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The Rise of Crowdfunding

By: Brittany Engelmann-- 2017-02-16 7:02 am --

Crowdfunding is a method for funding a project or business venture by raising money through the collective efforts of family, friends and investors. It is a tool that allows you to tap into the efforts of a large number of people to invest in your business idea, often by using social media and platforms like Kickstarter or Indiegogo.

The Basics of Crowdfunding

Traditionally, if you were trying to raise funds to start a business you would need to write a business plan, do market research and present your plan to potential investors. Crowdfunding allows you to build a single platform where you can share your research and ideas with a wider audience.

There are three main types of crowdfunding methods and the one you end up choosing will depend on the product or service you offer as well as your overall goals. The three primary types are equity, donation-based and rewards-based crowdfunding.

Equity crowdfunding

This type of crowdfunding allows donors to receive a stake in the company in return for equity shares. They will receive a financial return on their investment and a share of the profits. It is currently the most underdeveloped model due to legal regulations.

Donation-based crowdfunding

This model involves donating money with no expectation of financial return.  A common example of donation-based crowdfunding is fundraising for charities, medical bills and disaster relief.

Rewards-based crowdfunding

Rewards-based crowdfunding involves pledging money in exchange for a gift or reward. The reward is usually in the form of a product or service the company offers as opposed to money or shares in the company. This is a popular approach used on Kickstarter because business owners can offer an incentive without having to give up ownership of their company.

The Benefits of Crowdfunding

Crowdfunding is much easier than traditional fundraising efforts and allows entrepreneurs to fund their business venture without giving up equity or taking on a lot of debt.  When you create a crowdfunding campaign you have to evaluate your business, the product or service you are offering and the value proposition then present it in a way that is easy to understand.

Crowdfunding also provides an opportunity to gain market validation before taking your product to market. By presenting your business idea to a large number of people you have an opportunity to validate what you are offering. Based on the level of interest from potential investors you will have a better understanding of what is working and what isn’t.

One of the biggest benefits to crowdfunding is that is streamlines your fundraising efforts. You don’t have to pursue and track down individual investors; instead you can present everything online in an easily accessible format. This will give you the freedom to spend more time running your business as opposed to fundraising.

Conclusion

Crowdfunding is an excellent way for entrepreneurs to receive the funding and the exposure they need to verify and execute their business. Crowdfunding started out as an experiment but grown to be a valuable tool for thousands of people. And the industry only continues to evolve and become more efficient.