What is Crowdfunding?

Is Crowdfunding for you?

It is the big process of collecting money from a large number of individuals for building a new business or company. The project may be either a completely new concept or modification of existing one. Although the new venture can be in any field like insurance, healthcare, finance etc a lot of projects are based on IT (Information Technology) only. Mostly, the funds are collected only via the Internet.

Basically, any crowdfunding project will have three types of participants namely the creator/owner, moderator and the donors.

  1. OwnerThe project owner is the one who explains the scope of the project that requires funding by creating the complete set of documents related to the project like about scope/objective, milestones, roadmap, team etc.
  2. DonorsThe donor may be a single person or a group. They form the backbone of the project as they believe that the project will reach greater heights.
  3. ModeratorIt will be a platform or an organization in which the crowdfunding transactions take place. The moderator will be responsible for solving the disputes between the owner and the donors if it arises.

Every year, many projects are able to raise millions of dollars through crowdfunding.  Approximately $30 billion dollars were raised by various projects in 2015. Can you guess what is the highest amount raised by a single project through crowdfunding? $77 million dollars. Are you curious to find out the name of the project? It is called “Star Citizen”. Star Citizen is an online combat video game developed by an individual named Chris Roberts and Cloud Imperium Games.

What are the types of Crowdfunding?

In case of charitable donations, people don’t think about returns as they are spending the money only to help the good cause. It is not applicable for crowdfunding as people do expect returns on their investment. Basically, there are four types of Crowdfunding which are given below:

  • Reward-basedHere, the donors will get a small reward for their valuable contribution. For example, let’s assume that a local pop singer is raising funds for his/her next album which is related to a social cause. As a token of appreciation, the donor may get a FREE copy of the album or a ticket to the singer’s live concert. Who will be creating the reward-based campaigns? Mostly film producers, artists, and musicians will run this type of crowdfunding project because they will not able to raise funds by getting loans from banks. The type of reward varies based on the individual’s contribution and should have at least three levels. More contribution, more rewards.
  • Equity-basedThis type of crowdfunding is similar to the Venture capital investment because the donors are given some percentage or few shares of the company for their contribution towards the project. So, the donors will become the shareholders of the company and can track the progress of the project on a regular basis. Plus, they can get high returns on their investments if they are funding the right project at the right time. Generally, equity-based campaigns will run for several months and mostly used by entrepreneurs or start-ups who need to raise more than $100,000…

  • Debt-basedDebt-based crowdfunding is equivalent to getting loans from banks. But, the only difference is that the project owner will raise the funds from a group of people instead of a single individual. Here, the donors will not get shares or rewards from the company. Simply, they are lending the money with the hope that they will get the principal back with good interest. For example, someone can raise funds for home improvement or clear their huge credit card debts using this method. In debt-based campaigns, the donors will set the repayment schedule as well the interest rate.
  • Donation-basedYou might have heard about the GoFundMe platform. It is a good example of donation-based crowdfunding where many people help to raise money for a good cause. For example, a friend or family member can create a campaign to raise funds for performing a major heart surgery to a 5-year old kid. This type of crowdfunding is like the online charitable donations. Typically, donation-based campaigns are used to raise amounts up to $20,000.

Make sure that you always follow the below guidelines irrespective of the type of crowdfunding project you choose.

  1. Identify your crowdfunding goalsWhy are you interested in funding a project? If it is only for investment purposes, then why you are not considering options like stocks, mutual funds etc. instead of crowdfunding? When do you expect to get returns on your investment? If you wish to get a profit in few months, then Equity based projects will not suit you because you need to wait at least for a couple of years or so to achieve that goal. So, you need to ask yourself quite a lot of questions and fully understand the objective before investing money any project.
  1. Choose the correct platformThere are a lot of crowdfunding platforms like GoFundMe, Kickstarter, Indiegogo, RocketHub, Give etc. (Source: https://www.godaddy.com/garage/top-20-crowdfunding-platforms/ ). Each platform will have its own set of rules and regulations for funding a project. Take your time to know the terms and conditions of the platform as well as the project you wish to fund. Check out whether the platform lists all kind of projects or specific to a field or industry.
  1. Finding the right projectLet’s assume that you are a techie who loves to spend money to experience the latest technologies. Will you be interested to fund a project related to medicine or history? No. So, it is very important that you should have some knowledge or interest in the project you have chosen for funding. Before finalizing the project, carefully review all the documents and find out whether the project really has the potential to grow.
  1. Understand the legal aspectsOnce you finalize the platform and the project, make sure that you have clearly understood all the legal aspects of the project and the platform. If you are not able to understand it fully, then you can consult a lawyer or similar professional to get their legal opinion.

Crowdfunding a project will yield good returns if you do your homework well.

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Digital Global is a not for hire Business/Technology writer that writes on topics such as Business, Making Money, Entrepreneurship, startups, and all sorts of business-related digital technology.
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