Crowdfunding for Business: What It Is, How It Works, and What Are the Crowdfunding Platforms for Projects

Crowdfunding is a method of collective financing of projects, ideas or businesses, in which funds are collected from a large number of people through special online platforms. This method allows entrepreneurs, startups, and even large companies to access capital bypassing traditional financial institutions such as banks and venture capital funds. Crowdfunding is based on the support and trust of many private investors or consumers who believe in the success of the project and are ready to invest their money in its implementation.

History of crowdfunding

The history of crowdfunding dates back to ancient times, when people pooled their resources to achieve common goals, such as building public facilities or holding events.

However, modern crowdfunding as a financing tool appeared in the early 2000s along with the development of the Internet. It was then that the first crowdfunding sites began to be created.

The first significant crowdfunding platform was ArtistShare, founded in 2001. It allowed musicians to receive funding from their fans to record albums. Soon after, other platforms began to emerge, such as Kickstarter and Indiegogo, which became popular due to their support for a variety of projects, from tech startups to art and philanthropic initiatives.

How is crowdfunding different from crowdlending?

Crowdfunding and crowdlending are two different ways of collective funding that are often confused. The main differences between the two are in the nature and mechanics of funding.

Crowdfunding

Crowdfunding involves raising funds from a large number of people (crowdfunders) to fund a project or idea.

  • Reward-based crowdfunding: People who support a project receive certain rewards or products in exchange for their contributions. Examples of such platforms: Kickstarter, Indiegogo.
  • Equity crowdfunding: Investors receive a stake in a company in exchange for their investment. Examples of such platforms: Seedrs, Crowdcube.
  • Donation-based crowdfunding: People donate money to charitable or social projects without expecting a return. Examples of such platforms: GoFundMe, JustGiving.

Crowdlending

Crowdlending is a mechanism for financing business projects by individuals or legal entities under loan agreements. Unlike crowdfunding, crowdlending provides a refund with interest.

  • Personal loans: Individuals can borrow for a variety of needs, such as buying a car, renovating a home, or consolidating debt. Examples of such platforms: LendingClub, Prosper.
  • Business loans: Companies can borrow to finance their business projects. Examples of such platforms: Funding Circle, Kabbage.
  • Mortgage loans: Investors can provide loans for the purchase of real estate. Examples of such platforms: LendInvest, Landbay.

Main differences

Understanding these differences is important for both entrepreneurs choosing a financing method and investors assessing potential risks and returns.

How Crowdfunding Works

  1. Project creation: An entrepreneur or organization creates a project on a crowdfunding platform, describing its goals, required funds, and proposed rewards for sponsors.
  2. Campaign Launch: The project is published on the platform and a fundraising campaign begins. Campaigns usually have a specific time frame within which it is necessary to collect the declared amount.
  3. Attracting sponsors: The project is actively promoted through social networks, blogs, media, and other channels to attract the attention of potential sponsors. The more interesting and significant the project, the more likely it is that it will find support.
  4. Fundraising: Sponsors contribute their funds through the platform, and if the project achieves its fundraising goal within the stipulated deadline, the funds are transferred to the project initiator. In case of failure, the funds are usually returned to the sponsors.
  5. Project implementation: Upon successful completion of the campaign, the initiator proceeds to implement the project and fulfill obligations to sponsors by providing them with promised rewards or reports on the work performed.

 

Crowdfunding: pros and cons

Advantages

  1. Access to funding: Crowdfunding provides an opportunity to raise funds without the need to go to banks or raise venture capital.
  2. Idea testing: A fundraising campaign allows you to check the demand for a product or service even before it is launched on the market.
  3. Marketing and PR: A successful crowdfunding campaign can capture the attention of the media and potential customers, increasing brand awareness.
  4. Community support: Projects often find support among people who become loyal customers and brand ambassadors.
  5. Flexibility of conditions: Crowdfunding platforms offer various campaign formats and fundraising conditions, which allows you to choose the most suitable option.

Disadvantages

  1. High competition: Every year, the number of projects on crowdfunding platforms is growing, which makes it difficult to attract attention and funds.
  2. Risks of failure: Not all campaigns achieve their fundraising goals, and if they fail, the project can lose some of its reputation and time.
  3. Obligations to sponsors: Project initiators are obliged to fulfill all promises to sponsors, which can be time-consuming and costly.
  4. Platform fees: Platforms charge fees for using their services, which reduces the final amount available to implement the project.
  5. Limited funding: Crowdfunding can be ineffective for large projects that require significant investment.

Who is crowdfunding suitable for?

Crowdfunding is suitable for the following categories of businesses and projects:

  1. Startups and innovations: Young companies developing new products or services can use crowdfunding to raise seed capital.
  2. Creative projects: Art, music, and film projects often find support among fans and a wide audience.
  3. Social and charitable initiatives: Crowdfunding helps to raise funds for social projects, charity events and public events.

