Intro: Learning How Crowdfunding Works
Whether you’re an entrepreneur, an artist, or simply someone with a great idea, crowdfunding is a great way to reach a wide group of people and raise the necessary funds to get your project off the ground.
Whether you are looking to finance a project or contribute to a cause you believe in, it’s important to define crowdfunding and understand what the crowdfunding definition means for you.
In the following sections, we’ll show you everything you need to know about crowdfunding to answer the questions, “What is crowdfunding” and “How does crowdfunding work?”
Finally, to thoroughly define crowdfunding, we’ll talk about the key differences between crowdfunding vs crowdinvesting so that you can make the best financial decisions while exploring fundraising sites.
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What is Crowdfunding? How Does Crowdfunding Work?
Before you consider signing up with fundraising sites or donating to a crowdfunding campaign, you’ll want to make sure you have a solid sense of a crowdfunding definition.
So—what is crowdfunding? Well, there are plenty of ways to define crowdfunding, often depending on the specific crowdfunding campaign or different goals of fundraising sites.
We’ll look at various versions of fundraising sites in the following section, but first, let’s look at the basic crowdfunding definition and cover how crowdfunding works.
According to Investopedia, “Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.”
This type of forum offers two crucial components that are often missed by traditional means of fundraising: freedom and creativity.
In fact, plenty of fundraising campaigns have pushed the boundaries of these components, like raising $10k to make the perfect potato salad, proving that anything can happen on fundraising sites.
How Does Crowdfunding Work?
How does crowdfunding work? On a basic level, how crowdfunding works is by creating a forum that lets anyone pitch an idea for a creative project to an ever-widening pool of investors or donators.
Not only does crowdfunding provide an incredible amount of visibility, but it also takes much less effort and time than going door-to-door or constantly pitching ideas to your friends and family.
As Forbes points out, crowdfunding by definition is a low-risk way for individuals or companies to raise capital. If your financial goals aren’t met, inventory isn’t produced, there is no legal legwork to do, and participants receive their money back. On the other side of the coin, donating money to a crowdfunding campaign can have its own unique benefits.
Depending on the crowdfunding campaign, participation can provide small incentives, like a reproduction of the artists’ work, or it can simply provide the satisfaction of knowing that you contributed to a project that you believe in.
Some crowdfunding definitions even allow investors to get on the ground floor of the next big company, providing long-term financial benefits.
Ultimately, each specific crowdfunding process will largely depend on the type of fundraising sites that you choose, outlined in the section below.
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Crowdfunding Definitions & Examples of Fundraising Sites
Now that we have a basic crowdfunding definition, we can further define crowdfunding by a few unique features.
There are a few specific crowdfunding definitions that determine whether money is donated or invested and what types of benefits are received by crowdfunding campaign participants, listed below.
Crowdfunding Definition—Rewards-Based
The most popular kind of crowdfunding definition, these crowdfunding campaigns operate on a rewards-based system to encourage financial support for a project.
Typically, this crowdfunding definition applies to creative art projects, musicians, or designers trying to create an innovative product.
For example, perhaps an artist has an idea for a new series of canvas paintings. They can create a crowdfunding campaign to pay for the cost of materials or to cover living expenses while they work on their project.
As a rewards-based crowdfunding campaign, anyone who participates might receive a canvas painting or a print as a “thank-you” for their support.
Two popular fundraising sites that represent this crowdfunding definition are Kickstarter and Indiegogo.
Crowdfunding Definition—Donation-Based
A donation-based crowdfunding campaign is one where participants do not expect to receive anything in return.
Rather, financial contributions are warranted primarily through a desire to support, help, or encourage the goal of a specific crowdfunding campaign.
Campaigns that fall under this crowdfunding definition are typically more charitable in nature, like raising funds to cover expenses after a natural disaster, or to assist with a medical procedure.
A great example of this crowdfunding definition is GoFundMe, one of the most popular fundraising sites on the market.
Crowdfunding Definition—Equity Crowdfunding
These types of crowdfunding campaigns are less common, but they have the most significant impact for participants.
Rather than donating money for a cause or expect a tangible product in return, equity crowdfunding is an investment in a private company in exchange for some sort of monetary stake in the company itself.
Essentially, this crowdfunding definition offers the opportunity to become an online venture capitalist without the high investment requirements.
Two popular examples of these fundraising sites are AngelList and OurCrowd.
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Crowdfunding vs Crowdinvesting
Equity crowdfunding represents the key difference between crowdfunding vs crowdinvesting.
While crowdinvesting does share the basic crowdfunding definition, it’s not entirely accurate to define the two synonymously, since these types of fundraising sites operate on completely different terms.
Let’s consider donation-based and rewards-based crowdfunding definitions to illustrate the difference between crowdfunding vs crowdinvesting.
While participants may expect to receive a product in return, donation-based and rewards-based crowdfunding campaigns do not represent a long-term financial payoff or commitment.
Crowdinvesting, however, provides a long-term investment in a private company as incentive, like stock shares once the company goes public. If the startup does well, so do investors.
Because there is the potential for long-term payoff, crowdinvesting often requires larger investment sums, but tends to remain financially manageable. For example, OurCrowd requires a minimum investment of $1,000.
If you invest in the right startup, crowdinvesting can be a creative way to recoup your initial investment and even generate passive income from a successful IPO.
Ultimately, while all crowdinvesting sites fall under the crowdfunding definition, not all crowdinvesting campaigns offer the long-term benefits of crowdinvesting.
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Conclusion: Understanding How Crowdfunding Works
Whether you have an innovative idea that you want to bring into fruition, or you feel compelled to contribute to a creative project, fundraising sites are a great way to get your foot in the door.
If you’re exploring fundraising sites, keep this crowdfunding definition article handy.
Understanding how crowdfunding works and how to define crowdfunding is the best way to ensure that you find the best type of crowdfunding campaign for you.
Image Sources:
- https://www.pexels.com/photo/action-adults-celebration-clouds-433452/
- https://www.pexels.com/photo/idea-bulb-paper-sketch-8704/
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