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What is crowdfunding?
Crowdfunding is a way of raising funds, by sourcing small amounts of money — from many individuals or investors (the crowd). This contrasts with getting the funds you need, from one or two investors or a financial institution.
With the rise of fintech, crowdfunding has grown in popularity. Companies can use crowdfunding in a number of different ways including — pre-selling products, borrowing money and selling equity. Raising funds for charity is also possible.
Crowdfunding is a form of alternative finance.
Crowdfunding — considerations
Crowdfunding has greatly transformed the business funding landscape — through bypassing traditional sources of finance (banks). This has enabled more and more companies to get the financing they need — to grows their businesses.
Most crowdfunding is done online, through digital channels, making applications fast and funds potentially advanced just as quickly. Crowdfunding platforms are not as strict as banks, with their eligibility and financing criteria, meaning If your business/idea is good — you will be able to seek funds on their platforms.
Once on a crowdfunding platform, it is individuals (the crowd) that decide if they want to finance you and for how much — essentially democratizing the fundraising process.
Prior to crowdfunding, entrepreneurs and business owners needed to go into their banks — to apply for funding in-person. Banks would require formal business plans, market research and other kinds of documentation — without which applications would not be processed. Even if you had the documents, lending criteria were usually strict. As such, getting the cash required was difficult.
The thing that makes crowdfunding particularly powerful, is the ability to see how much interest there is in your business/venture — before committing the resources needed to make it happen. If interest is high — eventual product or service demand will likely be high too.
How does crowdfunding work?
With crowdfunding, your business would need to pitch its need for raising funds — through one of the many crowdfunding platforms on the internet. These platforms allow you to bring attention to your business — raising its profile among numerous potential funders and investors.
Your pitch/proposal would typically include information on your business, its plans and your funding requirements. In order for your proposal to be seen by investors, it would have to be vetted by the platform. Each platform will have its own rules and regulations to follow.
If the participants or investors likes your idea — they may pledge to back it with their own money. The amounts pledged can be as little as 1000 Naira or as much as 10 million Naira (and above).
You may get a handful of larger backers — pledging big amounts, or you may get thousands of backers — pledging smaller amounts. Every contributor would become part of the “crowd” — helping you reach your funding target.
As most crowdfunding is done using online fintech platforms — the processes are highly automated and streamlined. Depending on how good your pitch is — adequate funds may be raised in a matter of days. Should you be able to raise enough money, you would then proceed to implement your idea. You’ll need to keep your investors updated, and pay them as and when due.
Many crowdfunding platforms have an all-or-nothing funding model. Put simply, this means that if reach your fundraising target — you get the money. However, if you don’t, everyone gets their money back.
The crowdfunding platform takes a percentage of funds raised, as commission, so you normally don’t pay to list on the platform. Along with the commission charged, there may be other charges to note — such as payment processing fees.
Types of crowdfunding
Equity crowdfunding provides business capital, to start a new business or grow an existing one — in exchange for shares in the company. In essence, investors become part-owners of the said business — being entitled to a share of any future profits.
Reward crowdfunding offers perks or rewards — in return for financing an idea or business venture. These rewards are typically in the form of a product or service — the business/venture will offer.
Donation crowdfunding allows people to invest in, or fund — a cause or social project they believe in i.e. a charity. Think of this as any crowdfunding campaign, in which there are no financial returns for investors.
Debt crowdfunding, also known as peer-to-peer lending, enables companies to borrow funds from a large “crowd” of individuals — paying back with interest.
Benefits of crowdfunding
- No formal business presentations — it’s mostly all done online
- Validation of concept — low risk way of gauging interest in your idea
- Fast applications
- Funds can be released quickly
- Decide what you want to give — in return for funding
Limitations of crowdfunding
- Platforms may not approve your idea
- Competing with other businesses/ventures
- May only be able to raise limited funds
- Idea is no longer a secret
- Platforms may charge high fees
- Each platform is different — you must pay attention to terms and conditions
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