When crowdfunding failsveins

  1. Large projects: Projects that require significant investment may face difficulties in raising the necessary funds through crowdfunding.
  2. Specific niches: Projects designed for a narrow audience may not find enough support.
  3. Lack of a marketing strategy: Without active promotion and audience engagement, the chances of success of a crowdfunding campaign are reduced.
  4. Small and medium-sized businesses: Companies that need additional funding to expand or launch new products can take advantage of crowdlending.

How to use crowdfunding for companies?

  1. Prepare high-quality materials: Create attractive videos, images, and text descriptions of the project.
  2. Define goals and audience: Clearly articulate campaign goals and define the target audience.
  3. Choose the right platform: Explore different crowdfunding platforms and choose the one that best suits the needs of the project.
  4. Launch a campaign: Publish the project on the platform and actively promote it through social media, blogs, and other channels.
  5. Engage with funders: Regularly inform funders about the progress of the project and deliver on promised rewards.

Advantages and disadvantages for investors

Key Benefits

  1. Access to unique projects: Investors get the opportunity to support innovative and interesting projects in the early stages of their development.
  2. Social relevance: Participation in crowdfunding campaigns allows investors to support socially significant and charitable initiatives.
  3. Possibility of earning rewards: Investors can receive various rewards such as ready-made products, services, or exclusive access to content.

Main disadvantages

  1. Risk of losing investment: Not all projects are successful, and investors may lose their investment.
  2. No return on investment: Unlike crowdlending, in crowdfunding, investors do not receive a return on their funds if the project does not generate a profit.
  3. Unsatisfactory Rewards: Sometimes the quality or timing of promised rewards may not meet expectations.

How to Use Crowdfunding for Investors?

Investors should:

  1. Study projects: Carefully analyze projects, their teams, and implementation plans.
  2. Diversify investments: Invest in different projects to minimize risks.
  3. Assess risks: Understand the possible risks and be prepared for losses.
  4. Interact with teams: Keep in touch with project teams to stay on top of their progress and potential challenges.

What is a crowdfunding platform

A crowdfunding platform is an online service that provides an opportunity for project initiators to raise funds from a wide audience. The platforms provide technical support, transaction security, and project promotion.

How to choose a crowdfunding platform?

  1. Platform Type: Some platforms specialize in certain types of projects (creative, technological, social, etc.).
  2. Fees and conditions: Analyze the amount of fees and terms of use of the platform.
  3. Audience: Evaluate the activity and audience size of the platform.
  4. Successful projects: Study successful projects on the platform to understand its capabilities.
  5. Kickstarter: One of the most well-known platforms that supports projects around the world.
  6. Indiegogo: A popular platform with a wide range of projects, including technology and charity.
  7. GoFundMe: Specializes in charitable and social projects.

Do I need to pay tax on crowdfunding?

The issue of crowdfunding taxation depends on the legislation of a particular country. In Russia, funds received through crowdfunding may be taxed depending on their purpose and the status of the recipient (individual or legal entity). It is recommended to consult with tax specialists for the correct registration and payment of taxes.

How to launch a crowd project to attract investment

In order to successfully launch a crowd project, it is important to pay attention to these aspects:

  1. Develop a concept: Clearly define the project goals, target audience, and implementation plan.
  2. Create high-quality materials: Prepare videos, images, and text descriptions that will attract the attention of sponsors.
  3. Define rewards: Develop a reward system for sponsors that will meet their expectations.
  4. Plan your promotion: Make a plan to promote your campaign through social media, blogs, media, and other channels.
  5. Launch and Management: Launch the campaign on the platform of your choice and actively manage it by liaising with sponsors and updating progress information.

Examples of successful crowdfunding campaigns

Examples of successful crowdfunding campaigns can inspire and provide useful lessons for your own campaign. So let's look at a few well-known examples:

  1. Pebble Time (Kickstarter): The Pebble Time smartwatch fundraiser has raised more than $20 million, becoming one of the most successful Kickstarter campaigns ever. This success demonstrated the potential of crowdfunding in the technology sector and drew attention to funding opportunities through platforms.
  2. Exploding Kittens (Kickstarter): A card game created by comedians and illustrators raised $8.7 million with an initial goal of $10,000. This campaign showed how creative and original ideas can attract significant funding and become successful products in the market.
  3. Flow Hive (Indiegogo): An innovative beehive that allows honey to be harvested without disturbing bees has raised more than $13 million. This project not only received funding, but also drew attention to ecological and sustainable solutions in agriculture.
  4. Oculus Rift (Kickstarter): A fundraising campaign for the development of the Oculus Rift virtual reality headset has raised more than $2.4 million. This project was a pioneer in the field of virtual reality and attracted the attention of major investors such as Facebook, which later acquired Oculus VR.

Conclusion

Crowdfunding is a powerful tool for financing projects and businesses, providing an opportunity to raise funds from a wide audience. It has its advantages and disadvantages, but with the right approach, it can be a really effective way to implement ideas.

It is important to take into account the features and risks of crowdfunding, carefully plan and manage the campaign in order to succeed.

We wish you good luck in your endeavors!