11 Oct 2022
Crowdfunding has become a popular form of funding in recent years. Its origins date back to the 1700s; in 1713, for example, Alexander Pope requested donations to fund his translation of Greek poetry into English. But how does crowdfunding work today? And what are the benefits?
Unlike more traditional forms of funding – which typically rely on one or more entities providing a business with large sums of money – crowdfunding is a way to raise funds by asking more people for smaller amounts.
Crowdfunding can be a particularly useful form of funding for entrepreneurs, startups and companies that have a niche or innovative idea in the pipeline – something that’s new and hasn’t been seen before.
It may also work for those who aren’t able to secure funding from mainstream routes.
Before you consider embarking on your own crowdfunding journey, it’s important to understand the difference between donation/reward, debt and equity crowdfunding.
Donation/reward crowdfunding is when people donate money to a project or business and don’t expect a financial return. Instead, the company might offer rewards in the form of early access and free products or services.
P2P crowdfunding, otherwise known as debt crowdfunding, is when a pool of investors lends a company money which must be repaid, plus interest. P2P lending platforms typically offer unsecured business loans. These can be quick to set up and you don’t have to offer security, but keep in mind that interest rates might be higher.Find P2P finance
Equity crowdfunding is when people invest in a business or venture in return for shares in it. If the business or venture does well, the shares go up – and vice-versa. Think about whether or not you’d be happy to share your business before making a commitment.
As with any type of business funding, it’s important to weigh up the benefits and potential pitfalls of crowdfunding before making a decision. If you decide that crowdfunding isn’t for you, you could always explore the many other alternative funding options out there.
Crowdfunding can provide you with an insight into how receptive people are to your idea before you take it to market. If your campaign fails to gain traction, you can go back to the drawing board and act on any feedback you received.
Your crowdfunding campaign can act as a marketing vehicle for brand loyalty. Investors or donors will want to see your project do well and are likely to promote it to their network, either on social media or through word of mouth.
Although it’s important to understand that not all crowdfunding campaigns are successful, some do succeed – sometimes quickly. If you can’t obtain funding elsewhere, crowdfunding could be an alternative route to explore.
In some ways you are in control.
For example, you can decide which rewards to give away to donors or how much equity to offer investors. With debt crowdfunding, you might be able to access a competitive interest rate, especially if your business is in a strong position.
While crowdfunding might work well for one business, it may not be appropriate for another. And for all its plus points, there are a few key things to bear in mind.
Crowdfunding involves you having to put your idea out there for all to see. You have to do this to attract investment; people will want to know what your idea is all about before they part with their money. This means that competitors could potentially copy your idea before you take it to market. What’s more, legal disclosures on crowdfunding platforms can differ, so seek professional advice before you make a move.
Intellectual property protection includes:
For your crowdfunding campaign to reach as many people as possible, you’ll have to pump effort and resources into marketing it. If you want to succeed in crowdfunding, devote time to expanding your network and building brand awareness.
Of course, funding is only the beginning of the journey. Even if you do manage to hit your crowdfunding funding target, you’ll need a solid business plan and dedicated team to keep your new venture moving in the right direction!
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