Crowdfunding: What is it and how does it work?

The world of investments and financing is expanding more and more, as Crowdfunding shows us. Whether with new techniques, methods or concepts, the idea is no longer simply to invest, but also to finance, and to get something in return.  When a person, entrepreneur, wanted to obtain funds for a project only had to ask relatives for a credit in a bank or a grant.

Of course, this is still done only now it has evolved into a new alternative, Crowdfunding. This funding technique allows projects to materialize faster than normal, due to a collective participation. But what is Crowdfunding and how does it work? And are there risks? Let’s see. 

What is Crowdfunding

Crowdfunding, as its English term indicates, or micro-patronage is a cooperation or collective financing What do we mean?

The main idea is to get a group of people together and obtain a financial contribution from them, perhaps in the form of a donation, loan or otherwise to achieve a goal. For example, lending money, buying a product, producing some work, product or good.

Examples of Crowdfunding

This technique arose from the need to finance a musical project in 1989 and continued in 2004 when a certain French company managed to raise about 60,000 euros to carry out the shooting of a film.

In Spain, the best known case is that of the rock band Extremoduro, which funded its first album thanks to Crowdfunding in 1989 (without knowing it was called that).

It is necessary to take into account that the people who participate in this type of investment do not know each other. Why does this happen? Because this technique is applied through the internet, by means of different platforms, hence their participation is anonymous.

Some platforms for crowdfunding are:

  • Ulule
  • Goteo.org
  • Indiegogo
  • Kickstarter
  • Crowdcube

Types of Crowdfunding

Among the types or models of crowdfunding we can differentiate between the following:

Donation crowdfunding

Designed for projects with solidarity purposes, without receiving anything in return. The shares of the various donors are for charity. An example of this is the fundraising to restore an affected area due to a natural disaster.

Lending Crowdfunding or Crowdlending

For those who make an investment with the purpose of recovering it in the near future only receiving a percentage in interest. Even, such interest can be received monthly.

From Reward

The participant exchanges money for some tangible product or service. It is very useful when they are artistic projects.

Shareholder or Equity Crowdfunding

Here investors receive participation in the form of shares. Normally, this technique is often very fruitful when the project is growing, even the investment can be multiplied.

How does crowdfunding work?

The way Crowdfunding works will depend on the type of financing we want to do for our company or business. But it usually works as follows:

The entrepreneur must select a platform in order to send his idea or project, to see if he is a candidate to expose it. Of course, it is necessary to remember that the initiative must carry a small description, the amount you need, the time in which you need the collection, what type of investment it is, and so on. Be specific.

Now it is the community that is in charge of evaluating the project and see if it is viable, depending on the interest; the time ranges from 30 to 120 days of valuation. And its promotion is maximum in order to get the financing crowd.

On the other hand, after the promotion is achieved, the project deadline ends and that’s where you will be able to see how much you raised to make it happen. Now, obviously as you achieved this through an online platform you will have to pay a small commission for their help.

Benefits and Risks of Crowdfunding

This is a good option in order to get your business funded or raise the level of your small business. Of course, any investment or financing has benefits as well as risks.

Benefits of Crowdfunding

Crowdfunding as a modality has served to get the first funding to start projects and start initiatives of companies in order to help others. We have initiatives such as the Telethon, fundraising to combat some evil in the world, etc.. Even artists have proposed to help others through donations. Hence, you have the satisfaction of having contributed to a good cause.

On the other hand, when the project grows, both the entrepreneur and the lender, shareholder or funder receive income. This can be monetary or in the form of a reward.

You see, this type of system allows you to decide what you need and buy it. More ideas bring more diversity, hence crowdfunding is spreading to cultural, economic and social issues.

Also, it is a great opportunity for those who do not have the necessary funds to carry out a project. It is even a good option for those projects that seem unprofitable.

Risks of Crowdfunding

When investing there can be several risks, for example, remember that platforms are not banks, hence it is both the entrepreneur and the investor are responsible for the money that will be used for a purpose.

In addition, there is a risk of fraud. How so? Because it can happen that the investor deposits the money and in the end the project is not given, nor do you find out where your investment went. That is why you need to make sure that the initiative you follow is safe, or that the platform does to offer you confidence.

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