Introduction to the Crowdfunding:
Crowdfunding is basically a practice to raise a small size of funds from a selected group or community or group of individuals for specific projects, community, venture, or social projects. This approach taps into collective investment efforts of a pool of individuals based on their common interests like values, monetary gains, or ideas, either through online or specific crowdfunding platforms, and influences their networks to ensure wider reach and exposure.
Primarily, crowdfunding is considered as an alternate method of funding. It is remarked useful in certain situations where traditional models possess the risk of failure. The popularity of crowdfunding is seeing a boom in its growth and demand. Over the years, the numbers have only doubled, showing an exceptional growth of around 30% both in terms of transactional value and number of campaigns. All this in just a short span of years. Surprised by the prompt surge in popularity, we decided to step into this amazing world and provide you complete information that you need to understand about this phenomenal funding model. Go on to read further if you are willing to take part in the crowdfunding methods.
It may be noted that crowdfunding may sound like a fresh idea, but practically, it has a long history marking its presence since the 1700’s. Although, there have been alike concepts, which can be easily implemented through mail-order subscriptions, benefits events, or some other models that might vary in their fundamental values that we will discuss later on. If we talk about the present times, crowdfunding principally applies to digital outlets only.
What is crowdfunding?
Crowdfunding is basically a fund-collecting model that has great potential for both investors and entrepreneurs. Due to its dual-sided benefits, the concept is experiencing rapid growth and popularity all across the world. In simple words, it is a method to raise funds for various projects. It is the general public or targeted group of individuals or businesses that come forward to contribute to the funding campaign.
Further in this blog, we will try to shed maximum light on the concept for broader and clear understanding, which would help both entrepreneurs and individuals to implement the campaign. Our prime focus would be on answering the queries like: what is crowdfunding? How does crowdfunding work and what it is used for? Furthermore, we will also focus on the crowdfunding models like debt crowdfunding, equity crowdfunding, donation-based crowdfunding, and rewards crowdfunding.
At present, crowdfunding is a technology-based financial avenue, thus, it won’t be wrong to say that it’s growth and success is closely related to the evolution of the internet. The crowdfunding covers a range of approaches with a common purpose of raising funds from the crowd for specific campaigns or projects through an open call. The process lets entrepreneurs to raise funds from the targeted group of individuals through an online platform acting as an intermediary. This is an advanced method of fundraising, instead of conventional sources like banks or mutual funds.
Four Types of Crowdfunding:
Just like supporters get investment-like benefits and returns, there are also two types of crowdfunding campaigns available to the creators as well. The first one is debt crowdfunding and the second one is equity crowdfunding. Just in case when the backers’ receivable doesn’t act as investment-type assets, we further have two types of campaigns: first, reward-based crowdfunding, and second, donation crowdfunding projects. If we compare all of the four types, it is reward-based crowdfunding which is most popular, subject to the network of platforms operating in this particular model, number of projects or campaigns launched, and total funds raised.
However, soon many other platforms came into the frame and donation-based crowdfunding expanded 360-degree to cover every segment including personal charitable projects such as raising funds to pay for medical treatments, assistance in education and financial aid for athletes. Although this also invited some more weird and shady categories to this model. Therefore, it is suggested to be vigilant before investing in any of the projects or campaigns, know about the creator thoroughly and cross check all the credentials involved.
When discussing about the four major types of crowdfunding, donation-based crowdfunding is the smallest and if statistical data to be considered, it only represents 0.07% of the funds raised collectively within the crowdfunding avenue. PostBox Services is a popular platform for donation-based projects. Over the years, it has become a prominent player in the donation-based crowdfunding arena. This has motivated the small organizations and even opened the doors for them to explore the opportunities in pursuit of funds.
Since reward-based crowdfunding platforms were introduced, this model has gained the most prominence in this arena. In the reward-based model, investors give their funds in exchange for a non-monetary reward such as pre-order of a unique product or some specialized service under creation. This model is ideally suitable for companies and entrepreneurs to secure funds and improve cash flows to launch a new product and get pre-booking orders already in a pipeline.
