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What is crowdfunding?

Crowdfunding is the process of raising a small amount of money from a large number of people to fund a new business. Crowdfunding uses the convenience of social media and crowdfunding sites to connect investors and entrepreneurs in a large network. It has the potential to stimulate entrepreneurial activity by broadening the investor base from the traditional circle of managers, family members and venture capitalists. It has the potential to increase entrepreneurial activity by broadening the investor base from the traditional circle of managers, family members and venture capitalists.

How does crowdfunding work?

In many countries, there are restrictions on who can invest in a risky venture and how much they can invest. As with restrictions on investing in hedge funds, these rules are designed to prevent inexperienced or less wealthy investors from taking on too much risk in order to save money. As most start-ups fail, investors run a high risk of losing their money.

Crowdfunding offers entrepreneurs the opportunity to raise hundreds of thousands or millions of yen of investment from anyone who has the money. Crowdfunding is a place where anyone with an idea can submit it to a waiting list of investors.

We had a very interesting project funded by a man who wanted to create a new potato salad recipe. The goal was $10, but the project raised more than $55,000 from 6,911 backers. Investors can choose from hundreds of projects with a minimum investment of $10. The crowdfunding site takes a percentage of the money raised.

History

Crowdfunding has a long history with various roots. Book crowdfunding has been around for a long time, with authors and publishers advancing or underwriting funds to promote their book projects. If there are enough subscribers who are willing to buy the book when it is published, the book is written and published. The subscription business model is not exactly crowdfunding, as the money does not start flowing until the product arrives. However, a subscription list can build the confidence necessary for investors to take a chance on a book.

War bonds were, in theory, a form of crowdfunding for military conflicts: in the 1930s, London’s business community saved the Bank of England when its customers wanted to exchange their pounds for gold. They backed the currency until confidence in the pound was restored, and then crowdfunded their own money. An example of modern crowdfunding: Auguste Comte’s plan to issue banknotes to publicly support his continuing work as a philosopher In March 1850, the first annual circular addressed to the author of the Positive Philosophical System Fourteen Fourteen banknotes were issued, of which various stubs and denominations survive. Their precursor was the cooperative movement of the 19th and 20th centuries. In 1885, when an attempt to build a publicly funded pedestal for the Statue of Liberty failed, a newspaper-led campaign raised 160,000 small donations. When an attempt to build a publicly funded pedestal for the Statue of Liberty failed in 1885, a newspaper-led campaign raised small sums from 160,000 donors.

The first widespread use of crowdfunding on the Internet was in the field of arts and music: in 1997, fans of the British rock band Marillion raised $60,000 for their US tour through an online campaign. This was the first notable example of online crowdfunding in the music industry. The band later used this method to raise funds for a studio album. Magazine crowdfunding has been used successfully before, for example in a 1992 campaign by the Vegan Society to fund the production of the documentary video Truth or Dairy. In the film industry, independent screenwriter and director Mark Tapio-Quince set up the website for his first, then unfinished feature film, Foreign Correspondent, in 1997, and by early 1999 had raised over $125,000 from up to 25 online fans. In 2002, a pioneering software crowdfunding campaign was launched, the Free Blender campaign, which raised over $125,000 from 25 online fans to fund the completion of the film. The campaign aimed to open up the 3D computer graphics software Blender, raising 100,000 euros from the community and offering further rewards to contributors who donated.

The first company to work with this business model was the American website ArtistShare (2001). As this model developed, other online crowdfunding sites started to appear, such as Kiva (2005), The Point (2008, predecessor of Groupon), IndieGoGo (2008), Kickstarter (2009), GoFundMe (2010), Microventures (2010) and YouCaring (2011) and other crowdfunding sites started to appear online.

The crowdfunding phenomenon predates the term “crowdfunding” itself: according to wordspy.com, the first recorded use of the term was in August 2006.
Crowdfunding is part of crowdsourcing, and crowdsourcing itself is a much broader phenomenon.

Types of crowdfunding

Loans between individuals

That’s us, rebuildingsociety.com. It is sometimes called debt crowdfunding or debt crowdfunding. We, and others in the industry, often talk about “peer-to-peer lending”, or in our case, more accurately, “peer-to-peer lending”. They are often abbreviated as P2P or P2B lending.

This crowdfunding model involves a large number of individual investors who each fund a project in the form of a loan to a specific person or company. This loan is usually repaid with interest over a period of time as an amortised investment. It is similar to a traditional bank loan, except that the company is borrowing from a number of individual lenders rather than from a single bank.

