Definition of Crowdfunding: Types, Pros, and Cons

In this article, we will study “what is crowdfunding?”, “forms of crowdfunding”, “Kickstarter Crowdfunding“, “GoFundMe”, “investment “, “companies”, etc.

Introduction To Crowdfunding

From the name, you would get an idea of what crowdfunding is all about. It is linked with a high number of people. However, crowdfunding is a way, for fundraisers to obtain money from a big number of people. This is done through different media. Let us look at the meaning of crowdfunding and the types of crowdfunding.

What Is Crowdfunding?

This is regarded as a way by which a person obtains money from a large number of people to solve a particular problem. This is done through various platforms.

Technically, it involves the use of a technology service for financial purposes. The idea is to generate money from the crowd instead of financial institutions. With different online financial platforms, people donate capital. Of course, the question will be, “what are the benefits? “. However, this depends on the platform in use. Different platforms offer rewards based on the capital invested and the agreement of the investment. The reward is either in material or immaterial form.

Forms Of Crowdfunding

The form of crowdfunding is divided into two:

  • investment crowdfunding
  • non-investment crowdfunding.

The difference is in the role each funder plays. Funders for investment crowdfunding deposit money while expecting a profit. On the other hand, funders in non-investment crowdfunding support charitable organizations. In return, they receive immaterial rewards. In the non-investment model, you have reward-based crowdfunding and donation-based crowdfunding.

Categories Of Crowdfunding: based on the funder’s right

This is dependent on the model of investment. It is categorized under debt-based crowdfunding and equity-based crowdfunding.

There are many modifications to crowding. For this reason, various definitions emerge.

The concept of crowdfunding is direct. Funders provide the funds while online platforms facilitate the funding. This is by connecting the funders and those that need it.

The act of crowdfunding may require little or much capital. However, the idea is to make a lot of people, donate little capital to fund a business. Here, social media plays a vital role in this. People gain important skills and values when they connect online.

Important Notes

  • Anyone can’t just fund a new business. There are procedures to follow.
  • Investors can pick projects fund for as low as $10.
  • With crowdfunding, a certain amount of money can be raised. A site can generate revenue from this.
  • In the U.S., crowdfunding that is based on equity is regulated by SEC.
  • Some examples of crowdfunding platforms are Kickstarter, Indiegogo, and GoFundMe.

Working Principles Of Crowdfunding

It is very important to regulate who can fund a new business and the amount they can donate. This is done to protect average investors, from risking all their money. Investors should know that it is not definite for the funded business to succeed.

The pros of crowdfunding are many. A lot of money can be raised to fund a business or invest. Individuals could also, state their ideas before prospective investors.

The beauty of fundraising is, you could state your idea and target, and get even more than you expected. Once the investors see the prospects in your idea, they begin to donate to it. The crowdfunding site creates revenue from the donations made.

However, the working principles of crowdfunding have attracted the attention of many influential people. Also, Patron and Substack, which are crowdfunding platforms, create an avenue for sustaining individual creativity.

Some Notable Crowdfunding Websites

Some notable crowdfunding websites include Kickstarter, Indiegogo, and GoFundMe.

GoFundMe

GoFundMe was founded in 2020 but is currently the biggest crowdfunding platform. Statistically, GoFundMe has raised over $10 billion from various donations worth over 150 million. GoFundMe is the largest crowdfunding platform. Since GoFundMe was founded in 2010, the site has raised over $10 billion through more than 150 million donations. Most people make use of GoFundMe to raise funds.

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Kickstarter

Upcoming companies make use of Kickstarter crowdfunding to raise funds. However, it was founded in 2009 and has gained large popularity. Kickstarter Crowdfunding has funded close to 200,000 projects, with a lot of pledges to be redeemed. It is always compared to GoFundMe.

When compared to GoFundMe, it is observed that GoFundMe could be used to fund the charity. While Kickstarter crowdfunding is unique for generating projects which can be shared. Kickstarter crowdfunding regulates a whole lot of things, which it can’t fund. They are strict in their policies. It can’t fund charity, contests, gambling, political ambition, etc.

Indiegogo

In 2007, Indiegogo was created. Although it started as a fundraiser for independent films but has recently been accepting other projects. Due to its user-friendly and flexible quality, people tend to prefer it to Kickstarter.

