Crowdfunding is a way of financing projects and businesses using small contributions from a large number of individuals rather than the more traditional method of obtaining funding from a relatively few sources such as banks or other financial organisations.
Whilst it’s not a new concept, it has really taken off over the past few years, mainly due to the development of the internet which has enabled people to connect and for individuals to donate, lend and invest easily. There are many opportunities for all types of businesses and organisations to potentially benefit from tapping into this emerging market.
Crowdfunding platforms, such as Seedrs, Crowdcube and Kickstarter, are the online notice boards where businesses outline their projects and can pitch to multiple investors. Organisations and businesses may have different reasons for wanting to raise capital - so four different types of Crowdfunding have evolved: Donation, Rewards, Debt and Equity. The rewards and debt options may be most suitable for individuals looking to finance a project. For a not for profit organisation then the donation model is appropriate and for small businesses the rewards, debt and equity models can all be considered - here’s how they work:
Donation: allows fundraisers, usually from community based organisations, to directly make an appeal online for donations. People then invest for purely benevolent reasons or because it is a cause that is important to them.
Rewards: enables individuals to donate towards a specific project in the expectation of receiving some form of non-financial reward for their contribution. The advantage is that businesses are able to get their product or service out into the community and obtain valuable feedback to test likely demand in the wider market. Examples of rewards can include things like tickets to an event or one of the products being developed.
Debt Crowdfunding, also known as peer to peer lending, allows businesses to bypass the traditional loan markets, banks etc., Lenders contribute to the amount required with the expectation of receiving their money back with interest. Each person lends a small amount of the total required in the form of an unsecured personal loan.
Equity Crowdfunding is where a large group of individuals invest in a business in exchange for some shares, thereby taking a stake in a company. The investor is therefore sharing in the success or failure of the project. It is, in effect, a personal investment in a business.
How does it work?
In order to attract funding you will need a pitch that is likely to compel people to back you – it must be inspiring and not too complex, otherwise you may find it difficult to attract investors. It is then up to you to raise awareness using your contacts and social media to find initial investors. Generally Crowdfunding platforms operate on an ‘all or nothing’ basis so if the target amount is not reached a partial investment won’t go ahead - so take care to ensure the amount of funding you require is realistic and potentially achievable.
Crowdfunding tends to attract mainly start-ups who are trying to get their business idea off the ground. However, it is also suitable for established businesses, especially if the equity model provides some much needed capital to grow the business.
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