Crowdfunding is a type of funding, when it is raised from totally unknown people by using the technology for personal or business or any other purpose, then it is known as Crowdfunding. The funds may be provided by an individual investor or a company. Small amounts donated/invested by a large pool of people may become substantial amount for an individual to take off the venture.
How Crowdfunding is Different?
Crowdfunding is different from the traditional way of raising funds e.g. Bank Loan, IPO (Initial Public Offer) or any such means. There is no need to make a presentation or business plan to convince the donor/investor. With crowdfunding, it’s much easier for you to get your funding requirement meet. The donation/investment may vary from $10 to $1000 per person/company or more. One may also say, thanks and stop the donations once the required amount is received.
Benefits of Crowdfunding:
Like it or not, Internet has become a boon and opened up a plethora of opportunities for everyone. Online marketing, social media, presence of all types of companies etc. , all these enabled people to use internet for their benefits.
For start ups, this probably is the easiest way, as in the starting stage, it is difficult to spend on raising capital. By using a crowdfunding platform , one may have access to thousands of donors/investors with whom one can interact and share his funds requirements.
Initial fundraising is always difficult, time consuming and costly. In this process of raising fund the efforts are minimal. Traditional or conventional ways like Bank Loan etc. quite cumbersome. One may have to prepare a fund raising campaign and use on a crowdfunding platform to raise funds. This campaign may include presentation, business plan, video or any such material that helps you to get the funds at the earliest.
Crowdfunding helps the investor to evaluate the company in which it considers for investment in all possible, before deciding for investment. Similarly, the entrepreneur also has the opportunity about the antecedents of the investor. Once, both the parties are convinced, they can start discussions.
Types of Crowdfunding:
There are different reasons for raising funds from the crowd. Depending on the purpose, one can pitch his crowdfunding objective. Three primary types of crowdfunding are:
These are applicable to those, who look for people ready to donate generally for some kind or personal hardship or problem. Number of people is there to help such people, without expecting anything in return. It may be for some natural calamity or any such reason.
In this category, the investor expects some kind of a reward from the borrower. It may be in the form of product(s) that the company makes or some service or some type of favour. It generally is given to known people/organisation. It may a kind of gesture on the part of investor but definitely associated with something in return may not be in the form of cash.
Equity based crowdfunding enables the investor to become part of owner in the company depending on the amount he is investing. In this type of funding, the contributor is entitled to receive the dividend. This is a common way of crowdfunding.