Crowdfunding is a new way for start-up businesses and entrepreneurs to raise funding for their business. It is changing the way businesses raise investment. The ability to raise investment is essential if you want your business to succeed. Crowdfunding offers a viable option for start-ups to achieve this.
What is Crowdfunding?
Crowd funding is a powerful investment tool for start-up businesses to raise investment for a wide range of activities from setting up a new start-up venture, launch a new product or service, develop a new software or undertake community projects. Crowdfunding platforms like Kicstarted have become very popular among start-ups and investors alike and have helped to raise financing for thousands of businesses all over the worlds.
How is it Different to Venture Capital Funding?
Crowdfunding is different to traditional fundraising methods. It involves raising money from many different backers.
Instead of raising the entire amount from established investment schemes or large investment houses, crowdfunding lets you raise small investments from a group of private investors.
Unlike traditional venture capital funding or angel investment, where one person or organisation takes a large stake in a new business, crowdfunding involves funding from a large group of people ? all of whom take a relatively small stake each in the business. Best-known platform, US-based Kickstarter, only launched in 2009
This has led to the establishment of several crowdfunding platforms on the Internet. Inventors, entrepreneurs and start-ups all over the world are now able to take advantage of these crowdfunding platforms to showcase their new business ideas and attract the attention of investors.
How Does Crowdfunding Work?
You can use one of the many online crowdfunding platforms to raise investment for your start-up. The process is simple. You register for a free account on the crowdfunding website and post your project listing full details including the total amount you are seeking.
Your project is visible to vast group of people who are looking to invest in new business ideas. Investors who like your project pledge or transfer the amount they wish to invest which is held by the crowdfunding website till the investment deadline is reached. This can be anywhere ?between 60 days to 180 days.
Once the deadline is reached, depending on the funding model of the crowdfunding platform, you can withdraw the funds and start using it to develop your product, or to launch your business and develop your brand. The funding models are explained in detail below.
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Types of Crowdfunding Platforms
Funding Models:
These crowdfunding sites typically offer the following two models for raining funding for starting a business.
- All or nothing
- Keep it all
The all or nothing model only allows you to withdraw and be able to use the investment you have raised if your
entire investment has been raised. If you fail to reach the total investment you were seeking, the funds are returned back to the respective investors.
The ?KEEP IT ALL? funding model offers a welcome alternative to ?All or Nothing? funding sites. Under the ?Keep it All? model, when the investment deadline is reached, you are allowed to receive and use the funding you have received even if the stipulated total investment has not been raised.
Reward Vs Equity
There are two types of crowdfuning platforms based on the type of investment that is offered; the reward and equity platforms. These are explained below.
Reward Based Platforms:
This is the most commonly used platform. The reward-based approach has fewer legal constraints and there are no restrictions on the total amount you can raise for your business. You can easily raise far more than your funding target if your idea is great and proves popular among investors. It offers the opportunity to pre-sell your product and raise money for its creation.
The only drawback is that most of the reward based platforms use payment methods like PayPal so there is an additional 3 to 4% charge on every transaction in addition to the commission charged by the respective platforms.
Equity Based platforms:
Equity-based platforms are better suited for start-ups that require larger funding. They generally operate by wire transfer, so you benefit from lower fees on payment transactions.
You will also need to work out how much equity you are prepared to offer in return for investment in your business. As crowdfunding typically involves raising small amounts from multiple investors, the equity offered to each investor may only be 1 or 2%.
Growth of Crowdfunding
A recent article on Forbes.com has reported that transactions through crowdfunding are expected to reach $500 billion annually by 2013. This is phenomenal increase compared to $1.5 billion in 2011, and $3 billion anticipated in 2012.? If crowdfunding even begins to approach that scale, it will completely change the landscape for start-up financing.
In the US, this growth can be largely attributed to the signing of the new Jobs legislation by Barrack Obama in 2012 that breaks down restrictions for businesses to obtain funding from small investors. As a result, the crowdfunding market is set to explode in the coming years.
Until now start-ups have been restricted to raise investment from larger approved financial bodies only but the new Jobs legislation breaks down these restrictions. As a result, the crowdfunding market is set to explode in the coming years.
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Source: http://www.kronikmedia.co.uk/blog/crowdfunding-how-does-it-work/5676/
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