Crowdfunding; What it is and how it works.
Annan Capital Partners
A Boutique Investment Advisory firm and a Startup Ecosystem enabler
Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms.
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.
How does it work?
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; if you don’t, everybody gets their money back – no hard feelings and no financial loss.
Types of Crowdfunding
Reward crowdfunding is when you raise funds by reaching out to your sympathizers. You reward them with a small gift or a product sample when they achieve a milestone (like pledging a certain amount).?
As the name implies, debt crowdfunding is when you receive a loan—instead of money—with the help of crowdfunding. After receiving the loan, you have to return it within a specific period.?
In equity crowdfunding, you give up a portion of your company’s ownership to the crowd. Nowadays, early-stage companies and startups employ equity crowdfunding to raise funds for their business launch.
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.
Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return.
Businesses can share future profits or revenues with the crowd in return for funding now.
Offer businesses the opportunity to combine elements of more than one crowdfunding type.
Crowdfunding Platforms
Factors to Consider when Selecting a Crowdfunding Website
Whenever you are going for reward crowdfunding, you will come across one of these two models. Keep-it-all, or KIA, is when the fundraiser sets a particular fundraising goal and keeps the entire amount despite not meeting its objective.
On the other hand, all-or-nothing (or AON) is when the fundraiser sets a specific fundraising goal and keeps nothing until the goal has been achieved. Both these models have their advantages and disadvantages.?
Crowdfunding websites take processing fees from each contribution. It’s usually a certain percentage of the contributed amount.
Not just that, some crowdfunding platforms charge a fee of up to 8% of your overall earnings.