What is crowdfunding and how does it work?

crowdfundingCrowdfunding – read more about what this is and how it works

For many start-ups and aspiring businesses, it can be difficult to get the required capital to pursue customers and get the operation up and running.

Until recently, small companies and entrepreneurs were at the mercy of big investors or the few willing to take a risk and invest a lump sum.

However, the internet has allowed small companies to reach out to the thousands, nay, millions, of potential investors thanks to a concept known as crowdfunding.

Businesses can use crowdfunding to pitch about their idea or their product on a crowdfunding site and ask for money to turn the product or business into a reality. Once you have published your pitch, investors and users of the site can read about their idea and opt to invest or not.

The idea of the premise is simple. Rather than have one or two investors putting up the vast majority of the cash needed, crowdfunding looks to take a small amount of capital from thousands, or even millions of people, offering small investments in a company or idea. While people take less risk with what they wish to invest, the business can still get the cash it requires.

Simply put, businesses can get investment by attracting a crowd of investors.

Crowdfunding, perhaps naturally, is exceptionally popular with those working in digital marketing and online, especially for start-ups. With companies such as Kickstarter helping people get access to the concept, it is certainly a growing trend that many companies are embracing.

How does crowdfunding work?

While the concept of crowdfunding sounds relatively simple, the practice can be somewhat confusing. There are three types of crowdfunding, all offering different options. Crowdfunding can come in the form of donations, with people offering money with no return. However, as there is often no financial reward for the investor, such a funding type can be difficult.

Debt funding or peer-to-peer funding is the second type of crowdfunding and often results in those who have donated getting their money back with interest, effectively bypassing what a bank would do.

The final type of investment is equity crowdfunding. Under such a deal capital is exchanged for a stake in a business, project or idea. If the business is successful, those who invested get more; conversely, if not, the value goes down.


Who provides crowdfunding?

Many companies are USA based, others are UK based. People on both sides of the Atlantic generate results, based on their presentations.

Crowdfunder – UK based, claims to be the biggest in the UK

Growth Deck – UK based equity crowdfunding

GoFundMe – US based

Kickstarter – US based, well established

Indiegogo – US based

Regardless of which type of crowdfunding you opt to use, it is worth noting that as well as posting your pitch on a crowdfunding site, it is worth putting together a digital strategy to promote your pitch. This will maximise the audience reach to increase the likelihood of achieving your target.


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