Crowdfunding and how it works

Posted on Fri, 11/03/2017 - 16:58 by avantgarde

 is about persuading individuals to each give you a small donation. Once you get thousands of donors, you have some cash on hand.

This has all become possible in recent years thanks to the array of websites that allow nonprofits, artists, musicians and businesses to raise money. This is the social media version of fundraising.

There are more than 600 crowdfunding platforms around the world.

How it works: 

The most common type of crowdfunding fundraising is using sites like Kickstarter and Indiegogo variety, where donations are sought in return for special rewards. That could mean free product or even a chance to be involved in designing the product or service.

It is also possible to use crowdfunding to collect loans and royalty financing. For example, some sites allow members to directly invest in and borrow from each other, with the claim that eliminating the banking middleman means "both sides can win" in the transactions. The aim is to sell company shares or ownership stakes in the company on crowdfunding sites. 

Pros:

 Crowdfunding provides another strategy for startups or early stage companies ready to take it to the next level such as rolling out a product or service. Before, a business owner was subject to the issues of individual angel investors or bank loan officers. Now it is possible to pitch a business plan to the masses.

A successful crowdfunding round not only provides your business with needed cash, but creates a base of customers who feel as though they have a stake in the success pf the business.

Cons:

Sadly, without an engaging story to tell, your crowdfunding bid could be a flop. Sites such as Kickstarter don't collect money until a fundraising goal is reached, so that's still a lot of wasted time that could have been spent doing other things to grow the business.

It could be even worse if you meet your goal but then realize you underestimated how much money you needed. A business risks getting sued if it promises customers products or perks in return for donations, and then fails to deliver.

There is also an argument to be made that angel investors and even bank officers provide more than just money. They provide entrepreneurs with needed advice. Business owners miss out on such mentorship when they ignore traditional investors and turn to the crowd.

Some more factors that can better ensure a successful crowdfunding campaign are:

  • Have at least a small network of enthusiastic friends and family willing to help by giving and urging others to give.
  • If you're giving out perks in return for money, make sure the perks are worth the favor.
  • Present a serious business plan and an explanation of why the money will take your enterprise to the next level.
  • Demonstrate that you have your own skin in the game because of the personal funds you have already poured into the business.
  • Include a video pitch and keep it short and concise, with a call to action.
  • Some sites include different rewards for different levels of giving.