Since its inception, the crowdfunding concept has attracted many. It has become one of the strongest alternatives to the conventional methods of fund raising. People claim that it is by far the best method of fund raising. They say that the crowdfunding concept has revolutionized the business world. But is it actually so? Is the crowdfunding concept actually so good? Let us first begin by understanding what exactly Crowdfunding is.
Crowdfunding Definition
Wikipedia defines Crowdfunding as,
“The practice of funding a project or venture by raising monetary contributions from a large number of people.”
In simpler terms, it can be defined as,
“The process of fund raising with the help of monetary contributions from a crowd.”
Though the definition seems quite simple, the explanation doesn’t. I mean why would an unknown person give any amount of money to you. And as in the case of crowdfunding, why would a large number of people do that?
Crowdfunding Concept – How does Crowdfunding work?
The question pointed out above is quite legit. But let me tell this to you. Though this concept seems quite difficult to comprehend, it has actually been the success mantra of many.
This is because it is quite obvious no one is going to pay to you for nothing. But if there is a possibility that they can benefit from it, they will help you. This mutual give and take is the basis of the crowdfunding concept. The funders give you some money. And in exchange, they benefit from it in one way or the other. So what are these benefits? What do you have to do to make people fund your venture? To understand that, let us explore the crowdfunding types.
Crowdfunding Concept – The Types of Crowdfunding.
Based on the rewards the crowd funders avail, crowdfunding can be divided into 4 types:
#Equity Crowdfunding
This is one of the most widely accepted types of crowdfunding. It is the most beneficial type of crowdfunding for the funders, as well as the entrepreneurs.
Here, the funders get some equity or shares in return of the investments they make in a company. Unlike the stock market, these investments can be very little. And usually, it is the small companies who use it. Once the funders get their share in the company, they can profit from it as the company grows.
#Reward-based Crowdfunding
Though the basic crowdfunding concept remains the same, there are some peculiar differences between reward-based and equity crowdfunding. In reward-based crowdfunding, the funders don’t receive a direct monetary profit. Instead, they get a reward for their contribution.
For example, if you crowdfund a music band, they might give you a copy of their music CD f0r free.
#Debt-based Crowdfunding
Debt-based Crowdfunding is just like taking a loan from the bank. but the difference here is that instead of borrowing the complete amount from a bank, you borrow small amounts from many people. And they all expect to be paid back the principle with an interest.
#Donation-based Crowdfunding
This type of Crowdfunding is completely different from the other three types. Here, there are ‘donors’ instead of ‘backers’. And they fund social ventures in an effort to pay back to the society.
