The rise in the number of startups and venture capitalists’ interests in B2B tech companies has led to a growing curiosity about crowdfunding. It has even given a fillip to websites like Social For Action, Ketto and Milaap, which helps even laypersons to get funding for projects close to their hearts. Crowdfunding primarily uses small amounts of capital from several individuals to finance a new business venture.
Think of it like a money pool, where participants hope their small contributions to a project will pay off big time when that project gets off the ground and becomes a success. Crowdfunding can also be used for contributing to help a cause or a person in need.
Who Uses Crowdfunding
As you’ll no doubt know, to launch a new product or venture you often need a lot of cash upfront to make it happen. Crowdfunding is a way of raising that money from a ‘crowd’ of many individuals, rather than a handful of angel investors or venture capital funds. Crowdfunding platforms allow anyone with a great idea to set up a page that enables lots of people to contribute funds towards it. If you have ever pre-ordered a product on MIlaap or contributed to a Social for Action campaign, you’ve supported a crowdfunding drive.
Crowdfunding is most often used by startup companies or growing businesses as a way of accessing alternative funds. It is an innovative way of sourcing funding for new projects, businesses or ideas.
It can also be a way of cultivating a community around your offering. By using the power of the online community, you can also gain useful market insights and access to new customers.
This guide is aimed at entrepreneurs, businesspeople and companies, especially small and medium enterprises. If you are thinking about ways of financing a new business or idea, or have heard about crowdfunding and want to learn more, you may find this guide useful.
- Peer-to-peer lending
The crowd lends money to a company with the understanding that the money will be repaid with interest. It is very similar to traditional borrowing from a bank, except that you borrow from lots of investors.
- Equity crowdfunding
Sale of a stake in a business to a number of investors in return for investment. The idea is similar to how common stock is bought or sold on a stock exchange, or to a venture capital.
- Rewards-based crowdfunding
Individuals donate to a project or business with expectations of receiving in return a non-financial reward, such as goods or services, at a later stage in exchange of their contribution.
- Donation-based crowdfunding
Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return.
- Profit-sharing / revenue-sharing
Businesses can share future profits or revenues with the crowd in return for funding now.
- Debt-securities crowdfunding
Individuals invest in a debt security issued by the company, such as a bond.
- Hybrid models
Offer businesses the opportunity to combine elements of more than one crowdfunding type.
Crowdfunding platforms are websites that enable interaction between fundraisers and the crowd. Financial pledges can be made and collected through the crowdfunding platform.
Fundraisers are usually charged a fee by crowdfunding platforms if the fundraising campaign has been successful. In return, crowdfunding platforms are expected to provide a secure and easy to use service.
Many platforms operate an all-or-nothing funding model. This means that if you reach your target you get the money and if you don’t, everybody gets their money back – no hard feelings and no financial loss.
There are a number of crowdfunding types which are explained below. This guide provides unbiased advice to help you understand the three most common types of crowdfunding used by profit-making SMEs and startups: peer-to-peer, equity and rewards crowdfunding.
The Bottom Line
In the past, when someone wanted to fund something — be it a project, a company, or anything that required capital to start — there were a few ways to raise money. They could take on debt from a loan. They could raise money from friends, family members, and angel or VC investors. They could even take the “bootstrapping” route and scrounge up as much money as possible to fund the project themselves.
In the late 2000s, a fourth option became viable for those trying to get something off the ground: crowdfunding.
Crowdfunding is a way to raise money from a large number of people. Large groups of people pool together small individual investments to provide the capital needed to get a company or project off the ground. Individuals, charities, or companies can create a campaign for specific causes and anyone can contribute.
Social For Action makes it easy for companies to raise through crowdfunding. We do thorough background checks and vetting to ensure that all companies raising on our crowdfunding platform are credible. We’re home to a diverse community of angel investors, including some of today’s top VCs, and connect them directly to new funding opportunities.
If you know someone with a startup or early-stage company looking to raise funds for their company, you can refer them to Social For Action today. Our team will set up a time to talk about their venture and see if crowdfunding is right for their company.
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