What is Crowdfunding? - With the economic downturn causing banks to tighten their purse strings, you may need to find alternative sources of funding to get your start-up off the ground. Indeed, 65% of entrepreneurs planned to seek alternative finance in 2012, according to a survey by Huddlebuy.
Crowdfunding is asking a crowd of people to donate a defined amount of money for a specific cause or project in exchange for various rewards. Crowdfunding is an alternative method of raising finance for a business, project or idea, popularised by Kickstarter.com in the United States.
The main benefit of crowdfunding is that it creates a strong network of support for your start-up. With the equity model in particular, your investors are likely to become ambassadors for your brand – promoting it among their networks, tracking your progress and becoming returning customers themselves. They may also offer to lend a hand, for example by providing free legal advice or accountancy services.
There are more than three general categories crowdfunding can fall under: Equity, Donation, and Debt.
Equity-based crowdfunding is asking a crowd to donate to your business or project in exchange for equity.
Donation-based crowdfunding is asking a crowd to donate to your project in exchange for tangible, non-monetary rewards such as an ecard, t-shirt, pre-released CD, or the finished product.
Debt-based crowdfunding is asking a crowd to donate to your business or business project in exchange for financial return and/or interest at a future date.
Why do it
- Crowdfunding is useful for a variety of opportunities, whether fundraising for disaster-relief, creative projects, creating a salable product, or creating a start-up.
- Crowdfunding platforms allow you to market your project, generate interest, and receive funds.
- Crowdfunding backers can provide useful feedback about your project.
- Once you get a solid base of support, there is no limit to the amount of projects you can fund.
Why not do it
- Crowdfunding your project exposes your ideas to copycats.
- Crowdfunding platforms may limit the amount of funds you can obtain.
- Crowdfunding regulations and taxation can be difficult to work with.
- Usage of platforms is dependent on where you are from