The use of crowdfunding as an alternative source for raising capital has been fast gaining popularity among both entrepreneurs and investors over the last several years. Many people today are now taking advantage of crowdfunding as a means of financing their projects or expanding their business operations.

Although crowdfunding is a funding option that is relatively new, it has proven itself to be a successful peer-to-peer form of acquiring or investing money. Millions of people have been able to raise capital to start their own businesses from crowdfunding. Usually, you raise money through a time limited campaign for a specific project that has a target and a clear outcome on a dedicated crowdfunding platform.

Crowdfunding can simply be defined as “the practice of raising funds through the pooling of relatively small financial contributions from a large number of investors to finance a business or to fund the commercialization of a new product”. Crowdfunding can be a reliable way through which a lot of projects can be financed, from funding art shows, movies, short films, dance, graphic novels and theatre productions to financing charitable causes, startups and business expansion.

Crowdfunding also provides a wonderful opportunity for investors to potentially make some money while simultaneously lending their support to a cause they believe in. It can be a solid investment platform that doesn’t look to be going anywhere anytime soon and will most likely continue to rapidly grow into the future. According to Statista, there are already over 191 crowdfunding platforms in the US alone. Also, the volume of global crowdfunding platforms has risen from $530 million in 2009 to over $2.8 billion in 2012. Over the past few years, that figure has multiplied as more and more people join the bandwagon of crowdfunding investing.

2016 saw crowdfunding capital exceed funding from venture capitalists for the first time ever. It is a hugely popular funding option with a massive potential for generating capital that is predicted to reach the £66 billion mark worldwide by the year 2025. One very important thing to note, however, is that not all crowdfunding campaigns guarantee returns on investments to their investors. Having a complete understanding of the cause that you’re contributing to is very critical if you want to get the most benefit from your crowdfunding investment.

This brings us to the different types of crowdfunding models available. We will be looking at each of these models in detail and their respective returns on investment. There are basically four main types of crowdfunding models available at present. These are:

Donation-based

Donation-based is a type of crowdfunding model where people give money in support of a project or business idea. This type of crowdfunding does not provide any physical reward element to its lenders, just the reward of contributing to a worthy cause.

Pre-payment or rewards-based

Pre-payment or reward-based crowdfunding model is one where individuals contribute money to an organization, company, or project in return for some reward. The expected rewards to be shared among investors in this type of crowdfunding model can be in the form of freebies, discounts, product pre-order, or other items.

Loan based or peer-to-peer

Loan based or peer-to-peer crowdfunding model is one where individuals lend money to businesses or individuals at competitive interest rates.

Equity investment based

The fourth and final type of crowdfunding model is equity investment based. This is arguably the most suitable crowdfunding model for business financing and expansion. With this model, investors receive an ownership interest in the entity raising the funds in exchange for their contributions. It is comparable to angel investors or venture capitalists.

Crowdfunding investment has become so popular today and is regarded by many as a good idea because it promises huge potential benefits for its investors, both monetarily and otherwise. It can be so lucrative that it is looking to become the next big investment trend and here are 5 reasons why:

Convenience

Both investors and entrepreneurs alike appreciate the convenience that crowdfunding investment provides. No longer do entrepreneurs have to go through the nerve-racking experience of borrowing money from venture capitalists or other potential investors who ultimately might refuse to lend to them.

With crowdfunding, there is generally less paperwork involved and usually even less preparation needed to access sustainable loans. For an entrepreneur, setting up a crowdfunding campaign can be an extremely smooth process compared the traditional loan applications. For the investor, crowdfunding also provides a convenient and exciting way of obtaining an investment or finding a new venture to fund.

Validates Your Concept

Crowdfunding investment also provides a great opportunity for entrepreneurs and investors to determine the actual market acceptability for a particular idea, product, or project. Having an innovative idea is not necessarily a yardstick for ascertaining if the idea will yield a profit. Launching a successful crowdfunding campaign will effectively help in validating your concept. A proper concept validation not only proves that people are interested in your idea but also shows that they are willing to spend their money on it.

Reduces Risk

The beauty of crowdfunding investment is that since it validates the market, both investors and entrepreneurs may not have to worry about taking on as much risk. The venture, idea, or project that is being crowd funded can be realized with just a token as a contribution from multitudes of individuals.

Unlike other investments where you dump your savings into a venture that may have no sustainable market, crowdfunding allows you to test the waters without as much of an investment. As a matter of fact, since crowdfunding is a limited time campaign, all the money that is contributed will usually be returned to all donors in the event that the campaign turns out unsuccessful.

Another way crowdfunding is instrumental in reducing risk, according to investor John Rampton, a veteran crowdfunding investor, is that it reduces the cost of inventory. By crowdfunding a particular product, you no longer have to waste money on inventory that doesn’t sell, rather you only sell what is being ordered.

Real-time Feedback

Crowdfunding also allows both investors and entrepreneurs the opportunity to receive and review feedback and ideas from a live campaign. You can create opinion polls or surveys to see what people are saying about the product while the campaign is on. This real-time information allows you to make the necessary adjustments faster, positively influencing the speed at which your product gets to the market.

Another noteworthy advantage of getting feedbacks in a real-time campaign is that it helps to you build a community. By engaging and listening to the investors, you will have created a following of loyal customers even before the business has officially launched.

A Great Marketing Tool

Running a crowdfunding campaign also affords you the opportunity to spread your brand’s message and goals to a wide audience. It is a great marketing tool that enables you to reach your target market across multiple marketing channels. Also, when your campaign gets some traction, publications may begin to jump on board and promote the campaign even further.

Crowdfunding users can benefit immensely from the free PR that publications provide, it doesn’t matter whether it’s a local news station, newspaper, or a leading industry blog. One thing is sure, the campaign will get a wider coverage and you will get more brand awareness and attract more supporters for your idea, project, or business.

References:

• The Economist - https://www.economist.com/node/16909869
• The Guardian - https://www.theguardian.com/money/2013/may/04/crowdfunding-alternative-traditional-investments
• Forbes - https://www.forbes.com/sites/drewhendricks/2014/08/27/5-reasons-why-crowdfunding-is-the-next-big-investing-trend/2/#5ac1b3df6688