What is Crowdfunding?
Crowdfunding (or crowdsourcing) is the process of seeking funding from family, friends, neighbors, customers and other individuals that the campaign originator has a relationship with or whose support he has won. It relies on small contributions from many individuals instead of large amounts from a few big investors.
There are three main types of crowdfunding:
- Reward-based — Donors receive rewards and perks for contribution. Mostly used for funding startups.
- Donation-based — Donors contribute without receiving any incentive in return. Mostly used by charities.
- Equity — Donors gain part ownership of the business. Rare and mostly used by companies with wealthy founders.
Crowdfunding has rapidly grown in popularity over the past decade thanks to the emergence of numerous platforms and networks that bring together business owners and supporters. Small business owners see it as a convenient way to raise finance for a new business, new project or new product.
To establish a crowdfunding campaign:
- Determine your business, project or product budget.
- Identify a suitable crowdfunding platform.
- Create a business profile. Make it as complete as possible to provide prospective contributors with the information they need to be persuaded to participate.
- Define a funding goal.
- Offer incentives for contributors such as early access to a limited edition version of the product.
Crowdfunding has multiple advantages over traditional financing models:
- Easy way to raise capital.
- Business retains decision-making autonomy.
- Provides preliminary proof of concept by gauging audience buy in.
- No need to prepare extensive business plans, forecasts or financial statements,
- The money does not have to be paid back. It is not a loan.
- Introduces the business to new audiences and potential customers.
- Crowdfunders with expertise in the industry and target market can provide crucial feedback.
- Increased brand exposure and visibility.