What is Crowdfunding?
Despite its popularity, many people still do not know exactly what crowdfunding is. So what is it? Well, crowdfunding is a phenomenon that takes up the concept “the wisdom of the crowd” in which the public gets to consolidate in order to validate an idea.
Many entrepreneurs prefer crowdfunding when financing their business ideas or projects given the amount of money they can raise. In addition, they get a simple yet comprehensive platform where they can pitch their business ideas to potential investors without going into financial troubles.
Below are different types of crowdfunding:
- Donation: This sees the public donate or contribute funds for a community or charitable project.
- Reward: The public pledging money to a company with an aim of reaping the benefits of the company’s success.
- Equity: This sees companies that want to raise money issuing out equities to the public. By taking up these equities, they become shareholders. Entrepreneurs tend to take up this type of crowdfunding if they plan on expanding their business or are at an initial stage for start-ups.
- Debt (Peer-To-Peer lending): This sees the public lend money to individual parties or businesses which they later repay with interest.
Crowdfunding works in two ways. One, it works based on rewards. This allows the public to contribute their funds to a product either by a business or an individual with the promise of receiving the final product once the product is fully developed.
The other one sees the public raises funds for a company with the promise of having the slice of the company once it becomes successful. In exchange of their funds, the company or the individual given the money tend to give the public equities thus making them shareholders of the company. In Australia, only those are allowed to participate in this type of crowdfunding who earn around $250,000 or have assets that total up to $2.5 million.
There are several misconceptions or myths related to the crowdfunding, for example, many people believe that it does not require hard work. In fact, many believe that you can just start up a project, sit back and relax while the money rolls in. This is far from the reality.
For a crowdfunding project to be successful there has to be lot of work put into it. Another misconception surrounding crowdfunding is that it is only useful for start-ups or small businesses. Although it helps a majority of start-ups, established companies can also take advantage of it when they want to launch various products or even expand to other states or countries.
There are three key points one should keep in mind when it comes to get crowdfunding from investors. These are:
- Crowdfunding should help connect to a campaign’s greater purpose
- Crowdfunding should help connect to a campaign’s physical aspects
- Crowdfunding should help capture the campaign’s creativity
Lastly, it is important to make sure that every campaign has a powerful reason behind it. Most importantly, it has to have a reward aspect for the public for them to participate.