Crowdfunding Is defined as the act of raising small amounts of capital from a large number of people, companies and organizations (the ‘crowd’) to finance ideas, products, initiatives, businesses, and other projects. Although billions of dollars have been raised by these platforms, most of the campaigns are limited to sums below $20,000. There are, however, many cases of much larger sums being raised for original, creative ideas with realistic upside potential. Successful campaigns rely on personal networks on social media and require timely promotional inputs from the organizers. The platforms supply extensive information on how to run a campaign effectively but leave it up to the organizers to implement and drive them forward.
There are no up-front charges to launch a crowdfunding campaign on most of the popular platforms. But the organizers have to be prepared to spend some time and money on producing videos, set up their websites to attract donators and motivate their social and business networks to take action. This often takes the form of a personal appeal for funds and justification of how they will be used. Not everyone is comfortable and capable of participating in this highly personal manner. In tech start-ups, there is usually a high element of secrecy in the development of new software and hardware products. Providing detailed information to the general public may not be in the best interest for these entrepreneurs.
Its Viability and Benefits
It has proven to be a viable and successful manner by which to raise funds and has received support from governments and some of the world’s largest companies and artistic communities. As a financing tool, it has seen continuous growth over the past two decades and is expected to keep growing at a rapid pace.
Crowdfunding is typically conducted through the internet by reputable third parties like Kickstarter and Indiegogo that act as intermediaries between the project creators and project investors. This provides greater safety and security for the latter. They act as trusted escrow agents who control the flow of investments and distribution and promote the fundraising programs on their trusted website, which has millions of visitors and has globally raised billions of dollars for small entrepreneurs from micro-investors and enthusiasts.
Types of Crowd Funding
Crowdfunding falls into four categories as explained below:
- Investors finance company equity, receiving stocks in exchange for their financial contributions.
- Project initiators sell their products or services in advance to buyers providing required financing to develop and market their intended products and services while incurring less debt and without sacrificing equity
- Borrowers are able to apply for loans which are offered by platforms that source the funds from a crowd of lenders.
- Individuals donate funds to artistic, charitable, pro-social or pro-environmental or other cause without receiving any remuneration. They are motivated by helping what they believe to be a good cause or viable project with their usually small donations.
Crowdfunding allows companies and individuals to seek investments and funding from thousands of individuals. When comparing this to other avenues of financing projects, through established financial institutions, producers and venture capitalists, the exponential advantages of crowdfunding are clear.
As an example, if we take 1,000 investors, that have 25 or more friends, and then extend this to friends of friends, the network marketing effects potentially escalate to 625,000 people. With 100 friends, the numbers escalate to 10 Million. This is the exponential effect that powers such social media platforms as Facebook and Twitter. Each additional investor makes it more advantageous for the next investor to join. We can also assume that most of these new joiners will be like-minded people that enjoy the same values, social interests and like to support artistic ventures (pride of becoming micro-producers of films, and other media).
The Power of Crowd Demographics
The great advantage of using crowdfunding is that it allows the targeting of broad-based, demographically differentiated groups that cover nearly all market segments, based on:
- Earning levels
- Geographical Locations
- Character traits
These differences are then filtered to find market-based similarities, which help design and reposition any project on the basis of the latest market data.
This creates a continuously improving crowdfunding initiative that is market-driven, and economically, operationally and technically more feasible.