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Crowdfunding



Definition

Crowdfunding is a method of raising capital through collective efforts of friends, family, individual investors, and customers often via internet-based platforms. This approach taps into the collective efforts of a large pool of people, primarily online via social media and crowdfunding platforms. It helps individuals, businesses, and charities to fund their ventures by getting many small amounts of money from a large number of people.

Phonetic

The phonetics of the keyword “Crowdfunding” is /ˈkroʊdfʌndɪŋ/.

Key Takeaways

  1. Crowdfunding is a method of raising capital where a large number of people each contribute a small amount of money, usually via the Internet. This can be a beneficial strategy for new businesses, product launches, nonprofit projects, etc.
  2. There are various types of crowdfunding, including reward-based, donation-based, equity-based, and debt-based. Each type has its own set of advantages and disadvantages, and the choice of which type to use depends on the specific needs and goals of the project or business.
  3. For a successful crowdfunding campaign, it is crucial to have a well-defined proposition, a clear marketing plan, and to offer something of value in return to your backers. The success largely depends on the ability to market the campaign and reach a large number of potential contributors.

Importance

Crowdfunding is an important business/finance term as it represents a modern and inclusive method of fundraising that enables a broad range of individuals and enterprises to raise capital for their ventures. Traditionally, securing financial investment required one to rely on a small number of wealthy individuals or institutions, hence limiting opportunities for many. Crowdfunding democratizes this process by allowing anyone with internet access to contribute funding to projects, product development, or companies that align with their interests and values. It increases opportunities for entrepreneurs, startups, and small businesses who may not have access to traditional funding sources and allows for greater diversity and innovation in the market. It also contributes to the economy by promoting entrepreneurship, job creation, and business growth.

Explanation

Crowdfunding serves a multitude of purposes primarily centered around the collection of finance from a large group of individuals, often termed as the ‘crowd’ , to fund various endeavors such as starting up businesses, creative projects, or support for charitable causes. This mechanism allows entrepreneurs, artists, inventors, and others to bypass traditional sources of funding such as banks or venture capitalists, enabling the crowd to directly contribute funds to ideas they find compelling or valuable, thereby fostering innovation and entrepreneurship. Unlike traditional funding methods, this modern financing model is built on the ethos of communal support, empowerment, and democratization of resources. The use of crowdfunding is highly advantageous to both parties; the entrepreneur and the crowd, by offering a unique platform for the engagement between early supporters and creators. For the creators, it offers a pathway to raise capital with less bureaucracy and immediate customer feedback, which is crucial for market validation, fine-tuning products, or services before full-scale launch. The crowd, on the other hand, gets an opportunity to have early access to future products, be a part of something groundbreaking, or merely support causes they trust and value since typically they are rewarded either with the final product, exclusive benefits, or sense of fulfillment. Consequently, crowdfunding has revolutionized the funding landscape by offering a more inclusive, interactive, and flexible approach to raising capital.

Examples

1. Kickstarter: It is a crowdfunding platform that allows creators to raise funds for their creative projects like films, music, art, theater, games, comics, design, photography and more. Backers pledge towards these projects and in return get tangible rewards or experiences. 2. GoFundMe: This platform is often used for cause-related crowdfunding, such as medical expenses, education costs, volunteer programs, youth sports, funerals and memorials, or animal rescue. People from all corners of the world can make a donation to support the cause or individual. 3. Indiegogo: This crowdfunding site helps businesses and individuals fund entrepreneurial, technology, or charity projects. The contributors can get perks, such as early access to products, discounts, or other incentives. Startups like Misfit, a wearable tech company, successfully use this platform to raise initial capital before their launch.

Frequently Asked Questions(FAQ)

What is crowdfunding?
Crowdfunding is a method of raising funds, often through online platforms, where numerous people donate or invest a small amount towards a particular project, idea, or cause.
What are the different types of crowdfunding?
There are typically four types of crowdfunding: donation-based, rewards-based, equity-based, and debt-based (or peer-to-peer lending).
What kinds of projects or businesses typically use crowdfunding?
Crowdfunding is commonly used by startups, artists, musicians, filmmakers, and other creative individuals to finance new projects. It is also utilised by charitable organizations for fundraising purposes.
What are some popular crowdfunding platforms?
Some of the most popular crowdfunding platforms include Kickstarter, Indiegogo, GoFundMe, and Crowdcube.
What are the advantages of crowdfunding?
Crowdfunding can access a global audience, validate the market for a product or idea, and provide entrepreneurs with the opportunity to gain exposure and funding without losing equity or accumulating debt.
What are the risks or disadvantages of crowdfunding?
Risks include the potential failure to meet funding goals, criticism or negative feedback in a public forum, and the possibility of intellectual property theft.
Do I need to give up equity if I use crowdfunding for my business?
It depends on the type of crowdfunding you choose. If you opt for equity crowdfunding, you’ll offer shares of your company to investors. If you choose rewards-based crowdfunding, you usually offer a product or service in return for funding, without giving up any equity.
How can I create a successful crowdfunding campaign?
Successful campaigns typically have a clear message and goal, compelling rewards or reasons to support, a marketing strategy to reach potential donors, and constant communication and updates throughout the fund raising period.
Are the funds raised through crowdfunding taxable?
It depends on the circumstances and the tax laws in your specific location. In many cases, funds raised through crowdfunding are considered income and thus may be taxed. It’s always a good idea to consult with a tax professional.

Related Finance Terms

  • Donation-based Crowdfunding
  • Equity Crowdfunding
  • Reward-based Crowdfunding
  • Peer-to-Peer Lending
  • Crowdfunding Platform

Sources for More Information


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