Raising Capital through Crowdfunding

The concept of crowdfunding involves raising capital through a contributory scheme. The funds are gathered in small donations by a large number of people towards an objective or fundraising activity.

In the past investors facilitated major project through a collective fund financed by major contributors. However a new dynamic using the power of the collective and advancement in internet accessibility has raised new contributors.

The collective effort is not only geared towards raising investment funds. We also have debit crowdfunding, equity crowdfunding, security crowdfunding and investment funding.

Crowdfunding model has an ancient history and is based on cooperative movement towards a goal.  Crowdfunding gained modern popularity with the advent of crowdfunding websites.

The website focuses on specific niche groups such as film, arts, entrepreneurs and innovations. Other sectors are design, technology development, loans and startup capital.

Popular websites that offer crowdfunding are circleup, angel list, endurance lending network and micro ventures. More include rockethub, peerbackers and indegogo.

Types of Crowdfunding

The major types of crowdfunding are equity, debt, charity and reward. Equity crowdfunding involves exchange of equity ownership.

The mechanism of equity crowdfunding is similar to trading company share certificates. While debt crowdfunding focuses on lending money to individual investors or startup companies. 

Charity crowdfunding involves donations unlike reward based funding.

Types of Crowdfunding Platforms

Reward crowdfunding

Donation crowdfunding

Investment crowdfunding

Loans

Charity

Other Sources of Crowdfunding

Crowdfunding is not limited to websites or financial institutions. There are other sources of crowdfunding such as cooperatives, acquaintances, social club, family and friends.

Entrepreneurs looking to raise funds for their projects could consider crowdfunding as a viable alternative to bank loans.

Crowdfunding as a Fundraising Mechanism

The system has great potential as a fundraising mechanism. Important platforms and application of crowdfunding include real estate ventures, innovation, science and intellectual property.

Others are philanthropy, charity, industrialization, film and agriculture. Real estate investment is needed to develop residential estates and commercial buildings.

The huge amount of capital needed allows contractors facilitate funds through cooperatives and crowdfunding initiatives.

Philanthropic projects abound and they require funds or donations. Crowdfunding allows private individuals contribute to favorite charities.  Organization such as InnerWheel or rotary club use crowdfunding to implement major urbanization projects.

Benefits and Risks Associated with Crowdfunding

Crowdfunding has both financial and non financial benefits. The platforms provide audience engagement, feedback, project initiatives and marketing opportunities.

Financial benefits are low cost capital facilitated through angel investors, home equity loans, venture capitalist, family and friends. Other advantages are large pool of fundraisers, collective ideas and initiatives.

Controversies

Controversies that emanate from crowdfunding sources could be due to misuse of funds. The recipient of such funds could divert the funds into other areas not approved by the fundraisers.

Sometimes the recipient unwittingly or purposefully violate the terms of agreement. The crowd fund managers on such occasions could redraw support or penalize the recipient.

Risk Associated to Fundraisers

The donors face a few risks such as IP protection, donor exhaustion, reputation and abuse of the system.  Using the same donors for different projects will rapidly deplete their resources.

Most crowdfund managers have strict regulatory framework to guide loans. However, the framework is prone to attack, misuse and mismanagement.

Another challenge is the large number of investors in the crowd fund. There will be conflict of interest, undue interference and miscommunication.

Benefit to Investors

Crowdfunding is beneficial to investors in many ways. Crowdfunding provides value for new investors by reducing costs and support to neglected markets.

Collective investors also gain higher interests on their investment due to large amounts and better rates.

How to get investment

To rise funds concentrate on fundraisers in your particular niche. You need a comprehensive business plan and feasibility study.

The fundraiser will be interested in your competence, management team and ability to execute the project.

Create your business plan