You may have come across the term in recent years, with its popularity growing steadily in the last decade.
What is crowdfunding?
As the word suggests, crowdfunding refers to the efforts to source funding for business ventures via web platforms. Basically, it’s an open call fundraising done via the Internet.
Crowdfunding combines the practical features of crowdsourcing with microfinancing by bringing together prospective entrepreneurs who have innovative ideas, and funders who voluntarily commit resources to projects they want to support. Because of its practical and collective approach to investment, crowdfunding has gained considerable ground in the financial field – with billions in annual growth since 2012, and a projected $300 billion worth by year 2025.
To dig deeper into crowdfunding, let’s look at its different aspects:
Goals of Startups
Unlike the more traditional forms of financing, crowdfunding provides business startups with the opportunity to gain capital without going through standard financial intermediaries. Through websites, they could propose a particular project or product and raise initial money required to start their venture.
The foremost crowdfunding site, Kickstarter, has enabled 45 projects to become full-fledged entrepreneurial firms since 2009.
But funding may not be the only goal of business owners. In some cases, crowdfunding has been used by startups to demonstrate demand for a proposed product, which can then lead to funding from traditional sources. This was evident with the success of Pebble Smart Watch, which, while having been rejected by venture capitalists, became one of the most successful crowdfunding projects, gaining more than $10 million in a month on Kickstarter.
Wide Range of CrowdFunders
Crowdfunding attracts many funders because it is an open and flexible way to donate or invest resources. Funders may opt to be patrons, where they donate money without expecting any return. They could also act as lenders, where funds are offered as a loan with the expectation of agreed rate of return on the investment. Investors could also adopt the reward approach where they receive a reward for supporting a project (e.g. creative input in product development, acknowledgement, special access to funded products/projects).
Beyond the obvious benefit of funds, gaining support from funders means that you can build a support system, a solid tribe that campaigns for your vision right from the beginning. Funders could provide critical feedback and support, and more importantly, can help you reach a wider network of similar thinkers.
Crowdfunding is not only about sourcing funds. It is also an effective marketing strategy because you are essentially creating awareness about your project or cause in the biggest platform there is – the Internet – where there are literally millions of possible funders who can contribute to your initiative!
In fact, for a crowdfunding project to even be successful, it would need a great video pitch, a convincing call-to-action and a serious business plan that details how money will take the project to the next level.
Upside and Downside
The obvious advantage of crowdfunding is that it provides an open setting for both aspiring entrepreneurs and funders to engage in patronage and possible partnerships for projects that may, otherwise, be disapproved under the rigid rules of banks and investment firms. A great crowdfunding project not only gains money, but also creates a base of supporters and customers who have a stake in your business.
However, there are also downsides in crowdfunding.
For instance, funders may not always scrutinise project quality; as long as the project looks interesting or has an engaging story to tell, many funders could be drawn to it. This suggests that crowdfunding may be inefficient in guarding against misuse, and even fraud. What’s more, crowdfunding projects are prone to underestimate how much money and time are needed for the project, which usually results to delays or even failure to complete the project. Even well-funded projects suffer delays – especially if funders begin to expect more complex output from the developers.
So what is crowdfunding? It is an exciting, growing industry that’s instrumental in levelling the playing field for budding entrepreneurs. It’s not just about money: it’s about nurturing your own vision, brand and community.