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Crowd funding platforms provide an alternative way of collecting funds for projects. They are a relatively new phenomenon, as they have emerged only in the last two decades. Their rise, however, has been rapid and far-reaching, with thousands of platforms currently active all over the world.
Raising funds through an internet platform is a method well-suited to globalization. Crowd funding allows project creators to reach people all over the world, with no geographic or economic limitations. Traditional funding usually has one or only a few sources of extensive capital. Contrast this with crowd funding platforms, which bring together multiple sources of smaller capital that amount to bigger sums. Such a method means lowering the entry barrier for investors. It allows people from different economic backgrounds to take part in investment as well as to participate with projects that appeal to them.
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Who Crowd Funding Platforms Benefit
This type of funding is especially beneficial for people with a vision who might not have the experience or the collateral that would allow them to receive funding from institutions such as banks. It also comes with fewer strings attached, as you don’t owe a big debt to some financial establishment. That’s why it is a perfect way for individuals—such as owners of small businesses, entrepreneurs, scientists, artists, game developers, and activists—to get funding.
Crowd funding platforms provide opportunities for development in many different sectors. For example, people in the arts, in film, technology, healthcare, music, video games, and more take advantage of these opportunities. The list almost never ends.
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Even if as an investor your interests are rather obscure, the wide range of projects crowd funding platforms support will most likely allow you to find something you are drawn to. For example, if you’re interested in projects with high commercial value and you’re enticed by the idea of profiting from investing in a promising business, crowd funding might be something useful for you. It all comes down to finding the right type of crowd funding and the right platform for your needs and interests.
The Different Kinds of Crowd Funding
Reward-based crowd funding is one of the most popular methods of crowd funding. These are platforms such as Kickstarter or Indiegogo, for example. In this type of crowd funding, the creator of the project pitches their idea to the platform’s community. Then, in return for pledges, they give out different kinds of rewards. These rewards could be merchandise, limited-edition products, special access, and other personalized gifts connected to the project.
Equity offering crowd funding is probably the second most popular type of crowd funding. It entails offering investors shares in your business venture. Therefore, these are crowd funding platforms that entrepreneurs and startup companies typically use. The process of finding investors involves pitching the business or project idea as well as publicizing and advertising various details of securities you’re offering to potential backers.
Yet another type of crowd funding, credit-based crowd funding, means the fundraising platform allows an individual to apply for an unsecured loan. If accepted, the project creator borrows money from the platform’s community, pledging to pay it back with interest.
The last category is a donation-based crowd funding. On these crowd funding platforms, people give money as a donation with no strings attached, except for the expectation that the project’s creators will eventually realize the project. Unlike other types of crowd funding, however, projects on these platforms don’t give an ownership stake, reward, or a promise to repay the contributor. Given the no-reward system, projects funded by this method typically have a social or charitable element to them.
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The Process of Crowd Funding Explained Simply
In a nutshell, here is how the process works on crowd funding platforms:
1. Think about and flesh out your idea.
2. Submit your idea to the platform of your choice. Choose the crowd funding platform most suited to the type of project you have in mind. Moreover, think through what type of crowd funding you’re interested in.
3. Include all the vital information about your project. For example, describe the product or service, explain what you want to achieve, present your motivation, commercial potential, the fundraising goal, and so on.
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4. Announce the beginning of your crowd funding campaign, find backers on the platform, and begin the fundraising process.
5. The crowd pledges money in exchange for rewards, equity, or simply because they are passionate about your project and want to see it become a reality. Then they share your project among their friends and online communities, widening your campaign’s reach.
6. Reach your fundraising goal and begin to realize your project if you haven’t already begun.
The Advantages and Disadvantages
Unlike traditional methods of obtaining funds, crowdfunding platforms allow project creators to get worldwide reach much easier. They can find contributors who are actively engaged with their ideas. Also, crowd funding platforms allow individual people with small amounts of capital to become a part of projects they have an interest in. They can support ideas they feel good about, and, sometimes, they even offer a return on the contribution.
What’s more, crowd funding also offers market validation. Creators can find out if their project has commercial value and if it will gain interest from potential clients. The benefits seem endless. But are there any disadvantages to crowd funding platforms?
The main downside of crowd funding is that the public nature of crowd funding platforms could mean that innovative ideas get stolen. Also, if the project creator doesn’t reach their target goal, potential investors get their money back and the business goes away empty-handed. While this is a disadvantage for project creators, it is an advantage for investors. In the meantime, however, failing a project could also damage your product’s reputation.
Some Final Thoughts
Do you think the pros of crowd funding platforms outweigh the cons? Are you interested in using crowd funding platforms to fund your projects or maybe to support other people’s innovative ideas? We hope you found this article informative and that the world of crowdfunding platforms is now less of a mystery to you.