Crowdfunding Explained: Small Contributions Add Up

What Is Crowdfunding?

Have you ever had a great business idea but no means to finance it? In those situations, people often think, “If I could get a million people to donate 800 each, I’d have a million dollars to fund my ideas with!” Well, that’s more or less what crowdfunding is all about.

Simply put, crowdfunding is an accumulation of money (usually in order to start or support a business or a project) by collecting smaller amounts from a large number of individual investors. It’s mostly done through social media and special crowdfunding sites and platforms.

When it comes to traditional ways of raising capital for a business or a fund, most countries enforce certain legal restrictions designed to protect inexperienced individuals from investing too much of their savings into a business that might fail.

This is an amazing idea because you no longer have to apply for a business loan or make nice with a wealthy sponsor as a part of your funding campaigns. One of the biggest benefits of crowdfunding is that you can pitch your idea anytime and if the investors like it, they can support it with as much money as they think your idea is worth. No minimums, no maximums, no strings attached.

Types of crowdfunding

While receiving funds from investors interested in your business idea sounds like a relatively simple concept, there are still as many as four different types of crowdfunding. Let’s see what they are:

Donation-based crowdfunding

This is pretty self-explanatory. People give you or your company money without wanting or expecting anything in return. They do it simply as an act of support towards you or your business venture.

Debt-based crowdfunding
Reward-based crowdfunding

This method is very popular, especially when it comes to crowdfunding for startups. In this case, you send rewards as a token of appreciation to backers for supporting your business. These rewards usually vary based on the size of the donation and typically include things like T-shirts, coupons, discounts for products and services, etc.

Equity-based crowdfunding

This is a great way to run a crowdfunding campaign if you run a small business or you’re looking to get your startup going. With this type of crowdfunding, your backers are not just giving you money. Rather, they are investing in your company because they are given a small share of your business, based on the size of their donation.

It is important to note that there are certain limitations to crowdfunding. For example, equity-based crowdfunding is not allowed on some websites, such as Kickstarter. So if you are looking to finance your idea this way, you need to look at equity-based crowdfunding platforms. Also, there are certain rules and limitations regarding crowdfunding for nonprofits. All of these issues depend on a number of factors, but mostly on the website you choose and the legal limitations of the country you’re in.

This is why it is not recommended to dive headfirst into your first crowdfunded project. Take some time to read up and see if this is really the way you want to start your project or a business. Checking out some statistics on small businesses may help as well.

Crowdfunding Types

Crowdfunding is used most commonly by startup companies or growing businesses, as well as nonprofit organizations raising money for worthy causes. Although these organizations are all working toward the same end result, the type of crowdfunding they’re applying is different. Below, we break them down to help you understand which applies to your organization.

When someone contributes funds in exchange for something, it falls into the rewards-based crowdfunding bucket. This is typical for startups that might offer free swag or a discounted service. Similarly, equity-based crowdfunding allows small businesses and startups to give away a portion of their business in exchange for funding.

The simplest type of crowdfunding is donation-based crowdfunding, which means someone gives money for nothing in return. While seemingly lackluster for the donor, this type of crowdfunding can be extremely rewarding. It attracts loyal supporters who are passionate about your work, which we see happen year after year across the social sector.

Final Thoughts

On a final note, at an initial stage, an investor might not be interested in your ideas, but with crowdfunding, you can be sure that small amounts from individuals will take you closer to building your dream business. Crowdfunding is not just about raising capital but campaigns become great marketing tool as you get the opportunity to reach out to the masses and let them know what you are working on. This is a marketing strategy that works in most of the cases, and you get the unexpected support of the masses, who may not invest in your project but will tell others about the same.

When compared to traditional applications, you can be sure that the process is a lot easier and quicker. Compare it to the loan process or the resources involved in getting other capital investments, and you’ll know that there is a huge difference between them. Crowdfunding is easier also because you don’t have to invest your money in it. This way, you can start right away, with just the right idea in your mind and the skills to execute the processes whenever needed.


July 19, 2022

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