Crowdfunding is a method of funding a project or a business venture by raising small amounts of money from a large pool of individuals. The term crowdfunding refers to internet -mediated registries. The modern crowdfunding model has three partakers: initiator of the fundraising campaign, one who puts forward an idea, individuals and investors who support the idea and moderating organization (often called platform) that brings two two parties together. Crowdfunding can be used to fund a wide range of project, from startups to non-profit organizations.
There is more than one way to crowdfund your business. The most common types of crowdfunding are: reward-based crowdfunding, equity crowdfunding, donation-based crowdfunding and marketplace lending (also known as peer-to-peer lending). With traditional ways of raising capital you can easily feel restricted. Pursuing the limited pool of investors can be arduous and time-consuming. That way you can easily lose your time and money. Crowdfunding is considered alternative to traditional methods; it is young and quick growing market that is transforming the ways of raising capital. All you need to do is to sign-up with the platform and list your needs. But it is not that easy. it requires a good strategy and solid execution.
Reward-based crowdfunding provide the donors with rewards. It also means that you need to set the funding goals and devise a reward strategy. Depending on the amount of the donations you can separate donors into two or more ranks and therefor offer different types of awards. Often awards can be a prepurchase at advantageous prices or to first test the product. Good side of reward-based crowdfunding is that you don’t sell equity but instead you receive donations from people that support you and believe in your idea and/or your product. That is very important for your future products; it will be easier if you already have a fan base. On the other side it can bring a lot of pressure. After the funding part is over it means that you have to manufacture the product and ship which can be overwhelming for startup companies.
Other common type of crowdfunding method is equity crowdfunding. Similar with traditional methods, you get a working capital in exchange for part of ownership in your company. This means that in this way is giving the opportunity to wider range of people to invest. Sometimes on crowdfunding platforms you can meet accomplished investors or maybe an angle investors that are interested in your business idea. Another advantage is that you can potentially raise over $1.5 million. Very important benefit equity fundraising compared to traditional method are easier investor relations. All investors are consolidated as one investor by the platform. On the other hand you will have to give up part of you ownership in the company. You will have to get something really valuable in return in order to pursue it.
Crowdfunding has emerged as valuable way for businesses to raise money. Each method has it pros and cons and it is up to you to decide what is the best solution for you. Since crowdfunding is just getting started it is possible that there will emerge new ways to fund creative projects and businesses.
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