With the internet everywhere and start-ups popping up left, right and centre, it is no surprise that there has been a rise in alternative funding platforms. One of the most popular of these is crowdfunding

The concept of crowdfunding has been around for a while - the Statue of Liberty for example, was crowdfunded. However, it wasn’t until the last few years where it has really blown up in popularity. In simple terms, crowdfunding is the practice of funding a project by raising money through contributions from a large number of people.

There are two types of crowdfunding - donation and investment.

Donation crowdfunding is probably the most well-known type of crowdfunding. This normally involves a company or project being pitched and the public donating funds towards it, sometimes just out of the goodness of their heart or for a small reward in return, such as Kickstarter where projects rewards funders with a small gesture, like a badge or the finished product.

You don’t have to have a super creative or innovative project to use crowdfunding, for example, one kickstarted campaign is a small device that helps people who fidget, quite simple but has exceeded its target by 34,000% and has 22 days to go. It helps to know what your audience wants or needs, and to pitch it to them in a creative way.

Investment crowd funding is slightly different in that the funders are investing and hope to be paid back with interest. It is similar to traditional lending, but instead you cut out the use of a bank or financial advisor and investors choose where their investment goes.

Another part of investment crowdfunding is equity funding where investors fund a project and receive a share capital. This is fairly small in comparison to donation crowdfunding and lending crowdfunding.

For a new business, using crowdfunding can be a great way to get the money needed to start a project and drum up support from potential customers. However it is always good to weigh up the pros and cons.

Pros:

1. The potential reach: one of the great things about crowdunfing is the potential reach and marketing spinoff. Kickstarter has had 8.7million individuals back a project, for a new business, that is 8.7million more people who are aware of your business. Even if its just 10% of that that is still a great figure. With social media as well there is potential to reach an even wider audience as backers could share their donations online, helping extend your brand awareness.
2. Less pressure: crowdfunding takes out the pressure that is associated with bank loans as there is no concrete dates to pay back or the fear of losing your house if bills are not paid in time. While some have dates posted on their campaigns for when a funder will likely receive their reward, these are usually estimations. With less stress, a start-up can then focus on building a quality product.
3. Meeting funding goals quicker: applying for funding through a bank can take weeks or months with bucket loads of paperwork, and the final answer could potentially be no. For a start-up this can be a stress as money is usually tighter. Crowdfunding takes the stress out of this as most campaigns last 30 days and you receive the money within weeks.

Cons:

1. Commission and fees: nothing in this world is for free, not even the donations from funders! With most crowdfunding platforms there is a cost. While most are free to sign up, most platforms will charge around 5% if you goal has been reached and some charge a higher one if your goal hasn’t been reached, such as Indiegogo which charges 9%. It is always good to research the different platforms and factor in the percentage fee in your final goal.
2. Potential of no funds at all: each crowdfunding platform is different and each have different rules. In some cases, if you do not reach your goal, even by a small amount, you could have no access to that money, while others do not allow you to go over your target. There are some that allow you to receive funds even if the target has not been met and some that go over, so it is always good to do your research and make sure you pick the right platform for your business.
3. Making new ideas public: as crowdfunding is done on a public platform, this poses the potential risk of a competitor stealing your idea, which for any business is an unwanted problem. However, a way around this is to make sure you have potential risks planned out. Before uploading anything to a public platform, always seek professional advice and do your research, this way if anything does come up you will be well-prepared.

So, is crowdfunding worth it? Of course, for any start-up or new project crowdfunding is a great tool to help get the needed funds to kickstart something, while connecting to a wider audience. You just need to make sure you do all your research and are well-prepared for potential risks.