The difference between Kickstarter Crowdfunding and Indiegogo is, Kickstarter crowdfunding gives out funds at the funding stage. While the latter gives funds midway through the actualization of the project.

However, the person who has the idea that is funded should remember to fulfill any promise made through the funding. The fees being paid in platforms range from 5-12%. However, it is important to look out for legit crowdfunding platforms with comprehensive fee structures.

Pros Of Crowdfunding

There are a lot of advantages associated with crowdfunding.

  • It is most beneficial to companies that are starting up. This is because a lot of supporters are accessed.
  • With the use of social media, you can reach a large audience to grow your business.
  • Furthermore, investors can get rewards for their investments. It can be in form of cash or material. Let’s say a producer of a soap, produces a large quantity of dye with high funding. He or she can send some bars of soap to its investors.
  • The benefit of equity-based crowdfunding is, it gives startup businesses the opportunity to generate money. By generating this money, the control of the business isn’t given to big investors.
  • Investors can earn an equity position in the venture. In the United States, the Securities and Exchange Commission (SEC) regulates equity-based crowdfunding.

Cons Of Crowdfunding

The cons of crowdfunding are few but detrimental.

  • Companies lose their prestige when they resort to crowdfunding.
  • There are certain requirements you need to meet up with. In a situation where you don’t meet up, you lose everything.

What are the Requirements For Crowdfunding?

  • Good communication skills with potential consumers
  • Ability to gauge public opinion on your product
  • Adherence to the rules/fees of the crowdfunding platform

What are the Examples of Crowdfunding

From statics, most businesses succeed under Kickstarter crowdfunding. It funded Oculus VR, an American company that deals in virtual reality devices. Palmer Luckey in 2012, did a launch. This was for raising money to introduce new virtual reality gadgets. It recorded over $2.4 million as against its target of $250,000. Not long ago, Facebook bought Oculus VR for $2.3 billion.

Kickstarter also helps to fund M3D. It was founded by David Jones and Michael Armani. In 2014, they raised a sum of $3.4 million to develop their Micro 3D printer. That printer is now widely sold on Amazon.com, Staples, etc.

There are many other examples of crowding. A lot of companies have grown large with the help of crowdfunding. It is still very effective in recent times.

Crowdfunding is a form of service that obtains a small amount of capital from a large number of individuals to fund a new business. It may be in return for a reward or just for donation purposes.

Do you Refund in Crowdfunding?

As we said earlier, crowdfunding can be in form of a donation or investment for reward. If it is on a donation scheme, then it doesn’t require a refund. However, the business can just offer incentives in appreciation.

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Is Crowdfunding Functional?

In this segment, we will learn the functionality of crowdfunding. Also, we will look at, how to take part in the different types of crowdfunding.

Historically, before the advent of crowdfunding, people could get money to fund a business in various ways. They can borrow from a friend, take a loan from the bank, or sell family properties.

But now, a more convenient and viable means came forth. This is known as crowdfunding.

Its objective was to raise money from a large number of people. They do this, by donating little capital to generate enough funds for a project. Individuals can create campaigns to attract investors.

Types of Crowdfunding

  • Securities-based crowdfunding. It gives individuals the leverage to invest in startup businesses. This will require a reward, as investors receive shares or stocks in exchange for capital. Here are other different types of crowdfunding:
  • Donation-based crowdfunding. This doesn’t require a reward. The monetary donation is solely for charity or a particular cause (Eg. GoFundMe).
  • Reward-based crowdfunding. Just like the name, there is a particular reward to any supporting body. You can receive the product or an incentive.
  • Peer-to-peer lending. This is similar to the historic way of obtaining funds from friends and family. Individuals can get funds from people without any legal institution acting as a third party. It is more or less debt crowdfunding.
  • Real Estate crowdfunding. This a specialized type of crowdfunding that give individuals the opportunity to invest in real estate projects. The benefit is, you won’t have to deal with regulatory agencies like mortgage brokers, real estate agents, or contractors.
  • Human capital crowdfunding. In this type, individuals raise funds to solve personal projects. People who invest in such projects, deserve a reward. For instance, a poker game player gets money through crowdfunding. At the point of winning, he or she will distribute a share to the investors.

Are There Crowdfunding For Companies?

As we earlier said, the whole idea of crowdfunding is to raise capital to fund a business. This can be startups, angel investments, or transactions.

