Do you have a great idea that you think can be the next million dollar project or turn out into a very successful business or is a solution to a problem that people face but don’t know how to tackle it? But how to raise the funds to meet the expenses related to developing the project. You may have to get a loan or some investor. And that would mean dealing with banks and investors and other such hassles rather than working on your project. And when you are a small business, chances that someone will be interested in you are few. Well, crowdfunding is the answer to all these issues. It literally means funds from crowds. And that is exactly the basic concept of crowdfunding.
What is Crowdfunding?
In very simple words, you can say that crowdfunding is the method of raising capital for a product or project from mass and not just one or two investors. Generally, Internet and Social Media become the platform for these funding and they are capable of gathering a large crowd of similar-minded individuals. If you get even a small amount of money from hundreds and thousands of people, the sum can turn out to be really big. Also, when a person has to invest as minimal as a few hundred dollars and mostly even less than that, they are more likely to be interested.
Types of crowdfunding
There are mainly three types of crowdfunding.
In this type of funding, people just donate money and don’t expect anything in return. Charity events or a medical cause or funding for some religious construction are some of the prominent examples of donation-based funding.
In this type, people support your project by giving some money. In return, they are given a service or a product. They don’t have any share in the company or project. Projects on websites like Kickstarter and Indiegogo are mostly reward-based funding.
This type of funding is similar to the equity market. When you back a project or invest a certain amount of money, you get equity shares of the company. You earn when the company earns and you lose when the company loses.
The Funnel-Down vs Funnel-Up approach
Traditional fundraising can be compared to funnel with its mouth down. There are thousands of people with business ideas and who want an investment or a loan. On the top end of the funnel are investors and banks which are very few in comparison to those who want the investment. It is really difficult to target the appropriate group of investors and get your project going.
Crowdfunding simply inverses this scenario. There may still be thousands of people with projects and ideas but at the mouth of the funnel are millions of people who are ready to give their share of money to your project. The funnel nose is now faced up. Although the capital invested by an individual is small, the sheer strength of crowdfunding lies in the crowd that it can generate.
There are numerous reasons why a person can go for crowdfunding. Some of the prominent reasons are depicted below.
When you use a crowdfunding platform like KickStarter, you will be addressing not just local people but people from all around the world. There is more scope for the growth of your product.
Showcase your product
In order to start raising funds, you have to properly present your product to people. This presentation includes your motive for the product, the stages of development and the future prospects. Generally, creative and artistic people love this. They want people to back their product if only they can connect with it.
Evaluation of product
Generally, when people start a business, they develop the product, manufacture it and then put it on the market. Once the product hits the market, the creator gets to know if people are interested in his product or not. While in most crowdfunding platforms, funding is successful only if a certain goal is reached. You know in advance about the size of your customers or consumers. Your product is gets market evaluation even before manufacturing anything(except for the prototype, of course (: ).
The only risk that you run after you launch a project is the loss of time and effort and minimal costs in developing the prototype and running the campaign. Thus, there are lesser risks and high rewards.
Once the campaign is successful, the creator receives the funds. Thus, even before you manufacture a single piece, you get the money to do it.
We have seen some really cool, creative and out of the box projects on crowdfunding platforms. Crowdfunding frees you from all the worries of managing funds. You can put all your creativity and skills in developing a great product. Check out our extensive list of 16 crowdfunding websites for any type of crowdfunding whether it be creativity and innovation or charity, or artistic skills.
Crowdfunding is the concept that is here to stay and rule the world of investments. It brings entrepreneurs and investors in contact with each other. The only thing is that entrepreneurs are not necessarily typical business people. He/ she can be anyone with a good idea and purpose and utter dedication to building a great product. And an investor is not someone with a huge amount of money. A small amount and interest in the product are all it takes to back a product.