Crowdfunding is increasingly becoming a popular tool for investors to generate revenue and creators to finance their ventures, but what exactly is crowdfunding?
In simple terms, crowdfunding refers to the process of gathering small amounts of capital from a large number of individuals to finance a new business idea.
By taking advantage of the numerous crowdfunding websites and diverse social media networks, crowdfunding brings investors and entrepreneurs together. However, arranging a successful crowdfunded campaign can be a complicated task, here’s everything you need to know before moving forward.
The Different Types of Crowdfunding
There are a few different approaches to crowdfunding, mainly categorized into investment-based or donation-based. To further simplify it, we’ll break them down into three types:
Donation-based crowdfunding is very straightforward. Basically, any crowdfunding campaign in which there’s no financial return to the contributors and investors can be regarded as donation-based crowdfunding. Common donation-based crowdfunding initiatives often include charitable causes and fundraising for disaster relief.
Reward-based crowdfunding campaigns are the most dominating in the market right now. They involve individuals investing in a business in exchange for a tangible, non-monetary reward, typically in the form of a service or product that the business offers.
The value and significance of the reward usually depend on the contribution level. Because the rewards offered don’t include financial return or equity, reward-based crowdfunding can be considered a subcategory to donation-based crowdfunding.
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Equity-based crowdfunding is usually used by entrepreneurs who are already operating and looking to expand. In an equity-based interaction, the contributors are offered shares of the company’s stock in exchange for their investments, becoming co-owners of the company.
The Benefits of Crowdfunding
From tapping into a wider pool of investors and business ideas to enjoying more flexible fundraising and investment options, there are numerous benefits to crowdfunding over traditional business financing methods. Here are a few of the many possible advantages.
If you’re an entrepreneur, having a single comprehensive profile to which you can direct all your potential investors, eliminates the need to pursue each of them individually, saving you lots of time, effort, and resources.
This enables you to efficiently focus your attention on building your business and attracting capital. Legitimate crowdfunding platforms provide several advantages for investors as well.
According to this Fundrise Review by Eric Bowlin, navigating a well-designed crowdfunding website makes finding the right project much easier than traditionally researching the market to find investment-worthy ventures. Many websites nowadays allow you to reinvest your profit, diversify your money, and set the most appropriate strategy for you based on your risk tolerance and investing goals.
2- Marketing and Media Exposure
An active crowdfunding campaign can introduce a venture’s overall mission and vision to the market.
Many crowdfunding platforms adopt social media strategies and other marketing tactics, steering traffic to the company’s website and other company resources and allowing ventures to receive thousands of organic visits from interested users and potential investors.
3- Concept Validation
The exposure you get from a strong, highly visible crowdfunding campaign can provide validation and proof that are vital in charting the business owner’s path and showing the potential contributors which venture to trust. Trust translates into investment which makes validation and credibility invaluable to entrepreneurs and investors alike.
Important Tip: Choose Your Platform Carefully
The crowdfunding world is packed with various ideas and ventures in different fields. There’s a multitude of platforms that can facilitate a project’s funding, but which one to use? Different outlets provide different services.
Decide which type of funding you want to invest in or offer and carefully study the potential platform for hidden fees, potential risks, rules, and regulations. Be sure to pick the portal that best suits your needs, and what you hope to accomplish.
Some entrepreneurs may think that they can only raise capital from venture capitalists and banks, which isn’t true. Crowdfunding is a great alternative way to finance a business, gain visibility and validation, grow a wide customer base, and more. It also offers unconventional ways and opportunities for individuals to grow their wealth.
Whether you’re an entrepreneur or an investor, consider your situation and decide whether or not you have the risk tolerance for it, before taking the leap.
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