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Crowdfunding For Startups
  • What Is Crowdfunding?
  • How Does it Work?
  • Benefits of Crowdfunding
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What Is Crowdfunding?

Crowdfunding is the technique of raising small amounts of cash from a large number of people to support a new business endeavour without going through traditional routes like owners, family, and venture capitalists to raise funds.  Crowdfunding takes advantage of the easy accessibility of wide networks of people via social media sites and crowdfunding platforms with the potential to promote entrepreneurship by expanding the number of investors other than the usual circle.

By receiving the crucial boost to cash flow, entrepreneurs can launch new projects or start up new businesses. Most of these events are conducted online, have fundraising targets that must be disclosed, and have constraints for when money can be gathered.

How Crowdfunding Works?

Crowdfunding for business is essentially the opposite of the mainstream approach to business finance. Traditionally, if you want to raise capital to start a business or launch a new product, you would need to pack up your business plan, market research, and prototypes, and then shop your idea around to a limited pool or wealthy individuals or institutions. Crowdfunding has created the opportunity for entrepreneurs to raise hundreds of thousands or millions of dollars from anyone with money to invest. Crowdfunding provides a forum to anyone with an idea to pitch it in front of waiting investors.

Crowdfunding platforms are websites that enable interaction between fundraisers and the crowd. The platform gives entrepreneurs a single platform to build, showcase, and share their pitch resources, this approach dramatically streamlines the traditional model. 

Fundraisers or entrepreneurs 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. With crowdfunding, it’s much easier for fundraisers to get your opportunity in front of more interested parties and give them more ways to help grow your business.

Types of Crowdfunding

There are a variety of crowdfunding types. Which crowdfunding method an entrepreneur selects depends on the type of product or service they offer and their goals for growth. The 3 primary types of crowdfunding are:

  1. Donation-Based Crowdfunding

    Donation-based crowdfunding refers to when people donate money to a cause, business, or individual in exchange for nothing. Donation-based crowdfunding, commonly, refers to any campaign or initiative where there is no financial incentive for the investors or donors. Fundraising for charity, nonprofits, and medical expenses are examples of common donation-based crowdfunding projects.

  2. Rewards-Based Crowdfunding

    In rewards-based crowdfunding, investors participate in your company in return for a reward, which is often a representation of the good or service your firm provides. In this case, contributors get something in exchange for their contributions. The benefits are dependent on the gift amount, which encourages larger donations. Investors may obtain the company's goods or services at a discount based on how much they donate to a campaign.

    Despite the fact that this approach gives backers a reward, as there is no monetary or equity return, it is still typically regarded as a subset of donation crowdfunding. This strategy is a common choice on crowdfunding sites since it enables business owners to compensate their contributors without racking up significant additional costs or ceding ownership interests.

  3. Equity-Based Crowdfunding

    While some crowdsourcing types do not permit investors to own a stake in the organisation they are funding, like in the first two categories, some do. By exchanging funds for equity shares, equity-based crowdfunding enables contributors to take part in ownership of their business. The contributors profit financially from the investment and subsequently get a share of the earnings in the way of distribution or dividend as equity owners.

    Startups and small-scale companies can use equity crowdfunding to sell a piece of their company in exchange for capital. Participants in this sort of investment receive company shares in proportion to the amount of money they have invested.

Benefits of Crowdfunding

Crowdfunding has a variety of advantages over more conventional techniques, including the ability to reach a larger investor base and more flexible fundraising alternatives. Just a handful of the numerous benefits of crowdsourcing are listed below:

Better Reach - Entrepreneurs may reach thousands of certified investors who might invest in their company by using crowdfunding platforms. The likelihood of receiving funding increases with increasing reach.

Excellent public relations and marketing -  Fundraisers share and advertise their campaign using social media, newsletters, and other channels from start to finish. One can increase the amount of traffic to their website and highlight their startup by using this marketing strategy.

Assessment on the Concept - The potential to evaluate and improve your offering is wonderful when you introduce your idea or business to the general public. You'll soon determine if there is anything lacking as and when the potential investors start to show interest and ask questions.