Crowdfunding is among the most popular means of raising capital for all types of businesses. It’s also extremely successful, with crowdfunding generating $17.2 billion every year in North America alone.
While crowdfunding might seem like the ideal way to get your startup off the ground, you need to understand what it entails. Here we’ll go over what crowdfunding is, what sets it apart from other sources of funding, and the benefits and disadvantages that come with it.
Crowdfunding is a method of raising funds for individuals or businesses, whether to help kickstart a new business, complete a specific project, or support a cause. Normally, crowdfunding involves a large number of individuals who each donate a small amount of money over a brief period to meet a funding goal. Crowdfunding takes place both offline and online and often goes through various social media platforms to attract donors.
There are two primary models of crowdfunding: donation-based crowdfunding and investment crowdfunding.
In donation-based crowdfunding, donors will send money to help fund a particular project, which could involve a new product or service offering. The funds raised during this campaign would contribute toward the development of this offering. If a campaign involves a charitable cause, donors may receive certain other benefits in place of an offering. These benefits could include everything from a thank-you note from the recipient and name mentions in videos to personalized videos and certain perks.
These crowdfunding campaigns involve businesses that essentially convert donors into shareholders as they donate. This allows for a financial return that individuals wouldn’t see with the donation-based model. Typically, this model of crowdfunding requests donations from accredited investors. Startups often use this method to get funding from a large number of investors when other fundraising options aren’t as accessible or affordable.
Crowdfunding differs from other types of funding methods in a few key ways. Some traditional methods could include venture capitalists, angel investors, and loans from banks and other financial institutions. The following are the main differences between these methods and crowdfunding:
Equity in a startup is the money that shareholders normally receive following the liquidation of a business’s assets and the paying off of loans and debts. Traditionally, angel investors and venture capitalists want equity in return for funding, which gives them a degree of control over the company.
However, through donation-based crowdfunding, startups have the ability to keep all of their equity, with investors receiving neither stake in the company nor direct financial returns. While investment crowdfunding gives equity to investors like other fundraising channels, you can use donation-based crowdfunding to offer other rewards to investors.
Getting funding through venture capitalists and angel investors comes with a degree of risk for investors. Although investors may gain a degree of revenue if the startup excels, they could experience more severe financial losses if the business fails. The failed startup would then be responsible for repaying investors.
Crowdfunding, on the other hand, comes with less financial risk, as startups can avoid the need to repay investors if their venture fails. At the same time, investors can avoid significant financial loss if they make no real investment in the company.
Traditional funding involves investors who expect some form of financial gain, whether it’s in the form of shares and revenue for angel investors or interest on loans for financial institutions. Conversely, investors who contribute through crowdfunding don’t typically anticipate these types of gains with the donation-based model. Instead, you can offer other rewards to investors that aren’t as financially impactful.
These are simply a few differences to consider between crowdfunding and more traditional funding strategies.
For startups of all types, crowdfunding comes with certain advantages and disadvantages to consider. Knowing these will help you make the right decision when choosing between crowdfunding and other methods.
Some specific advantages of crowdfunding include:
Crowdfunding is beneficial for many, but there are certain aspects to keep in mind, such as:
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