What is Crowdfunding?

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Source: medium.com

It is a method of raising money to implement and maintain scientific, creative, social, environmental and other ideas. That is, those who wish to invest money or attract sponsors, who can then profit from the financed projects. But it is also done on a gratuitous basis, when people voluntarily give money to support a startup they like or to charity.

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First, let’s address a bit of history. The term “crowdfunding” was coined in 2006 by journalist Jeff Howe. In English it translates as “public financing”. This term began to operate quite recently, but the method of fundraising itself existed already in the last century.

At present, it is realized most often through the Internet, that is, funds are collected through special online platforms. The first example of such an operation in history is considered to be the “sponsorship” of the tour of the rock band Marillion in 1997. American fans held a campaign all over the country and raised more than 60 thousand dollars.

Where crowdfunding is used and how it works

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Funds are raised for absolutely different purposes. You can help artistic, educational or technical projects. For example, open a language school, create a board game, invent a unique window-washing product, and much more.

It is mostly done on special Internet platforms, but money is also raised through the media or even through social networks. TV news shows talk about children in need of treatment, or people who are in a difficult situation and experiencing financial difficulties. They usually ask for a text message with a donation amount. The funds are transferred to the foundation, which distributes them itself. In this case, we are talking about gratuitous donations, fundraising. This term means raising money for social and charitable purposes.

People can also use crowdfunding for personal purposes. For example, a student can’t afford to pay for college; a person doesn’t have enough money to travel or buy a car. Social networks, groups, or personal pages sometimes advertise for help to support creativity. The owner of the page indicates the details of the card to which funds can be transferred, or a link to a crowdfunding site.

How crowdfunding works and how businesses can use it

Crowdfunding works as follows:

  1. A company generates a business idea. The project must interest sponsors.
  2. The team working on the idea chooses a suitable crowdfunding platform. Some platforms are for commercial projects, others are more suitable for charity.
  3. The team draws up a plan for the campaign. Taxes and other mandatory payments are taken into account when calculating costs. The amount needed to launch the project is derived.
  4. The company or entrepreneur opens a collection on a crowdfunding platform. It is also possible to place an ad in a social network.
  5. The team leading the project chooses a way to reward investors.
  6. The firm brings the idea to life.
  7. If the project is successful, the firm pays taxes; if the funds were raised on a particular platform, its administrators receive a commission from the company.

Types of crowdfunding

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  • Funding, followed by a reward. The author of the project promises sponsors some kind of gift. This reward can be absolutely different: in the form of a service, a monetary gift, or even a virtual bonus. For example, for helping to open a language school investors can attend 10 free classes. Or if you supported the creators of a mobile strategy game at the very beginning, the developers will give you bonuses and offer special features.
  • Equity investments. When a firm tries to raise money by selling shares in a project.
  • Debt Crowdfunding. A type of financing in which the sponsor earns a profit with interest.

Benefits of starting a crowdfunding site

When it comes to investing in a business or startup, one of the advantages of crowdfunding is that by putting their money into a project, investors can make a profit if the project becomes successful. The following is an overview of how crowdfunding works.

When you invest through a crowdfunding platform in a business, you buy stock in the project. If the business thrives, its stock may rise in value. That way, you can potentially multiply your investment if the business project is successful.

Here’s an example. You decide to invest in a startup with one share worth £10. By taking 10 shares, you give away £100. With a favorable development, the company can succeed. For example, after some time the value of the shares increased by 10 times because of the success of the project. In this case, 10 shares are no longer worth £100, but £1,000. In other words, funding a project through crowdfunding can multiply the money invested.

Types of crowdfunding

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It can be divided into 2 categories:

  • Donation-based investing, where participants produce funding for a new project. The main purpose of donation-based crowdfunding registration is to implement a project, product, product or service at the expense of investors. A typical example would be a charitable project.
  • Investment crowdfunding. In this form of investment, companies sell their shares to investors. In this way, they become shareholders and can make a profit if the business is successful.

Types of crowdfunding are as follows:

  • Equity crowdfunding.

Used by companies when they raise money by selling a stake in their project.

  • Debt-based Crowdfunding.

This type of project financing is characterized by the fact that investors who have invested their money in the project receive their money with interest over a certain period of time. This structure resembles peer-to-peer lending. This type is also called “debt crowdfunding.”

  • Reward-based crowdfunding.

Participants in such a crowdfunding platform can receive valuable prizes or gifts for their monetary contribution.

It is worth remembering that before opening a crowdfunding platform, it is necessary to register a legal entity, as well as to obtain the appropriate permission to conduct such activities.

Conclusion

Crowdfunding is a promising way to both find money for a specific purpose and successfully invest it in a potentially successful project. This financing scheme will be a great solution for a startup, innovative developments, testing the feasibility of an idea, a non-profit project. Perhaps in a few years crowdfunding will be able to offer a full-fledged alternative to bank loans for business development.