How crowdfunding works? Crowdfunding brings entrepreneurs into contact with internet users, or the crowd. Thanks to online crowdfunding platforms, it has become accessible to a wider community. Although it may seem complicated, crowdfunding is actually much simpler than traditional business funding methods. Also, it requires less paperwork, and it’s a perfect solution for those who are looking for profitable, but safe ways to raise funds necessary to start their own businesses. Read on.
How crowdfunding works? – table of contents:
What is crowdfunding?
Frankly speaking, crowdfunding is all about raising money and funding various ventures with the help of Internet users who decide to support a particular project. In essence, it means raising funds in the form of small contributions from a large number of investors. Backers can come from every nook and cranny of the world as they are not limited by their origin or country of residence.
Contributors themselves decide how much they will donate for a particular purpose since there is no minimum treshold for contributions. In the case of startups, we are dealing with equity crowdfunding which consists in selling shares to a number of investors in return for investment.
Most crowdfunding platforms charge a commission on each successful campaign. In the case of Kickstarter and Indiegogo, it is 5% of the raised amount. In return, the creator and investors expect a safe transaction and delivery on commitments. If the campaign fails, you don’t lose any money, and the backers get their investment back.
If the campaign reaches its financial goal, the crowdfunding platform where it takes place will make money. If you don’t raise funds before it ends, the website won’t earn anything, and its good reputation will be harmed.
In fact, campaign creators are the most important for crowdfunding platforms. A large number of crowdfunding sites will give you the necessary support, tools and capabilities for free to make you successful. Therefore, crowdfunding agencies favor people who are serious about their campaigns.
When creators submit their projects with missing elements, it is a warning sign for the platforms that they are poorly prepared. Crowdfunding agencies treat such creators with reserve and put their campaigns on the back burner. Campaigns with poorly prepared marketing plans will not attract potential investors.
How crowdfunding works?
Currently, several sites are based on the all-or-nothing and flexible funding models. The all-or-nothing model assumes that enrepreneurs earn no money unless the fundrising goal is achieved. There are also no fees if their campaign is unsuccessful. Kickstarter uses the all-or-nothing model.
Flexible funding allows entrepreneurs to keep all funds they raise, even if they don’t hit their target. The flexible funding option is suitable for almost all campaigns on Indiegogo. During the campaign you can see its target amount, how much money has been raised at the moment, how many people have decided to support the project, and when the campaign ends. Setting a specific time limit will encourage contributors to quickly collect necessary funds before the campaign closes.
How crowdfunding works? In theory, crowdfunding works extremely well for both creators and investors. In practice, however, funding innovative projects may prove more difficult than initially assumed. It’s not easy to gain trust of the crowd, and participating in the venture as a sponsor doesn’t ensure future benefits from it.
Although crowdfunding platforms help you reach more investors, they don’t guarantee that your idea will be enthusiastically received among the Internet users. Crowdfunding is a great way to gain funds outside the regular financial system, but it comes with its own risk.
You have now learned how crowdfunding works. Other resources:Advantages of crowdfunding.