What is Crowdfunding?
Crowdfunding is a way companies, organisations or individuals raise money. More specifically? Crowdfunding works with the help of certain individuals or organisations who invest in crowdfunding projects in exchange for a potential profit or reward. Investing in this way can be risky, so make sure you know what you’re doing. It’s just as risky to start such a campaign if you don’t have a good, well-promoted product and an attractive project.
There are several types of crowdfunding. And we’ll give you a brief overview of them, so you know exactly what you’re targeting when you start a crowdfunding campaign.
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- Investment-based crowdfunding. You invest in a business and receive a stake in return (usually shares).
- Equity funding based on loans. You lend money to individuals or companies in exchange for a pre-set interest rate. Also called peer-to-peer or peer-to-business (P2P or P2B) lending.
- Donation-based crowdfunding. You donate to a person or charity (you may be promised something in return).
- Reward-based crowdfunding. You give money in exchange for a reward related to the project or for a cause you support.
What are the risks of investing in Crowdfunding?
Crowdfunding is a relatively new concept. Investing in small businesses or newly launching businesses can be risky. The main risks of crowdfunding are:
- The business you invest in might give you a headache. Many new companies fail in the first few years, so you could lose all your money. Returns are not guaranteed. Your shares may not increase in value and you may not get paid dividends.
- It can be hard to sell your shares. Shares are normally unquoted.
- The crowdfunding platform itself might collapse. This could mean that you lose the money if you have paid the crowdfunding website.
So, ideally, you should only invest money you can afford to lose – specifically, no more than 10% of the entire investment amount for one year. The money you invest should be kept in a separate account, or into the crowdfunding site’s bank accounts before being handed over to the company. However, crowdfunding sites have limited protection under the Financial Services Compensation Scheme. So, you may be able to claim compensation from them if the site becomes defective.
So much for investing in crowdfunding campaigns. Now, let’s talk about what a crowdfunding campaign is and how to do it. Although risky, crowdfunding investments are on the rise. More and more investors are eyeing crowdfunding platforms, looking for an innovative product that will bring them future gains. In other words, they are looking for businesses to invest in.
What is a crowdfunding campaign?
Apparently, the principle is simple, if you get to know the concept. There are two major international crowdfunding platforms: Kickstarter and Indiegogo. Here, entrepreneurs from all over the world put ideas “up for auction”. They come up with a project and ask for funding. Basically, the “buyers” who access these platforms sponsor the idea. If the product is an attractive one and the project reaches the proposed funding, a few months later, the investors also get the products they bought.
How to run a crowdfunding campaign on Kickstarter.
Let’s take an example: suppose you want to sell smart pens. It’s just an idea. You choose to pitch your idea on Kickstarter. You have your prototype, you have made your business plan and you know exactly how much money you need to start your business. Make a pitch video showing what your product does. Write a project that should be informative and convince people of the benefits of your product and upload everything on Kickstarter. Set the amount you want to raise and…done.
The hard part is promoting the product. For promotion, you need other international platforms. Platforms accessed by Kickstarter users who know your product and who you can convince. If you use the agency specialized in such projects, both the project development and implementation part will be their responsibility. You should know that the basis of a successful Crowdfunding campaign is the promotion and presentation of the product.
For further information and advice, do not hesitate to write to us. We are happy to share our experience, because we like Crowdfunding campaigns a lot, even if the concept is little known in Romania.