To attract backers or investors for a special product or service that’s not yet launched, a discount is often provided on the expected future market price, along with rewards exclusive to the campaign. However, it is important to note that the product or service launched through crowdfunding may not be available on a larger scale. Therefore, limited supply and FOMO (fear of missing out) lures the backers to invest in a particular project or launch.
Talking about Kickstarter, it has hosted more than 471,000 funding campaigns or project since its launch in 2009, with a successful rate of 37.5%. Around 175,599 campaigns alone raised a total fund of $4.71 billion from over 17.2 million investors or supporters. More than 57,000 of the successful campaigns raised funds for more than $10,000; while about 6,710 projects alone raised more than $100,000. Reward-based crowdfunding has proven to be the most successful in segments like music, film and video, art, games, publishing, fashion, technology, food, theatre, photography, journalism, dance, and all types of crafts.
An important fact is that in reward-based crowdfunding, all campaign creators retain their intellectual property rights, patents, copyrights, and trademarks. In simple words, it won’t be wrong to say that the platform is a just sophisticated mediator and not a producer or publisher or marketer that bridges the gap between entrepreneurs and backers to let them interact among themselves and figure out the benefits and prospects of the campaign. Backers assume the degree of risk and the returns. One of the best benefits that the reward-based crowdfunding gives to entrepreneurs is the mitigation of potential risks that a significant investment might possess. Even if the objectives of the project or campaign are fully funded, there’s no guarantee that the entrepreneurs will stick to their promises to backers.
However, the constant presence of the crowd, their highly social nature obliges as a kind of warning against any possible abuses. Hence, anyone willing to contribute or invest in a crowdfunding campaign for a specific cause or project, it is suggested to be always vigilant about the decision-making.
Equity crowdfunding is basically the sale of stocks in a business to various investors with an objective to raise funds for organizational operations. The concept is almost similar to how shares are bought or sold in a stock exchange to venture capital. The key difference here lies in the operating platform on which the sale of stocks take place, the regulatory body for the process, and the lower barrier of entry for both the parties involved.
Equity Crowdfunding came into existence after President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act in April 2012. Also termed as “The Crowdfunding Bill”, the JOBS Act primarily aimed to lower the regulatory burdens on small scale businesses and to legalize equity crowdfunding to raise funds for business. The idea removed the ban on general solicitation restricting entrepreneurs to make public that they are raising funds. Startups and real-estate are two segments which gained the most benefits from the equity crowdfunding opportunities. However, it is important to note that equity crowdfunding carries a high risk – high reward model, and thus, the degree of risk involved is usually considerable.
So, if you are looking for investment opportunities in start-ups and early-stage businesses, but you lack having sufficient capital to act as a business angel, then startup equity crowdfunding can be an ideal opportunity for you. Startup equity crowdfunding is basically an online crowdfunding where your funds are invested with early-stage companies in return of shares or stocks representing a percentage of ownership in the business. As a shareholder of the business, you would have legal rights to have a share of profits if the business plan succeeds as per expectation. On the contrary, a shareholder will lose some percent of the investment or full if the company fails to make profits.
Equity crowdfunding is almost similar to the stock market investments, where anyone with the capacity to participate, can invest in the stocks of the companies that are yet not ready for initial public offerings.Equity crowdfunding is inspiring to democratize the process of funding capital as well as the investment market. Entrepreneurs can gain the maximum benefits by having access to a large pool of potential investors. At the same time, a host of opportunities are opened for the investors to invest in potential projects and earn good returns over a period of time.
