networks of potential investors through social media and crowdfunding websites. This could boost entrepreneurship by expanding the pool of investors beyond traditional owners, relatives, and venture capitalists.

Working of Crowdfunding

A majority of jurisdictions limit who can finance new businesses, as well as their contribution amounts. Regulating hedge fund investments is similar to preventing less sophisticated or non-wealthy investors from risking too much money. When new businesses fail frequently, investors risk losing their capital.

Entrepreneurs can raise hundreds of thousands or millions of dollars through crowdfunding campaigns. Through crowdfunding, investors can hear about any idea.

An individual seeking funding for an amusing project created a recipe for potato salad. The total he raised exceeded his $10,000 fundraising goal of $55,000 thanks to more than 6,911 backers. Investors can choose from hundreds of projects with a minimum investment of $10. Websites that raise funds through crowdfunding take a percentage of their proceeds.

Types of Crowdfunding                        

According to a report released by the Crowdfunding Centre in May 2014, there are two main types of crowdfunding:

  1. Rewards Crowdfunding: Entrepreneurs can sell a product or service without having to take on debt or sacrificing equity.
  2. Equity Crowdfunding:In return for the money pledged, the backer gets shares of the company they back.

Many people hope to start or support the next big thing on crowdfunding websites like Kickstarter, Indiegogo, and GoFundMe.

  • GoFundMe

In 2021, GoFundMe will be the largest crowdfunding platform. Over 150 million donations have been made to GoFundMe since the site launched in 2010.1 GoFundMe is most beneficial to individuals who need help recovering from medical expenses or natural disasters, such as fires, floods, or other emergencies.

  • Kickstarter

Another popular option is Kickstarter. As of 2021, more than $5.7 billion has been pledged across all Kickstarter projects since Kickstarter began in 2009. Among all crowdfunding sites, Kickstarter is the most popular choice for businesses seeking capital and exposure. Contrary to GoFundMe, Kickstarter is only accessible to people who can share their projects. The Kickstarter marketing agency typically charges 15% to 25% of pledges related to their marketing efforts. Kickstarter crowdfunding agency will often do the marketing for you for zero or minimal cash and take a percentage of the funds they raise on your behalf. Donation crowdfunding is allowed, but equity crowdfunding is not. Regulation A+ fees range from 3% to 6%, but there is a big caveat.

  • Indiegogo

After its 2007 launch, Indiegogo began accepting projects from all categories rather than only raising money for independent films.

Unlike Kickstarter, where backers must opt for a fixed or flexible model, Indiegogo is viewed as more flexible and less strict. Differences in crowdfunding platforms are most pronounced in this regard.

Read More: Crowdfunding for Small Businesses | Advantages and Disadvantages

The Pros and Cons of Crowdfunding

The biggest advantage of crowdfunding for startups or individuals is that it enables them to reach broader and more diverse groups of investors. Crowdfunding platforms are an excellent way to generate an audience and obtain funding, due to the prevalence of social media.

Investing in equity-based crowdfunding is becoming increasingly popular because it allows startups to raise funds without controlling venture capital investors. Investors may also be able to earn equity in the venture. American Securities and Exchange Commission (SEC) regulates equity crowdfunding.

As a disadvantage to crowdfunding, you may have to worry about affecting the reputation of your company or yourself by resorting to it, as well as the fees associated with the platform; if you do not meet your goal, your investors can retrieve the funds, and you will not be compensated.

LEAVE A REPLY

Please enter your comment!
Please enter your name here