Donation-based crowdfunding

In this model, individuals donate money to achieve a fundraising goal for a specific charitable project, but do not necessarily receive anything in return.

It is ideal for charities such as social fundraising, community chest and medical expenses.

Reward-based crowdfunding

This model is similar to donation-based crowdfunding, but donors expect to receive some kind of “reward”. Individuals contribute to a project or venture with the expectation of receiving a non-monetary reward afterwards.

Examples of rewards include product samples, T-shirts or a variety of other goods and services.

Equity crowdfunding

This model is somewhere between peer-to-peer lending and venture capital, and is also known as equity crowdfunding. Entrepreneurs sell shares in a company to external investors in exchange for equity to raise funds for the business. The investor then becomes a shareholder in the company.

This is a common way of raising funds for start-ups, although the entrepreneur loses some control of the company to the shareholders.

Crowdfunding with profit sharing

In this model, a company can share profits or future revenues with the crowd in exchange for funding. This is also known as “rights-based crowdfunding”. As the lender is not a shareholder, it only receives income (not necessarily profit) when the project or company starts generating revenue.

This method is often used to introduce a new product to the market, such as an app or mobile product. Sponsors can offer their support before the app or product is fully developed or launched, and share in the revenue after the launch.

Digital security

Another form of crowdfunding involves raising funds for projects that offer digital securities, called tokens (or ICOs), as rewards to backers. Tokens of value are generated endogenously by a given open, decentralised network and incentivise the network’s client computers to consume scarce computing resources to maintain the network protocol. Such tokens may or may not exist at the time of crowdfunding, and considerable development work and eventual release of the software may be required before the tokens can be used and their market value determined. While the object of the funding is the token itself, funds raised through blockchain-based crowdfunding can also represent shares, bonds or even a “market maker’s seat at the management table” of the funded organisation. Examples of this type of crowdfunding include the decentralised prediction marketplace Augur, which raised $4 million from more than 3,500 participants, the Ethereum blockchain and “decentralised autonomous organisations”.

Litigation crowdfunding

Crowdfunding litigation allows a plaintiff or defendant to raise funds semi-privately by contacting hundreds of peers simultaneously, asking for donations or offering rewards in exchange for funding. Investors can also buy shares in the litigation they are funding, with the possibility of recovering more than the amount invested if the case is won (the fee is based on the commission received by the parties at the end of the litigation, known in the US as a success fee, in the UK as a contingency fee, and in many civil law systems as a pactum de quota LexShares is a platform that allows accredited investors to invest in litigation.

The best crowdfunding platforms

Kickstarter: The best overall

crowdfunding platform kickstarter

When it comes to crowdfunding, Kickstarter is known as the brand that helps tech and creative entrepreneurs raise money for their projects before taking out loans or raising venture capital. Since its inception in 2009, Kickstarter has raised more than $6.2 billion and helped 21 Since its inception in 2009, Kickstarter has raised more than $6.2 billion and funded more than 21,000 projects (as of November 2021).

It is also a very easy way to raise funds. You can start by setting a goal and a deadline for reaching it. Just so you know, Kickstarter requires approval before you can start your campaign. Depending on the level of funding each person raises, you can set up a small gift or personal experience for your donors.

Kickstarter is an “all or nothing” platform, so if you don’t complete your campaign, you won’t receive any money. And even if the campaign goal is not reached, no money will be charged to backers’ credit cards. The fee is 5% on top of the payment processing fee (3% – 5%) per transaction. There is a 14-day waiting period for fundraising if sufficient funds are raised.

Indiegogo: Second best overall

crowdfunding platform indigogo

Indiegogo users often create campaigns for technological innovations, creative works and community projects. This crowdfunding platform works in a similar way to Kickstarter, except that it is not an all-or-nothing funding model.

Users can choose between two options: fixed funding and flexible funding. Fixed funding is ideal for projects that need to raise a fixed amount of money, while flexible funding is ideal for campaigns that can use whatever funds they wish. With flexible funding, you receive funds whether you reach your goal or not, while with fixed funding, all funds are returned to the donor if the campaign goal is not reached.

Unlike Flexible Funding and Fixed Funding, where the target is reached (5%), there is no charge for campaigns that do not reach their target. There is also a 3% processing fee and a $0.20 fee per campaign. The minimum amount for both fundraising methods is $500.

