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Summary
- A large number of individuals lending their money collectively for a business is called crowdfunding.
- Crowdfunding is cheap and inexpensive compared to conventional fundraising methods.
- The number of investors that can be reached is much higher in crowdfunding than in traditional fundraising.
Getting your project funded by accumulating money from various sources is called crowdfunding. In this process, finance is raised by collecting a small amount of money from several potential funders.
Crowdfunding is evolving as one of the fastest growing industries as it helps entrepreneurs set up their businesses faster by speeding up the process of raising money. Through crowdfunding, one can invest in start-ups companies and generate more return compared to investing in well-established companies.
What is the process of crowdfunding?
The process of crowdfunding started more than two decades back. Any person looking to raise fund is required to set up a profile of their project or purpose to raise finance on any website that allows crowdfunding, generally known as crowdfunding websites.
If the investor likes the idea behind raising finance, they invest in the innovative projects.
Types of Crowdfunding
Equity Crowdfunding: Investing in equity crowdfunding is done to exchange shares or a small stake in the business. If the business succeeds, the shares become more valuable, whereas in case of business failure, one might end up in losses.
Debt Crowdfunding: This concept is similar to peer-to-peer lending, in which investors receive interest for lending their money. However, in Debt crowdfunding, apart from receiving interest, your money will fund a business idea in which you believe.
Donation Crowdfunding: This type of crowdfunding is supported for a cause, and the donor gets no financial benefit in return. Donation crowdfunding is driven by the feel-good factor.
Reward Crowdfunding: Any investor who goes ahead with this type of crowdfunding gets a reward such as gifts or a ticket for an event etc. It is a sub-type of donation funding; therefore, no financial benefit is given in return.
How is Crowdfunding different from conventional fundraising?
- Crowdfunding saves time and is inexpensive as everything from marketing to branding and conducting seminars is done online.
- Traditional funding involves pitching a limited number of investors on a one-to-one basis, including friends, family, and work acquaintances. Whereas, in crowdfunding, many lenders can be contacted through an online platform.
- In the case of traditional fundraising, the idea behind your business remains confidential or is disclosed to limited financers only. Whereas in the case of crowdfunding, it is disclosed to a large crowd.
- In crowdfunding, the control lies with the promoters, whereas in traditional funding, control is shared with the investors as they own a stake in the business.
- Crowdfunding supports innovative ideas, whereas in traditional funding, investors are mainly focused on the returns they will get out of investing.
