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Main Dictionary C

Crowdfunding

Crowdfunding is a method of providing a business or an idea realization with a needed amount of money by collecting it in small portions from a vast number of contributors, typically via an online platform, in a limited period of time. Crowdfunding has recently become extremely popular due to a number of advantages it gives to entrepreneurs and creators, with the biggest one being the possibility to launch a product without incurring debt. At the same time, there are also difficulties and problems associated with crowdfunding, so this system of funding worth careful consideration before using it either as a project initiator or a contributor.

Main principles of Crowdfunding

Although similar systems based on funding a project from many sources and concerned individuals have appeared a long time ago, crowdfunding in its modern meaning refers to a process organized through online platforms for presenting a project and attracting investors for it. 

There are always three parties involved in crowdfunding:

  • a creator, or a project starter, who begins a crowdfunding campaign to raise money;
  • investors, or contributors, who choose a project they want to support and supply them with funds;
  • an online platform, which operates as a mediator, provides a possibility for organizing the procedure, set the rules and conditions, and monitors the process and outcomes.

The process itself might be different depending on a platform it is organized on and a type of project. But there is a common scheme for most crowdfunding projects a project initiator wants to bring the idea into life, chooses a platform with the most convenient conditions for his case, then follows the guidelines of the chosen platform, usually involving pitching the idea, a plan or a draft, setting a deadline and the needed sum. It is also important not to dismiss a promoting side of the crowdfunding campaign, which is usually not provided by the platform, so the project initiator does that independently, advertising it on social media, among friends and relatives, and using other possible advertising options.

The outcomes of a campaign might vary. It’s important to know that less than a half of launched crowdfunding projects achieve their goal because of different reasons. So, it would be reasonable to check out what the chosen platform suggests in case the campaign fails, because in some cases all the raised funds are returned to the investors, in other cases it’s possible to find out other solutions, and fees are often charged to the project starter.

Main types of Crowdfunding

Crowdfunding is used for supporting various types of projects, including business startups, different works of art like films, music albums or video games, software, social initiatives and charity projects, therefore the process and organization of crowdfunding campaigns also differ significantly. 

There are three main types of crowdfunding:

  • Equity crowdfunding and profit-sharing crowdfunding, which share a similarity with a traditional form of investing in that a contributor buys a stake in the business or gains control over some part of it and might expect a share in future profits;
  • Rewards-based crowdfunding, which is used more often and suggests no equity or control sharing over business or the project in question, but offers rewards for the contributors such as early access or exclusive bonuses;
  • Debt crowdfunding, also called peer-to-peer crowdfunding, which is used in a special type of credit projects, allowing participants loaning and borrowing of the funds.

When crowdfunding is used for charity or social projects, no reward for contributors is suggested in most cases, and the whole campaign functions on a voluntary basis. This type of crowdfunding is sometimes called donation-based. Researches made on the topic show that people are often driven not by a possibility of financial gain, but by the desire to be a part of an event that is personally important for them or brings them the feeling of being united with a community.

Popular platforms for Crowdfunding

With the upsurge of crowdfunding in the middle of the 2000s, numerous websites providing such services have appeared around the web. Although the first specialized crowdfunding platforms like ArtistShare and Kiva are still functioning today, the most popular platforms were launched towards the end of the first decade of the 20th century. 

These platforms are the following:

  • Kiskstarter. The most famous and popular platform for crowdfunding business projects, known for the simplicity of its use and openness to contributors from any part of the works. The main principle is that all the projects which are crowdfunded on the site should be shared with the others after the completion, though the site rules give no guarantee that a funded project will be finished. The platform offers a rewards-based crowdfunding system and doesn’t allow equity sharing.
  • GoFundMe. This service, being the biggest crowdfunding platform nowadays, is mostly used for non-profit and charitable projects, although businesses can also use it to raise funds. GoFundMe provides a donation-based system of crowdfunding.
  • Indiegogo. It has started as a platform for supporting independent cinematography, but quickly evolved into a platform for any sort of projects. It’s rewards-based and known for the provision of two different types of funding which a project initiator may choose between.

Crowdfunding advantages and disadvantages

As it was stated above, the main advantage obvious to everyone who considers using crowdfunding is that it relieves an entrepreneur or a creator from the necessity of borrowing large sums of money or spending all savings to deliver the product. It brings more freedom to the creator and provides great support for the beginners in case their campaign was successful.

Another important advantage is that it’s not necessary to share equity or control over the project if the creator doesn’t want to, because different forms of crowdfunding exist, and many of them don’t suggest such form of reward.

One more alluring feature of crowdfunding is represented by the fact that it doesn’t only attract possible investors, but also the public in general, if the advertising campaign is soundly managed, creating visibility and promotion for the project.

But the last mentioned feature also may lead to one of the significant disadvantages of crowdfunding, as early presenting of innovative ideas to gain investors’ attention may also result in those ideas being stolen by someone else. 

A deadline and a minimum level of the needed funds, which must be set for a crowdfunding campaign, may also be a disadvantage for creators, as there is always a possibility to be wrong about the amounts of time and money needed for the project and, accordingly, a high chance of failing to meet the deadline or finish the project. Reputational problems associated with a possible project failure are also an issue with the crowdfunded projects.

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