Crowdfunding means raising a large amount of money from a small number of people

What Is Crowdfunding, Types, How Does Work, and Examples

Crowdfunding means raising a large amount of money from a small number of people. It is generally done to finance a new business venture, raise funds for disaster relief, help people who cannot afford expensive medical treatments, etc. Crowdfunding uses social media or crowdfunding platforms that connect entrepreneurs or investors. It is important for entrepreneurs as it broadens the range of ways to raise money beyond other traditional sources like business owners, family members, or venture capitalists.

  1. Crowdfunding is raising capital from people other than traditional sources.
  2. It doesn't involve banks or other financial institutions for funding.
  3. The Securities and Exchange Commission sets a yearly limit for raising funds through crowdfunding.
  4. The SEC also sets the maximum amount for investors to contribute to the fund.

What are the Types of Crowdfunding?

There are four types of crowdfunding through which money can be raised.

  1. Donation-based crowdfunding: As the name suggests, people contribute to a business or project expecting nothing in return. It is a donation for a project or business growth. It also means donating to a cause like disaster relief.
  2. Debt-based crowdfunding: In debt-based crowdfunding, the pitcher promises to repay the amount with interest.

  3. Reward-based crowdfunding: In this type of crowdfunding, the investor receives a reward depending upon the amount of investment. The reward can be in the form of a gift or coupon.

  4. Equity-based crowdfunding: In this type of crowdfunding, a small business or startup gives a portion of its business to investors, depending on the investment amount.

  5. Real estate crowdfunding is used to raise capital for real estate acquisitions. Individuals and businesses that raise funds through this method also provide desirable returns to their investors.

How does crowdfunding work?

Crowdfunding means raising an amount that is put into it for the growth of the business. It is the best way for small businesses and startups, as they sometimes face problems obtaining funds for their businesses. It helps businesses reach a greater number of people, which can include individual investors or even customers.

  1. There are various crowdfunding platforms for backers to start with. The entrepreneur or any individual who wants to raise funds must register on the official crowdfunding website.

  2. These websites connect fundraisers and investors.

  3. The website also provides the opportunity to pitch the idea or concept to investors. This also helps the investors decide whether to put money into the project or not.

  4. If a pitcher successfully raises money, they pay for the crowdfunding campaign, which is generally based on the percentage of fundraising.

  5. The profit acquired by the fund is shared among the investors, depending on the type of crowdfunding.

  6. Businesses are offered numerous ways to raise capital through crowdfunding.

  7. Investors have multiple options to invest in, with a small amount of even $10.

  8. Launching a campaign does not guarantee success. It depends on the message being delivered. Look for cost-effective methods to promote a campaign and focus on the idea that can attract potential inventors.

  9. It is good to market the campaign before the beginning of the project. Also, update the target audience about business growth and develop relations with investors.

  10. Crowdfunding platforms charge 5% to 12% fees.

Examples of Crowdfunding

A few examples of crowdfunding are given below, which will help you to understand this topic in detail;

  1. Oculus VR: Oculus VR is now a part of Meta. The company is engaged in the production of virtual reality headsets and other software. The founder of the company raised $250,000 through crowdfunding in 2012. Later, in 2014, Facebook purchased it for $2 billion.

  2. Pebble Time: The company produces smartwatches. The company aimed for $500,000 and raised $20,338,986 through crowdfunding.

  3. Animoodles: The company manufactures and supplies toys. The company raised $1.5 million in just 11 hours through crowdfunding.

  4. City Light Books is a bookstore that targeted raising $300,000 and successfully accomplished the same in just one and a half days.

Advantages and Disadvantages of Crowdfunding

Crowdfunding is good for budding entrepreneurs and small businesses.

The advantages of crowdfunding:

  1. The biggest advantage of crowdfunding is that it raises capital for a business without any security.
  2. Raising funds in a short 
  3. period of time.
  4. There is no need for extra documentation or verification.
  5. An effective way to promote business is to pitch a good idea for capital.
  6. A good way of raising funds without compromising the equity of the firm

The disadvantages of crowdfunding are:

  • It needs a good pitching idea and a convincing business plan to attract potential investors.
  • If a pitcher reaches the funding goal, it may prevent him from losing money already raised.
  • It may compromise the reputation of the business if the campaign fails to raise the target amount.

What happens to the money if crowdfunding fails?

If a business or project fails to reach its target, it signifies the failure of crowdfunding. In such a case, the investors get their money back. The crowdfunding platforms hold the money in a separate bank account until the target is reached. In the event of a failure, the investor receives an email stating that the project was unsuccessful, and a refund is initiated. The project creators need to get the amount raised after the funding is declared unsuccessful.

How much money do I need to invest in crowdfunding?

The project creator who wants to raise the funds, along with the idea and target of the fund, is supposed to mention the minimum amount of investment to the investor. The amount can be as low as $10.

How long does it take to get money from crowdfunding?

The time for raising money through crowdfunding depends on the concerned site. Even the goal of the project can determine the time. A project can receive the funds in a few hours, or it can even take months to accomplish the target. If a project completes the funding, it can take up to four weeks to complete the other verification and documentation work and to finally reach the amount in the account.

Can I use crowdfunding to buy a house?

Crowdfunding is used to help with residential finances. Various real estate crowdfunding sites are specifically designed to fulfill the housing goal. It is a way to raise money online from investors for real estate acquisitions. Individuals or businesses can use crowdfunding to get capital to purchase a property. Such a type of funding provides a share of the property to investors.

Who is eligible for crowdfunding?

Anyone can start crowdfunding to raise money by creating a campaign. If you are under 18, you need to do it with an adult who needs to verify his identity, enter the bank details, and take responsibility for the project.

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02 Nov, 2023

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