Now if we talk about real estate crowdfunding, it is a convenient and easiest way for the builders and landlords to raise money for the project. They usually offer equity or stock in a real estate project to the investors, as per their share of investment. This way it is easier to call for a large number of investors with a small amount of investments, instead of calling for a few investors with huge investments. The key difference between conventional real estate funding and real estate equity crowdfunding is that the funds are collected through a safe and convenient online platform in the crowdfunding process.
Besides using dedicated crowdfunding platforms, real-estate builders also use social media platforms to market, advertise, and connect with potential investors for their projects directly. Thus, a community of potential backers or investors is formed to further support the project financially. Being actively participating to the social media marketing increases the momentum, reach and impact of the property.
Debt-based crowdfunding, also known as peer-to-peer lending, has taken up the empty space that was left vacant after the 2008-09 crisis when credit availability to SMBs was limited. Debt-based crowdfunding allows the entrepreneurs to raise more funds without even looking at banks. Entrepreneurs can raise money from a pool of investors in order to fund their projects and business ideas to support growth and expansion. The backers give money to a company with a mutual understanding that the company will repay the amount along with interest.
Debt-based crowdfunding emerged in the United Kingdom in the year 2005 as an investment vehicle. And, a year later in 2006, it was introduced in the United States as well. The debt-based crowdfunding allows borrowers (Companies) to apply for unsecured loans and borrow funds from the ‘crowd’ and pay it back with interest. P2P platforms generate their revenue through the percentage of loan amounts from the borrower and in the form of loan servicing fee from the investors. It may be noted that the application is free for the borrowers. Investors, who lend their money to the borrowers, earn interest on each investment, assuming that the borrower will ensure timely payments.
It is simpler, easier, and cheaper for the borrower to get a P2P loan, rather than traditionally borrowing from a bank. As most of the P2P lending services are automated such as reviewing application, credit score check, payment processing, loan disbursement, account reporting, and collection, it is cheaper to borrow from this platform. However, this results in lower approval rate and out of thousands of applications, only few are approved. Rate of returns are impressively high, which are enough to generate solid returns for the investors. These are better than traditional money markets and bonds; and in fact, carries lower risk than stocks. The investment provides fairly reliable monthly cash flow throughout the loan term.
P2P platforms are more complex comparatively to the rewards-based platforms as they involve securities regulated by the SEC. therefore, while investing through P2P platforms, you’ll be required a little more time to research and understand how the system works. The more you explore, the more you will understand the possible risks and returns for each of the investing opportunity. P2P consumer lender is sometimes also called as consumer crowdfunding. This sort of debt-based crowdfunding is principally identified by individuals or group of individuals, who are looking for some investment opportunities. P2P consumer lending is an ideal financing vehicle for personal and household purposes. In addition, it generally involves unsecured loans that don’t require any collateral against the loan. However, some crowdfunded lendings are backed with insurance or other valuable tangible assets.
Loans sanctioned under P2P consumer lending covers a range of lending vehicles such as wedding loans, pay-day loans, student loans, car loans, travel loans, and refinancing services. The loans are generally backed by a personal guarantee from the borrower and typically has flexible interest rates, subject to the objective of crowdfunding and risk factor. Pay-day loans are often considered to be the most expensive due to the higher interest rates they carry. In fact, car loan or home loans are sometimes relatively cheaper due to low risk they possess, since the loan is backed with a substantial asset.
In generally, giving money for a specific purpose can be a risky affair, especially when the objective of a borrower is to park the funds in something that is not tangible. Unlike P2P business lending that mostly relies on business assets to generate income, P2P consumer lending is more about an individual or you can say a family’s household income. Hence, just like any other types of crowdfunding, backers or supporters carry high amount of the risk.
Some major crowdfunding platforms:
Donation Crowdfunding Platforms
- Lending Club
How Crowdfunding Works – Process Overview
The Ingredients Of A Successful Campaign
The very first ingredient for any successful campaign is the idea and concept. Not every concept can be tailored accordingly for crowdfunding. For instance, ideas which involves tangible and attractive products are best suited for reward-based crowdfunding. On the other hand, ideas that serves a strong impact on social causes and really stand a chance to make things better are ideal for donation crowdfunding. If we talk about equity crowdfunding, the ideas must represent strategic business plans and vision to show potential growth and returns. And finally, ideas are valued on the potential revenue, growth, sustainability, and contribution in case of P2P lending crowdfunding.
