Simply put, Crowdfunding is the process of asking the general public for start-up capital for new ventures. Entrepreneurs and small business owners can bypass venture capitalists and angel investors entirely and instead pitch ideas straight to everyday internet users, who provide the financial backing.
In fact, a Crowdfunding campaign can bring with it more than financial support: the project owners can gain from early validation of the idea, and get an indication of market scope, glean feedback, win fans and open the opportunity to profit from public recommendations about how to directly improve the project.
Crowdfunding has become a major trend in the field of business financing. Established companies as well as small start-ups are using Crowdfunding to great effect as a means of accruing capital for their projects, via more than 500 platforms.
EU crowdfunding platforms operate a diverse range of funding types which we have summarised by five broad headings, as follows;
- Loan based – is when a crowd lends money to a person or company on the understanding that their money will be returned to them with interest added.
- Reward based – is when a crowd gives money to a person or company and in return gets a reward for their contribution. Rewards vary from project to project and depending on the amount given you can receive a high 5 or a state of the art smart watch. It’s generally considered to be a method of pre sales.
- Equity based – The crowd invests in a company in return for shares. If that company is successful, the shares that you own will be worth more than you paid for them. If the business fails, you will lose your investment.
- Donation based – is where a person gives money to a project and does not expect anything in return. These campaigns are almost always for a charitable cause.
- Invoice trading – allows companies to receive an immediate cash advance rather than wait 30, 60 or even 90 days for their customers to pay. Companies will however pay a small percentage on each invoice.
These ‘Types’ will be discussed in more detail in later chapters.