What does Crowdfunding mean?
Let us get our concepts clear as we go back to crowdfunding basics. Crowdfunding. The word is quite self explanatory. It means raising funds with the contributions of the masses. It is just like any other fund raising method. Though, it is used majorly online.
How does Crowdfunding work?
To understand the crowdfunding basics, we need to know its working.
Crowdfunding is done through various websites. It works like the other fundraising spectrum. But here, the crowdfunding websites work as an online mediator. They connect entrepreneurs to the public or the masses. It is driven by different motives like charity or rewards. And people donate or invest some amount of money.
Types of Crowdfunding
Crowdfunding is categorized into three types namely:
- Donation Based Crowdfunding
- Reward Based Crowdfunding
- Equity Crowdfunding
Donation based crowdfunding
According to the crowdfunding basics, crowdfunding can even be donation based. When an organisation is working for a noble cause, they tend to rely upon donation based crowdfunding. Here, the masses donate some amount of money. While they don’t expect anything in return.
Reward Based Crowdfunding
Some crowdfunding projects provide rewards to the investors. Crowdfunding basics term it as reward based crowdfunding. Here, the business owners send some rewards to their investors. The amount of investments determine the rewards. They can be a sample product, or a voucher. An e-mail subscription or a small amount of shares.
Equity Crowdfunding
Equity crowdfunding, in a broad sense can be considered an actual investments. According to crowdfunding basics, it is the one which reaps profits in the future. In equity crowdfunding, people invest on ideas or projects. In return, they receive a share in the company. Equity crowdfunding is the most profitable of all. Though, the investor might even end up losing everything. Since, there is an equal chance of the failure of the idea. However, it is not so widely popular. As the legislation is quite unstable at the moment.
Pros of Crowdfunding
#Easy Fund raising
According to crowdfunding basics, it is the simplest of the fund raising techniques. As it is easier than bank loans or individual investments. Therefore, an individual can save a lot of time and effort.
#Prior Customer Base
During the crowdfunding process, your product or service finds some popularity. You get a preset customer base. As people have already attached with your product.
#The Rewards are with you!
As you get to choose the rewards for your investors, crowdfunding becomes a simpler job. Though, you have to be reasonable with them. But there are no fixed rules which you need to abide by.
Cons of Crowdfunding
#Doesn’t work for large capital!
Crowdfunding basics clarify the fact that crowdfunding cannot raise large capital amount. Though, they can raise a lot of fund, complex and large projects cannot be handled by crowdfunding.
#Incorporates inflexibility in the project
Once released, your project cannot be changed drastically. As you are answerable to your investors, you lose the flexibility.
#Chances of repute damage!
Though, you can raise good amounts from it, you lose your reputation if the project doesn’t fair nice. You might end up losing it all.
