Crowdfunding has recently risen as one of the best capital raising strategies that people and companies alike can utilize to secure financing for whichever project they need. It is utilized by creators, activists, entrepreneurs, and pioneers who use today’s technology to try and launch their project and vision . However, despite its newfound fame, is it truly an effective practice worth doing?
In this article, the notion of crowdfunding will be analyzed along with the concept whether it is a suitable plan for people, as well as some advantages and disadvantages the strategy offers.
Crowdfunding 101
In the simplest of terms, crowdfunding denotes to collecting capital from many different people. People everywhere globally employ it to finance their own projects, causes and business ideas. Through the use of crowdfunding platforms like Kickstarter, Indiegogo, GoFundMe, and Seedrs people share their case for why they would deserve or require people´s contributions.
Some of the most common cases where crowdfunding is utilized are philanthropic efforts, such as environmental campaigns or social awareness events that cost money to organize. Other cases are individual campaigns, such as individuals who are sick and need others support for treatment.
Crowdfunding can be an extremely powerful tool as through the utilization of social networks, people can source money for basically anything they want.
Types of Crowdfunding
There are various forms of crowdfunding, each with its own purpose:
Reward-Based Crowdfunding: supporters receive incentives or items in return for their cash.
An example of this could be a watch company trying to release a new model with new technology and creates different product categories of their watch (Basic, Standard, Elite) based on people’s contributions, investors would get their respective item in return for their investment.
Equity Crowdfunding: Investors will put up equity in exchange of a piece of the firm or enterprise.
For example, that same watch company needs to have some kind of equity to begin production. So they call John, who loves the idea and proposes to assist them in trade of a chunk of the business.
Donation-Based Crowdfunding: People donate without expecting rewards or equity.
The most frequent cases include social causes and helping others.
Perks and Disadvantages of Crowdfunding.
So, why is crowdfunding worth considering? Isn´t it easier to just appeal to individual investors? Here’s why and why not:
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Market Validation: Crowdfunding can help you get a feel of the market by gauging people’s interest and demand. By using crowdfunding for a business, you can see how many people actually think it’s a good idea by actually committing some money into the project
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Community Support: People who choose to invest in the project can also become involved and provide additional support. Thus enriching the project.
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Flexible Funding: Since projects are talking simultaneously to multiple people, they can be straight about what they want to do, how they want to do it.
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Communication: By developing a community, information can easily flow between all group members
However, crowdfunding may also have certain disadvantages for businesses:
- Investment: By having so many people invest, they might all want to have a say with the direction the project undertakes. These situations could potentially prove very difficult to maneuver as unsatisfied investors might pull their capital or leverage it into decisions that go against the company’s vision.
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Expectations: Transparency and constant briefs about the project status would be of the utmost importance in order to keep investors engaged and informed. This way, through feedback of comments they can share their input of vision for the project step-by-step..
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Not enough funding: Crowdfunding is actually way more difficult than it seems. It required deep strategic design and influence and work to secure quality funding. It’s also quite costly to create a campaign to attract people to invest
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Not enough support: It could possibly be true that in order to begin operations, businesses require a minimum of capital. However, crowdfunding might not be enough to reach the required level. Less than 25% of businesses actually meet their goals.
Crowdfunding Success Stories
While most crowdfunding campaigns end in disappointment, some mange to revolutionize industries and bring actual value. Such is the situation of the cryptocurrency EOS, which launched back in 2017 securing one of the biggest crowdfunds thus far.
EOS: Raised USD $7.1 million in ETH.
Crypto Projects like Fliecoin and Tezos: Raised about 250 million respectively
However also, video games like Star Citizen or TV shows like the chosen have been crowdfunded into existence. These were funded by fans excited about the project and what the game had to offer.
Regulations and Considerations
Asking people to invest in your project, whatever it may be, seems easy enough, right? However, it doesn’t really work that way, as this type of funding works in the same way as an investment does, and this needs to be regulated by either the Securities and Exchange Commission (SEC) regulations or Independent Platforms in the US.
Some of these regulations include:
Investor Protection: In the U.S; the Securities and Exchange Commission (SEC) regulates crowdfunding campaigns to provide in detail, the financial information, hazards and the project’s business plan. This is in order to protect investors from fraud.
Investing Limitations Many regulations have established a monetary limit on how much people can invest through crowdfunding. The SEC has established limits based on the investor’s income and net worth to reduce the risk of considerable damages in the instance of failure.
Legal Compliance: Crowdfunding platforms often need to register with authorities bodies and comply with specific operational guidelines. Otherwise they risk being shut down.
The Future of Crowdfunding
Crowdfunding has changed the game in regards to how funds are raised, offering new opportunities for all kinds of people, especially in the retail or mainstream sectors. How greatly crowdfunding will impact the venture capital industry can will mostly be seen in the following categories:
Technology: With more advancements in technology, with everyday that passes new and exciting initiatives are introduced to the market. Recent examples include the blockchain and smart contracts,
Crowdfunding Growth: As regulations become more favorable, crowdfunding will become more popular and safer for everyone to do.
Rise of Niches: Niches are already becoming a thing where specialized services are provided for every sector of the industry (i.e renewable energy, social impact projects, or creative arts)
Globalization: Crowdfunding is becoming more and more global. This means people in the U.S can fund a project in Europe or people in Japan can contribute in the U.S. Allowing creators to have a worldwide reach.
Tips for Crowdfunding Success
Crowdfunding is not easy to do. In fact, most project do not reach their goals, so here are these recommendation on how you can increase your odds of achievement:
Work on a good Idea: Ideas that can actually give something in return are the ones worth investing in.
Build a community: In order to secure funds, some buzz around the initiative requires being created first, in order to signal investors the project is a good idea.
Market the Idea: In order to obtain funding, showcasing the project will be the best way to get it out there. With more people knowing about it, the greater the chances of investment.
Deliver updates: Trusting others can often be complicated. So being transparent with investors can go a long way
Conclusion
Crowdfunding has come to stay. Apart from huge changes to the industry, it´s arrival has given small businesses and projects access to capital which may help fund unusual ideas which would otherwise be ignored.
By using the strength of teams, crowdfunding has the potential to secure huge amounts of money for projects that can actually change the world for the better fashion. The stronger the concept, the greater the chance, the bigger the funding.
As technology advances, crowdfunding is becoming more and more sophisticated, with trends such as new technologies, niche platforms, and e-commerce serving as some of the crucial aspects happening in the industry.
However, despite all of the positives, crowdfunding does not come without its challenges. It will mean sacrificing a segment of the company, the revenue, of the decisions as outside investors will want to keep their interests protected. After all, there is no such thing as free money.
However, the biggest challenge of all remains to actually secure the funding. With so many people competing for their personal cause, crowdfunding campaigns now need to be strategic and well designed.Most likely, they´ll otherwise fall short of their goals.
Despite this, the growth of crowdfunding has allowed investors as well has the potential to add yet another chance of funding for underrated or non corporate perspectives especially with startups and alternative businesses.
Ultimately, crowdfunding not only provides financial backing but also cultivates a feeling of togetherness and common purpose. As it continues to evolve, crowdfunding will play a crucial function in molding the future of entrepreneurship, creativity, and social impact, enabling diverse voices and concepts to flourish in a progressively interconnected world.
