What is crowdfunding? Definition, Types and How does it Work?


Looking for crowdfunding methods, right?

After brainstorming the ideas to create a perfect business model, one big question rise to your mind is how to raise capital for your Start-up company.

There are many ways to get the capital investment for your start-up company, having the absolute Business plan and structure to launch it.

Some of the methods to raise funds for a new company are bootstrapping, angel investors, and venture capitalists.

But later in this internet era, a new method came, which is called Crowdfunding that attracts many entrepreneurs to make their dream possible.

Here in this article, we are going to see What is crowdfunding? Types, How does it Work? And how it will benefit your Start-up company.

What is Crowdfunding?

Crowdfunding is the method of financing a Start-up company that involves getting a small amount of money from a larger number of individuals or groups of people.

In very simple words “funds” from “crowd”.

Individuals who invest in this crowdfunding method expect a product or service or equity or rewards in return from the companies.

Some of the people donate money to certain charities and non-profit organizations for social causes through the crowdfunding platform, who will not expect anything in return.

How does Crowdfunding works?

  • Crowdfunding is processed through certain websites and social media platforms, where the entrepreneurs attract investors to raise capital for their company.
  • Entrepreneurs prepare a detailed Business plan about their Start-up which shows Vision and Mission statements, goals, Investment amount, and profit for their Business.
  • After that, they pitch their business model with proof of concept by creating a campaign in the hosting sites and crowdfunding platform.
  • On seeing this plan, if the Investors like the idea of the Business they come forward to contribute to your business and get a share from the profit.
  • Also, this platform acts as a mediator and earns some commission from the entrepreneurs.
  • But before you choose Crowdfunding as your Start-up capital you will need to check legal conditions and compliance that vary with different platforms and countries.

The 4 Types Of Crowdfunding

Donation-based

Crowdfunding websites are used by social workers, charities, and non-profit organizations in which they seek help from people for good social causes.

People who contribute to these organizations will never expect any returns because they wanted to be a part of such good causes that relatively benefits helpless people.

Reward-based

Reward-based funding is something similar to donation-based crowdfunding.

But in this method, the people who donate or contribute to the business will expect a return in the form of rewards, like products or services of the company.

However, the contributors won’t get much benefit from the company they are donating to.  Which means they shall not expect any financial or equity return other than the reward.

Debt-based

Debt-based funding is also called peer-to-peer (P2P) lending.

This involves individuals lend money to the Start-up companies and the borrower will repay the money with the interest at a certain point in time.

It seems to be like a bank loan, but it is a non-traditional way of borrowing money where the individuals reach out to the lenders through some funding websites.

Equity-based

Equity-based funding is exactly suitable for start-up companies for their investment capital.

Individuals invest money in the new companies which have a unique idea and growth potential and become a part-owner for the equity shares.

Investors get a financial return through stocks, profit shares, and other securities from the companies.

Reader’s Insight

Let us know if we missed out on anything in this article, what is crowdfunding? Definition, Types and how does it Work? And share your thoughts in the comment section.


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