Every company needs money and investment to grow. And it is easy for large companies to do this. Because there is no shortage of people who trust them and lend them money.
But how small owdfunding. Which you must have heard many timles. And seeing how famous it has become today, you may also feel that this is a new concept. But no, crowdfunding has been going on for many centuries.
And today it has become very famous due to online platforms. So in this case, it will be very fruitful for you to know what is crowdfunding. How does it help businesses? Are there some drawbacks along with its benefits? And are there different types of crowdfunding?
So to know all this about crowdfunding, please read full article.
👉 What is Crowdfunding
Crowdfunding is a way in which money is raised to finance projects and businesses. In traditional financing methods, where a fund was raised from a small group to run a project or business.
Today, money can be raised from a large group of people through crowdfunding. In this, the social media and crowdfunding websites have played a very important role.
Who have connected investors and entrepreneurs to large groups of investors. The most important thing about crowdfunding is that investors can contribute from very small amounts to very large amounts. And through this, money can be raised for many different purposes.
Like to start a business, to develop a new product, to help a needy person, or to support a social cause. Through crowdfunding, startups and businesses not only get funds, but also get many other benefits. Like market validation.
Because when your business idea is presented to the public for fundraising, then it becomes easier to find out on the basis of people’s interest. What is the future of such an idea? And what is the demand for that product or service? Through this, it also helps to create awareness for audience building and for your project.
In addition, before the official launch of your product or service, feedback is also received. Which proves to be very helpful in improving. A successful crowdfunding campaign, publicity and marketing can also become an effective tool.
And through this, it becomes easy to reach potential partners and other funding sources of the industry.
This also increases the chances of future investment opportunities. And to raise funds, crowdfunding platforms are used. Which take fees for their service. Which is often 1% of the raised fund. Crowdfunding can be of many different types.
👉 crowd funding types
you should know about its 4 main types.
- Reward-based crowdfunding
- equity-based crowdfunding
- debt-based crowdfunding
- donation-based crowdfunding
1. Reward-based crowdfunding
This model is often used by startups to launch their new product or service. For its development, they need funds. In this type of crowdfunding, reward is given to the people who give funds to the startup. Which is often a product or service of the startup.
To use this type of crowdfunding, Kickstarter and Indiegogo are famous reward-based crowdfunding platforms. In this crowdfunding, the company does not have to give a share in the ownership. Just have to give a reward.
So this is a plus point of this type. It is also a very good way to know about the market interest of your product or service. However, its minus point may be that if the startup is not successful in giving rewards. Then its reputation can be damaged. And supporters can also ask for their funds back.
2. Equity-based crowdfunding
In this type of crowdfunding, the company gives company shares to its investors instead of investment. Startups with high growth potential use this model. Because by giving shares to your company, a lot of funds can be raised.
To use this type of crowdfunding, Seed Invest and Circle UP are equity-based crowdfunding platforms. The plus point of this type is that investors like to give more due to getting equity. This also creates a long-term relationship between investors and the company.
At the same time, the minus point of this crowdfunding type is that offering equity in the company means giving a portion of your ownership to investors. Which has to share the control and decision-making of the company somewhere.
The laws and regulations related to this are quite complex. And there is also a pressure to give returns to investors.
3. Debt-based crowdfunding
This is also called peer-to-peer lending or P2P lending. It is like a traditional loan. The difference is that instead of taking a loan from the bank, a loan is taken from the crowd of investors.
In this, the startup agrees to return the loan with interest at a specific time period. Lending Club and Prosper are such crowdfunding platforms. The plus point of this crowdfunding is that like equity crowdfunding, there is no need to give equity in it.
As soon as you pay the loan, the responsibility is fulfilled towards the investors. This type of loan is quickly obtained in comparison to the traditional loan method. But its minus point is that you have to pay interest along with the loan.
4. Donation-based crowdfunding
This type of crowdfunding model is used by such non-profit organizations that do charitable work for community benefit. In this, the donors do not expect
any financial return, but believe in that welfare project that it will help the society. And by
contributing to it, the donors will feel good.
GoFundMe is such a donation-based crowdfunding platform. Its biggest plus point is that it is done for social causes. And the other benefit is that there is no need to do any repayment or equity exchange in it.
This also builds a community of supporters, which is sensible for social causes. On the other hand, the minus point of this crowdfunding type can be that sometimes it can be that its appeal can only be approached to a limited audience, due to which it gets less success.
👉 important points
So after knowing these four major crowdfunding types, you also know that before using any type of crowdfunding, which important points should always be kept in mind. So first of all, the crowdfunding type should be chosen according to the nature of your business or project.
So that the chances of it being successful can be high. Like if you want to launch a new product or service, then choose reward-based crowdfunding. If you want to raise a large amount by giving equity, then equity-based crowdfunding is best.
If you have the confidence to repay the loan, then debt-based crowdfunding will be the right choice. And if there is a strong social mission, then donation-based crowdfunding will be a good choice for it.
In addition to the nature of the business, it is also necessary to select the crowdfunding type according to the financial needs. Because for a large amount, equity and debt-based crowdfunding options can be proven right. And for a small amount, reward and donation-based crowdfunding.
The importance of market validation for the business is also very high. So if you need to test your product or service in the market, then reward-based crowdfunding should be used. So that customers can get both feedback and validation.
Keeping in mind the ownership of your business, it is also necessary to take a decision. Because if you have to keep all the ownership of your company with you, then instead of equity-based crowdfunding, any one of reward crowdfunding and debt-based crowdfunding can be chosen. It is also necessary to check the ability to fulfill promises.
If rewards can be produced and delivered on time, then reward-based crowdfunding should be chosen. Similarly, if a loan can be repaid on time, then debt-based crowdfunding should be applied.
And if such a large number of equity holders can be easily managed, then the option of equity-based crowdfunding should be chosen. It is also necessary to take care of legal needs. Therefore, the crowdfunding whose legal requirements can be fulfilled can only be used.
The legal and regulatory requirements of equity-based and debt-based crowdfunding are very complex in comparison to reward-based crowdfunding. So it is important to take action keeping them in mind.
And by considering all these major points, you can understand which crowdfunding type will be suitable for you. So that you can get success in it.
And now you know what crowdfunding is, what are its different types, and what should be kept in mind while choosing the best crowdfunding type for your business. So how did you find this information in the comment section, do tell us what you have to say about it, plus what is your advice or what is your experience, you can also share it with us.
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