But an idea remains just an idea if the execution is not successful. So of course, the second most important ingredient of a successful campaign is strategic execution of idea or concept. The product or service finally developed should be the result of smartly executed action plan, which usually involves development, prototypic, testing, feedback, and improvements. A smart and strategic plan must have a back of your strengths and passions, extensive research and data to prepare a blueprint of how achievable and realistic it is to achieve the objectives and what is the risk of investment. Social projects or campaigns should specifically advertise their action plan to bring the targeted community all together on a single platform.
The key component for successful execution of a market plan then lies in choosing the right audience. Targeting the right audience would make it easier for you to raise funds as the community would have better understanding and knowledge about your product, service, project, business plan, and investment. As a campaigner, your primary job is to find, excite, and activate reliable audience for your project. Then the next step is to covert your targeted audience into a community of supportive backers, i.e. going beyond the usual conversation to engage better. So, devote yourself completely to ensure 100% outcomes as per your expectations and demand.
Here, it is also important to note that every successful crowdfunding campaign is based on how smartly you do the project launch. There’s a saying, ‘Well begun is half done’. This fits perfectly well for crowdfunding campaigns as well. A great start helps you successfully activating the crowdfunding campaigns for fund raising. It effectively determines how much funds you can actually collect and how soon you can reach your objectives. This is because if you excellently launched your project, it creates motivation, momentum, positive belief, and of course, powerful action. All these collectively creates a self-reinforcing circular process, which ultimately pushes you towards achieving better results.
Once you launch the project successfully, the next ingredient in line is running the campaign with the same momentum, otherwise, the project may stagnate or may be shelled out. Running the campaign with a constant flow is a must as it executed in the pre-launch and launch phases. Lastly, manage the post-campaign situation, which generally directs to the right usage of funds in accordance to plan and objectives presented during the initial stages of crowdfunding campaigns. It is important to achieve the results as anticipated. This creates trusts among the investors, which ensures enhanced stability and opened opportunities for future growth.
Benefits of Running Crowdfunding Campaigns
So far, it is clear that running a crowdfunding campaign is quite a complex task. On the contrary, since the popularity and demand of crowdfunding has grown exponentially in the last 10 to 15 years, there are lot of benefits to run a crowdfunding campaign, thanks to the advanced toolkits and technology. Easy automatization and delegation are some of the features that makes the operational activity quite easier and convenient. At the same time, they also promote creativity and resourcefulness.
Besides the advanced tools and knowledge, if there’s something to support the growth and success of crowdfunding campaign, then it is the advantages from which one stands to earn profits while successfully running a campaign. Some of the many benefits are mentioned below:
- Crowdfunding is comparatively more efficient than the traditional fundraising methods.
- It lets you to explore a widespread marketplace that is constantly growing and is not expected to slow down anywhere in future.
- It allows to gather new investors at a fraction of the cost.
- Crowdfunding allows businesses and companies to generate whopping revenue through different models.
- Crowdfunding is a great platform to build power, social existence, and validation.
- It masters a structured and systematic model to support a product, service, business, and campaign launch.
- Crowdfunding helps you get early supporters and loyal advocates.
- Crowdfunding campaigns give you a chance for enhanced media and marketing exposure.
Avenues For Future Growth:
With so far discussion, it is clear that crowdfunding carries a huge potential for future growth with minimum risk and most importantly, supports an impactful global change. Although, crowd-based businesses and markets need more trust from the crowd to achieve inherent potential and predicted growth. The trust factor should be high both in terms of quality of the fundraiser and creditworthiness of the lender.