Crowdfunding for companies or a business is simply a way, for generating funds for startup businesses from a large number of investors. The benefit of this is, it promotes early-stage investment for companies with high innovations. It can also create empowerment when people benefit from the progress of the business.

How do Companies achieve crowdfunding?

Crowdfunding works for companies with a few steps. However, backers can make investments with platforms like Republic. It is only normal for some crowdfunding platforms to reward investors. This happens especially when the business meets its target. They can earn either cash or stock.

What Makes Crowdfunding Unique?

Various projects are easily achievable with crowdfunding. This is because it involves a large number of investors. Unlike the early form of raising funds from a few major investors. Also, as crowdfunding is online, it is very efficient.

Importance of crowdfunding

We shall look at the various importance of crowdfunding. However, there is more to crowdfunding than fundraising.

It is evident that obtaining money can be overwhelming. Some demand collaterals while some demand high-interest rates. With crowdfunding, you don’t have to worry about those challenges. Now, people can willingly donate and promote the business. Also, it will attract new investors and create room for empowerment. As crowdfunding carry out its operation online, promotion becomes effective. A large number of people connect to the company’s brand, product, or service. Above all, with crowdfunding, startups can secure early investors and people who can serve as brand ambassadors.

Entrepreneurs can raise more funds, more than expected, to fund their projects, especially in technology.

In the situation of Black founders, being conventional is not our way. This is because they did not raise us to be conventional. Equity crowdfunding makes that comprehensive.

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An investor sees crowdfunding as an easy way to fund genuine businesses. These investors donate a little amount in large numbers and different projects. This way, you maximize profit. Also, investors should risk the money they can lose, as there is no certainty of the business succeeding.  

Risks Involved In Crowdfunding

We have been singing the praises of crowdfunding, now let us look at the risks involved.

One prominent risk is the ability of investors to lose their whole investment. However, when you meet the crowdfunding campaign goal, it doesn’t mean that the company is bound to succeed. When this company does not succeed, the investors lose all their investments. If for any reason the company succeeds, it may take a long while for any returns to mature.  

Some crowdfunding campaigns are not authentic. Therefore, when you invest, your money just goes away. This is to say, investors should investigate properly before investing.

When they expand private investment markets, the republic aids to reduce risks. This is through some internal teams in the private market. However, nobody is willing to scrutinize these companies. The need to be able to provide accurate information to enable investors in decision-making.  

Steps for crowdfunding to succeed

Here are some steps to utilize the crowdfunding opportunity.

  • The goal — This is the first and most important step. What is the idea behind the campaign? What will they use the money for?
  • The team — It is also an important aspect to look into. Carrying out an investigation on the team on board will enable you to determine if they are capable or not.
  • The UVP (unique value proposition) — This aspect involves, knowing the value the platform possesses. Also, to know the current technology they make use of, and if it is bringing unique solutions to the market.
  • Research the market and traction — Here, you find out, if the people need the services they render. What they render is desirable. Then determine the performance of their concept in the market.
  • Fraud — It is only right to determine the sincerity of these platforms. You can check the company’s website, and fill in and out other paperwork. Without doing these things, you are taking a big risk.

Examples of successful crowdfunding campaigns

  • A man known as Zach Brown wanted to rent out a party hall. His capital target was $3,000. This will enable him, to invite his friends to the potato salad party. In the end, 7,000 people came and he raised about $55,492.
  • Another example is the pebble smartwatch which has also attained huge success. Its desire is to raise money to launch its Pebble 2 and Time 2 watches. It was able to raise over $1 Million in one hour, and Kickstarter enabled it to make this success.

Let us talk about Sapient. It looked to raise a seed-stage round. It kicked off a campaign and raised $1,070,000 from 1,889 investors. Its customers kept increasing, attracting the likes of Jason Calacanis.

With these examples, the campaigns showed concrete goals which made them actualize the goals. This enabled them to unlock new products and services. With all these, you can see that crowdfunding has really been beneficial to people.

Ways to start Crowdfunding on Republic

An important factor in crowdfunding is Republic. It facilitates fundraising with crowdfunding. That is why it is important to investigate platforms before investing in them.

Republic has a role in helping individuals raise funds. Therefore, you can refer anyone who has a startup company to Republic.

CONCLUSION

I believe you have learned a lot from this article. You can still carry out more research on the topic for more information.

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