Some things you must know about crowdfunding

You will have some general concepts and understanding of Crowdfunding.

Miya Wu

Aug 13. 2021

how to define Crowdfunding?

Crowdfunding is the use of small quantities of capital from a giant range of people to finance a new commercial enterprise venture.Crowdfunding makes use of the handy accessibility of large networks of human beings through social media and crowdfunding websites to carry investors and entrepreneurs together, with the plausible to extend entrepreneurship by using increasing the pool of buyers past the standard circle of owners, relatives, and undertaking capitalists.

KEY POINTS

  • The most welcome and popular crowdfunding platforms are Indiegogo, Kickstarter, and GoFundMe.
  • Restrictions are suitable for those who are allowed to fund a new business and how much they are allowed to contribute.
  • Crowdfunding allows investors to choose from hundreds of projects but the amount of investment is at least $10 or more.
  • Crowdfunding sites generate income from a proportion of the cash raised.
  • Equity-based crowdfunding ventures in the United States are supervised by the SEC.

 

How does Crowdfunding work?

In most control situations, limitations apply to who can fund a new business and how much they are allowed to contribute. Like the restrictions on hedge fund investing, these limitations are supposed to shield immature or investors with less funds from placing too much of their savings at risk. Because so many new businesses fail, their traders face a high hazard of dropping their principal.

Lots of new chances for entrepreneurs has been created by Crowdfunding to collect thousands of hundreds or thousands and thousands of bucks from each person with cash to invest. Crowdfunding provides a platform to everyone with a thought to promote it in front of ready investors.

One of the more fascinating projects to receive funding was from an individual who wanted to create a new potato salad recipe. His fundraising target was $10, however he raised greater than $55,000 from 6,911 backers. Investors can choose from hundreds of projects and invest as little as $10. Crowdfunding websites generate income from a proportion of the money raised.

 

Types of Crowdfunding

The two most ordinary uses of the term mirror the type of crowdfunding finished via start-up companies looking to carry a product or service into the world and by individuals who skilled some type of emergency. Many individuals affected by a natural disaster, expensive medical expense, or another tragic event such as a residence fire have obtained a quantity of economic assistance they would not in any other case have had access to thanks to crowdfunding platforms.

 

However, in latest years, some crowdfunding platforms such as Patreon and Substack have broadened the range of crowdfunding to provide a way for innovative people—artists, writers, musicians, or podcasters—to support their creative work by receiving a continuous supply of income.

Popular Crowdfunding Websites

Crowdfunding websites such as Kickstarter, Indiegogo, and GoFundMe attract hundreds of thousands of people hoping to create, or support, the next big thing.

GoFundMe

Until 2021, GoFundMe is the largest crowdfunding platform. Since GoFundMe was established in 2010, the site has raised over $10 billion through more than 150 million donations.GoFundMe is the site most welcome and famous for individuals looking for restore from a medical expense or catastrophe such as natural disaster,a residence fire, or sudden emergency expense. Start-up corporations have a tendency to use Kickstarter.

Kickstarter

Kickstarter is another commonly used platform. until 2021, Kickstarter has successfully funded nearly 200,000 projects since it was set up in 2009, with more than $5.7 billion pledged across all Kickstarter projects.Kickstarter is the most popular crowdfunding site for ambitious businesses hoping to raise funds and obtain a larger audience. Actually, different  GoFundMe, Kickstarter can solely be used for creating projects that can be shared with others.

 Furthermore, Kickstarter cannot be leveraged to raise capital to donate to a charity or cause, projects can't provide incentives like equity, profit sharing, or investment opportunities, nor can any project involve the site's list of prohibited items such as "any project claiming to diagnose, cure, treat, or prevent an illness or condition," political fundraising, drugs or alcohol, or any contests, coupons, gambling, and raffles.

Indiegogo

Indiegogo started out as a crowdfunding website originally centered completely on elevating cash for independent films however started accepting initiatives from any class a year after its launch in 2007.

Compared with Kickstarter,Indiegogo is seen as a loose and more flexible platform.cause it offers backers options over whether they want fixed or flexible models—this is probably the most significant difference between the two crowdfunding platforms. Only after the campaign has reached its funding goal,Kickstarter releases funds, however Indiegogo permits the campaigner to receive funding pro-rata, or wait until their purpose is achieved.

 As a campaigner, it might be easier and less risky to go with flexible funding (i.e., receiving funds as they come); however, regardless of the amount raised, campaigners must still deliver on any promises made. For a backer, fixed funding is more attractive as it is associated with much less of a risk.

 

 Warning:Crowdfunding platform fees range from 5% to 12%. so be careful of punitive fee structures before selecting a crowdfunding platform.

Pros and Cons of Crowdfunding

The most apparent merit of crowdfunding for a start-up corporation or individual is its capability to provide chance for a larger and more different group of investors/supporters. With the universal of social media, crowdfunding platforms are an unbelievable way for businesses and individuals to both increase their audience and receive the funding they need.

Additionally, rewards-oriented is an important feature of many crowdfunding projects ; investors may get to get involved in the launch of a new product or receive a present for their investment. For example, those who Invest in a new soap made from bacon fat will get a new soap made by the manufacturer for free. Video games are a popular crowdfunding investment for gamers, who often receive advance copies of the game as a reward. 

Equity-based crowdfunding is becoming more and more popular as it permits startups to raise capital without losing control of venture capital investors. In some circumstances, it also provides investors the chance to earn an equity position in the venture. In America, the Securities and Exchange Commission (SEC) supervises  equity-based crowdfunding.

 

Hidden defects of crowdfunding include the possible destruction to you or your company's prestige caused by "complaining" to crowdfunding, the cost related to the crowdfunding site, and, at least on some platforms, if you don't accomplish your funding aim, any finance that has been pledged will be returned to your investors and finally you will receive nothing.

Access to funding you otherwise might not qualify for from traditional sources
  • Great way to associate with latent consumers
  • Ability to measure public thoughts on your product
Must comply with the rules/fees of the crowdfunding platform
  • In some circumstances, if you don't meet your funding aim, any finance that has been pledged will be returned to your investors
  • Possible damage to your start-up company's prestige.

 

Examples of Crowdfunding

Many of the products and businesses crowdfunded on Kickstarter became very successful and lucrative endeavors. For instance, Oculus VR, an American company specializing in virtual reality hardware and software products, was funded through the site. In 2012, founder Palmer Luckey launched a Kickstarter campaign to raise money to make virtual reality headsets designed for video gaming available to developers. The campaign crowdfunded $2.4 million, ten times the original goal of $250,000.In March 2014, Facebook, Inc. (FB) acquired Oculus VR for $2.3 billion in cash and stock.

Another example of a company that rose to success through the help of Kickstarter campaigns is M3D, a company founded by two friends that manufacture small 3D printers. David Jones and Michael Armani raised $3.4 million for their Micro 3D printer on the crowdfunding site in 2014.6 The tiny 3D printer, which comes with a variety of durable 3D inks, is now available at Staples, Amazon.com, Inc. (AMZN), Brookstone, and elsewhere.



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