What is crowdfunding? How it works, types and advantages

What is crowdfunding? Today we often hear about this well-established reality: crowdfunding

To date, over 17 billion dollars have been raised with crowdfunding campaigns in 2022 globally, according to Market Data Forecast

Crowdfunding has been a turning point for companies that need to raise liquidity, i.e. find money or investors. If until a few years ago the only options to raise the funds necessary to create a project, a business, or a startup were to ask for a loan from the bank or actively propose yourself to traditional investors, today thanks to crowdfunding this is no longer the case.

Let’s see in detail what crowdfunding is, how it works, which types exist, and what the advantages of a crowdfunding campaign are.

What is crowdfunding

The term "crowdfunding" literally means "financing from the crowd", a tool that allows anyone to invest their savings in the realization of a project.

In a world where finding liquidity to invest in a project has its difficulties, especially for young people, creatives, makers, and innovators, crowdfunding could summarily be defined as a form of access to credit alternative.

To find the money and finance an idea we therefore do not resort to traditional channels, to those banks that increasingly deny access to credit to individuals and small businesses, but to the crowd (crowd) that is, ordinary people. Ultimately, it is a form of bottom-up economy, one of the many results of the sharing economy which faced with the global crisis it rolled up its sleeves to find alternative forms of financing.

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How crowdfunding works

The most powerful tool used by crowdfunding is undoubtedly the web. Generally, the procedure is simple and immediate: a startupper or an ordinary person who has decided to materialize his idea turns to a specific online platform, specialized in raising financing, to which he presents his project. There are many platforms that deal with crowdfunding, some of the best known are GoFundMe, Kickstarter, Patreon, Indiegogo and many others.

If the project presented is deemed worthy of note, it gets a space on the platform and a fundraising campaign starts: a budget necessary to realize the idea and a deadline by which the funds must be obtained are set. Depending on the type of collection, there are different selection and evaluation criteria for the project being presented.

The next step is publicizing the idea: it is talked about on the social networks connected to the platform, and the press office is activated to circulate the news, perhaps on other websites or specialized blogs. If the project receives the necessary funding by the set date, the project goes ahead and, in all likelihood, will be realized.

Even for investors the procedure is quite simple, in fact, it is necessary to carry out a few simple operations:

• choose the online platform;
• open an account;
• choose the project from the “projects” section and click on the “invest” button;
• choose the amount to invest;
• after receiving an email with all the information relating to the investment and the IBAN code, you can proceed with the payment via bank transfer.

Types of crowdfunding

There are different types of crowdfunding, different ways in which it is possible to request and obtain financing for a project. These are methods that vary from country to country because they must adapt to specific fiscal and economic legislation but can be summarized in the following points:

• Crowdfunding donation-based: in this case the investor, the financier of the idea, makes a monetary donation. It is, therefore, a donor who receives nothing in return, the payment of the sum is made exclusively with a charitable intent. This is a type of crowdfunding particularly suitable for social and civil projects. Being essentially a donation, the benefactors, although they are called backers, play the role of real philanthropists, offering their money for non-profit projects.

• Crowdfunding reward-based: in this model the investor receives a reward, i.e. his financing allows him to have a economic return which may consist, with the differences of the case, in a sum of money or even in the product/service created. Crowdfunding reward is the most used type to sell a product or service even before its creation. Contrary to what one might think, however, investors in this type of crowdfunding are very involved in determining the characteristics of the product and in this case, the investor also becomes fundamental for the realization of the proposal.

• Lending crowdfunding: known as social lending or P2P lending, this type of financing involves the disbursement of a real loan through online platforms. Its purpose is to lend money to people or businesses looking for funds that will be used for the growth of the project itself, however in exchange for interest and repayment of the capital. The money will then be returned to the lender with interest.

• Equity crowdfunding: this type of crowdfunding is the tool that allows a large number of people to finance the collection of capital of private companies. In exchange for their investment, you will obtain shares in companies, shares, or dematerialized shares, based on the type of company in which you decide to invest. The investment takes place through specific collection platforms, on which it is possible to find out about the companies that are proposing a collection, the characteristics, and what type of company share you will have access to. These portals obviously also play the role of guarantors, given that the projects found online have been selected and only those that could be most profitable for potential investors are visible.

Obviously, when you launch a crowdfunding campaign it will also be necessary to have a clear understanding of the most suitable type of collection for your needs, in order to be able to achieve your goal.

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The advantages of crowdfunding

A crowdfunding campaign not only allows you to finance ideas that, most likely, with the sole use of traditional channels would never get off the ground, but it also offers many other advantages.

Let’s see some:

• investors can become a valuable contribution to improving the product/service you intend to create;
• the interest in a project on the part of investors can attract the attention of bigger fish, such as venture capital funds;
• on crowdfunding platforms transactions are transparent;
• in addition to being a fundraising tool, crowdfunding is also a marketing tool that allows you to obtain great visibility;
• crowdfunding allows you to create lasting relationships, which could be useful in the future for raising new funds.

Choosing to raise funds online via crowdfunding can also have disadvantages. Since a large number of people are involved in the project, promoting it becomes extremely important and requires a lot of energy, which is why it may be more stressful. Furthermore, the obligations and responsibilities are greater since part of the profits will have to be shared with investors. Also worth taking into consideration is the strong competition that characterizes crowdfunding platforms on which, in fact, it is not always easy to get noticed.

In any case, it is an innovative approach to creativity and entrepreneurship that has represented and can represent for many the only opportunity to emerge and realize their own project.

Original article published on Money.it Italy 2023-11-11 08:50:02. Original title: Cos’è il crowdfunding? Come funziona, tipologie e vantaggi