A Walk Through The Basics Of Crowdfunding

Despite having its roots way back to the late 20th century, Crowdfunding gained tremendous popularity only in the 21st century. Crowdfunding is basically persuading individuals online to lend you money or invest in your start-up ideas. Why not just take a loan from a bank or a friend, you may ask? The amount of money the bank is willing to lend you largely depends on your collateral, and in the case of your friends, there’s only a certain amount that they can and are willing to lend you. Thanks to the internet and brewing of Crowdfunding, both these tensions are eliminated. Millions of people have access to the internet and pools of them are potential investors. Hence, instead of taking a huge chunk of money from one friend, Crowdfunding helps you to collect small sums of money from a large number of investors. Since the process is fairly simple, all the administrative hassle of the bank is eliminated, too, as the Crowdfunding software looks after it for you.

Crowdfunding acts as a match-maker between the ordinary investors and founders using the internet as a medium. The biggest benefit of Crowdfunding is that it is easily accessible to all small companies and start-ups, founders, and investors and no one is excluded. The market value of the global Crowdfunding market was estimated at 10.2 billion USD in 2018. There are four main categories of Crowdfunding platforms, each having their own benefits and setbacks.

  1. Equity-based Crowdfunding:

Platforms: AngelList, EquityNet.

Equity-based Crowdfunding, in simple terms, is raising capital from a mass in exchange through the sale of securities (sales, revenue share, etc.) in a private company. Its functions can be considered similar to that of the Kickstarter or Indiegogo campaign, wherein interested investors visit a funding portal website in order to surf through various investment options. However, there are certain restrictions involved, like the investor should be above 18 years of age, and depending on the investors’ income and net worth, there are limitations on how much capital an individual can invest. In equity crowdfunding, the companies sell a security, in the form of debt, revenue share, equity in the company, etc. Investors in the company are generally in it for the long haul. They don’t just participate for a discount but stand a fair chance of gaining a large profit depending on the size of their investment. This also benefits the company as it creates a huge board of ambassadors rooting for the company to make a profit and hence, will try to reach out and promote the company in their own networks. Another charm that adds to its appeal is that the entrepreneur raising capitals dictates the terms and takes control of the offerings.

  1. Reward based Crowdfunding:

Platforms: Indiegogo, GoFundMe.

Reward based Crowdfunding is the most popular kind of Crowdfunding. Very similar to charity fundraisers, Reward based Crowdfunding offers product or service based perks from the business in exchange for your money in the form of pledges and donations. For example: Getting a first copy of the product before its release as a thank you gift for your donation. Generally, it works according to the principle of “larger the donation, the better the reward.” This kind of Crowdfunding is very favourable to the individuals investing in the creative fields. Like an individual investing in their favourite game, movie, artist, music album, book, or sports Team Company as they may either receive a limited edition gift or credits towards the end of the movie. The downside to this is that due to low diligence on the founders raising the money and minimum investment amount, the chances of being scammed are quite high. It works best for small start-up companies as the process is simple and it doesn’t require financial or legal help.

  1. Debt based Crowdfunding:

Platforms: Zopa, LendingClub.

Also known as “Crowdlending,” or “Peer to Peer,” Debt-based Crowdfunding in lay man’s terms would be the process of raising funds in exchange for interest. Albeit very similar to traditional bank loans, Debt based Crowdfunding offers more advantages, like it is more flexible than a bank loan, which makes repaying the debt relatively easier. Instead of directly handing over the money to the founders, in certain Crowdfundings, the investor’s handover the money to the funds managed by platforms and the platforms lay the investment in business ventures is looking for capital. Investors can either decide on their own regarding which company they would like to invest in or let the platform take the call. It is more popular than the equity based Crowdfunding as there is has a reduced risk factor.

  1. Block chain Crowdfunding:

Block chain Crowdfunding is a highly effective revolutionary technology and can be used as a synonym to “bitcoins.” It is the most recent and least well-known type of Crowdfunding. Block chain Crowdfunding leverages the hold of cryptocurrencies like bitcoin. The Bitcoin Circuit is the most famous platform of automated trading for cryptocurrency in the recent times. It does so to generate money by creating new tokens using the process called the Initial Coin Offerings (ICO’s). The investors who participate in such crowd funding generally have a knack for taking higher risks. It is a very complex form of Crowdfunding and is beneficial as it is decentralized; it makes Crowdfunding relatively less expensive for the founders and investors. Block chain Crowdfundings are available universally and have flexible options.

News Reporter
Janice Morgan is the head writer at Gonzagala. She loves writing as much as she loves her seventeen cats! Her articles on nature are well appreciated.