Have you ever wondered “what is crowdfunding?”
Crowdfunding is an alternative form of financing; it is the practice of funding a project or business by raising money from a large number of people, now conducted via online platforms. Under this model, there are three different roles: the person/entity that proposes the idea and/or project to be funded, the individuals that support the idea, and the platform/organisation that brings both parties together.
The most common types of crowdfunding are: Reward crowdfunding and Equity crowdfunding. Other types include donation-based crowdfunding and debt-based crowdfunding.
Reward crowdfunding is when the business or project raises funds and the backers receives a non-financial reward in return. This allows a business to presell a product or service to launch their business concept without sacrificing equity. For example, a video game creator wants to launch a new video game, the backers invest money so the funds can help develop the game and in return the backers receive the game in-advance or for free once completed.
Equity crowdfunding is when a business is trying to raise capital without incurring debt in order launch or grow the business and in return the backers receive equity securities (shares) in the company. Due to the expectation of receiving a return on their investment, more in depth information (such as the company pitch and market research) is required.
Reward-based crowdfunding platforms include:
Patreon – specifically for musicians and content creators
Naked Wines – specifically for wine projects
GoFundMe – meant for more personal fundraising, not commercial campaigns
Equity-based crowdfunding platforms include:
FrontFundr – Canada’s equity crowdfunding platform
It is important to note that depending on the platform one uses, different restrictions and rules will apply. For example, who is allowed to invest in a business/project or the minimum investment required. As well, for equity-based platforms, as they are dealing with securities of companies, they are regulated by the governing body in that country.
Below are some of the benefits and risks that could be associated with using crowdfunding:
Audience Engagement – Makes them feel a part of the business
Receive early feedback
Low cost of capital
Investors can act as brand ambassadors
IP infringement or ineligibility as required to release a lot of information publicly
Reputation – in case the project is unable to meet campaign goals/ failure
Fear of being perceived as a scam
Allows for spreading risk/ diversifying portfolio
Reduces the search and transactional cost of investing in early-stage companies
Opens the doors to neglected markets
Reduces ability to conduct thorough due diligence
*This content is for information purposes only and should not be regarded as a recommendation of, or an offer to sell, or as a solicitation of an offer to buy, any financial product. You should consult your professional advisors to ensure this financing method is suitable to your specific needs.
We hope this article has provided useful insights and has allowed you to see crowdfunding as an alternative financing option.
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Thanks for reading!