Patreon: The best for creators

crowdfunding platform patreon

Patreon is a popular service for YouTubers, podcasters, bloggers and other digital creators. Unlike campaigns that collect one-off donations, you use a subscription model where patrons donate a certain amount of money on a regular basis, either monthly or per production.

The site also allows artists to build relationships with their fans, and creators can offer exclusive content to registered patrons as an incentive to raise more funds. This service would be best if you regularly share your work on a personal platform. Otherwise, contributors have the option to unsubscribe if the creator does not create content.

There are three levels of plans for patrons, who take a percentage of the monthly revenue generated on the platform: Lite (5%), Pro (8%) and Premium (12%). There is also a payment fee, which depends on the level of plan chosen and the customer’s payment method.

The site has over 6 million active users and over 200,000 creators. However, the downside of Patreon is that it does not promote its creators as much as sites like Indiegogo and Kickstarter, which have entire pages or verticals about their projects that potential donors can view.

GoFundMe: The best for personal fundraising

You have probably seen many GoFundMe fundraising campaigns on social media for emergencies and charitable causes, but businesses can also use this method. This crowdfunding site charges a 2.9% processing fee and $0.30 per donation. This is not an all-or-nothing site, so all money raised is yours. Also, in the US, the cost of fundraising for an individual campaign is zero.

GoFundMe has run several successful campaigns, such as the Las Vegas Victims Fund ($11.8 million) and the Time’s Up Legal Defense Fund ($24.2 million). If you are looking for a specific fundraiser for a service, such as medical needs or emergency assistance, this is the place for you.

It is important to note that only 1 in 10 GoFundMe campaigns are funded.

CircleUp: The best for crowdfunding

circleup crowdfunding platform

If you’re building a consumer brand, it’s worth taking a look at CircleUp, which has helped over 500 startups raise $500 million. We provide you with a platform to raise equity and loans and to network with experts, suppliers and entrepreneurs. It also allows you to connect with accredited investors with a net worth of at least $1 million or an annual income of at least $200,000.

Additional benefits include access to a dedicated credit line and the development of market insight business strategies using CircleUp’s proprietary Helio machine learning technology.

The company is ideal for entrepreneurs who want to scale rather than develop their ideas. The selection process is quite competitive, and you normally have to have an income of at least one million dollars to be on the list.

Strengths and weaknesses

Before diving into the exciting but time-consuming world of figuring out a project, attracting backers and then bringing an idea to life, entrepreneurs can save themselves a lot of time and effort by understanding the pros and cons of crowdfunding beforehand.

The following table can help microenterprises considering crowdfunding to determine whether their business, idea or timing is suitable for using crowdfunding as a source of finance.

What are the advantages and disadvantages of crowdfunding?

Advantages of crowdfunding

  • A company sets a target amount they want to raise for their project. If they reach it, they receive as much as a penny for it.
  • Successful crowdfunding projects can gain a large readership on social media and other platforms, and can do more than just raise money.
  • Presenting your project or business through crowdfunding can be a valuable form of marketing.
  • It can raise funds almost instantly, and some companies have raised £100,000 in just a few days.
  • Through crowdfunding, companies can receive feedback on their ideas and how they can be improved.
  • Crowdfunding is ideal for niche ideas that would otherwise not have the opportunity to gain an audience or funding.
  • Thanks to crowdfunding, a company’s audience becomes its most loyal customers.
  • “The success of crowdfunding can send a positive message to other backers, enabling them to raise more money and on better terms. Liam Collins, Nesta

Disadvantages of crowdfunding

  • “Crowdfunding projects are visible, limited and easy to understand. Without these three qualities, a project cannot succeed”. Ann Strachan, Crowdfunding Foundation UK
  • If the target amount is not reached, potential investors will get their money back and the company will be left with nothing.
  • Unsuccessful projects risk damaging the reputation of the company and those who have made the commitment.
  • Thus, by making an idea public, it allows others to copy it.
  • Companies need time and money to prepare the community, raise awareness and attract investors before they can raise funds.
  • Strong, established and existing networks are essential for the success of a project. Without it, even the best ideas will not be supported.
  • Incorrect calculation of profits and revenues may result in an excessive share of the project being handed over to investors.
  • “Companies with limited networks, those with no digital or social media presence, or those whose products are very complex, will find it difficult to work with crowdfunding”. Jude Cook, ShareIn

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