Crowdfunding: Meaning, advantages, disadvantages and

Fundraising has become a necessity for businesses globally. Startups try hard to gather the necessary funds needed to kickstart a business from numerous avenues. A business is similar to a plant, which must be watered, tendered and attended to with utmost attention before it blossoms into a full tree. But unlike trees, all a business requires to blossom is the necessary funding and a great deal of attention.

Crowdfunding is one of such vital avenues through which businesses can raise funds. Although the crowdfunding technique is novel in today’s economic and business landscape but has recently become highly significant to the progress of most startups globally. This article offers all there is to know about crowdfunding.

What is crowdfunding?

Crowdfunding is the fundraising technique that allows the general public to donate small amounts to entrepreneurs to fund their businesses. The crowdfunding technique utilizes a wide range of avenues to reach out to people for support, such avenues include social media channels, communities and a host of others, including crowdfunding websites. The crowdfunding technique offers a shift from the traditional form of funding to businesses globally with strong concentrations on community involvement in the business.

Understanding how crowdfunding works

Crowdfunding is an avenue through which businesses can raise funds for operations from the public. It acts as a sort of donation or support system for startup companies’ operations. Crowdfunding is highly similar to raising funds through bonds at the capital market, nonetheless, they both have a significant difference. Bonds offer funding to the business in the form of a debt payable with interest, whereas, crowdfunding offers funding to the business in exchange for equity or a share in the business.

With crowdfunding investors can now raise funding from several people with a large disposable income to invest. The crowdfunding technique is highly regulated in most countries across the globe, in Nigeria, the Securities and Exchange Commission (SEC) is responsible for regulated crowdfunding for businesses and has released a guideline to that effect in Nigeria. The essence of regulation is to avoid the uncontrolled funding of investments by individuals with little or no financial knowledge into a startup with a high risk of failing in the end.

The crowdfunding technique works with the startup putting a proposal to the general public for a stake in the business. For instance, $10 for a 1% stake in the business; investors can then subsequently invest and gain the correlating capacity of their investment in the business.

The major crowdfunding websites globally

GoFundeMe: GoFundMe is arguably the largest crowdfunding site in the world with over 100 million donors raising over $10 billion as of 2021. The crowdfunding platform was founded in 2010 and has since grown to become one of the biggest names in crowdfunding. Nonetheless, when compared to equity crowdfunding, GoFundMe ranks low in this regard.
Kickstarter: Kickstarter is the first name when it comes to crowdfunding in the business world. The platform is currently the world’s largest equity-based crowdfunding and has supported over 200,000 businesses by raising over $6 billion in over ten years.
Indiegogo: currently at third place, Indiegogo was originally set up to support movie projects across the globe but has grown to support all forms of projects and is ranked the world’s second-largest equity-based crowdfunding platform as of today. Indiegogo ranks higher than Kickstarter in terms of flexibility and less bureaucracy.

Advantages of crowdfunding

Crowdfunding possesses numerous advantages, some of which sets it as a first for investors starting up their businesses. Some of the advantages are listed below.

Access to capital: Crowdfunding is a fantastic source of capital for businesses globally. Sources capital through crowdfunding has recently become the vogue, its ease of access to investors seeking a part of a startup with promising success cannot be overemphasized.
Less bureaucracy: despite regulations being in most jurisdictions, the crowdfunding technique still scores highest in the funding technique having the least bureaucracy. When compared to other forms of funding, the demand to follow guidelines coupled with excessive due diligence, legal advice, account checks and others can be daunting, with crowdfunding that number is greatly reduced, allowing for the business to raise funds while maintaining less bureaucracy.
A source of community: Perhaps the most significant advantage of the crowdfunding technique is that it acts as a source of community support to businesses. The community can act in agreement to jointly support businesses for worthy causes with investors getting funds to build the projects without corrupting their foundations. For instance, for an investor who seeks to build an invention like Facebook or Twitter where individuals can have their voices heard, having such an invention in the power of a few rich men or the government can further derail the business’s original mission.

Disadvantages of crowdfunding

There exist varying disadvantages to crowdfunding. Some of these are listed below

Likely to mislead: most investors in the crowdfunding space get little or no knowledge of investing and of the business they seek to invest in. Crowdfunding investors may get lost in the momentum of trying to get a share of a promising business idea that they place their life savings into the business. This disadvantage is the major reason most countries have crowdfunding highly regulated to have the public educated on the art of investing.
It is highly risky: crowdfunding is a high-risk venture that takes lots of knowledge to undertake. The issue arises from the fact that a majority of investors in the crowdfunding community see the promising business idea rather than the people behind it, this could lead to disastrous effects of loss in the long run when the business idea fails and the investors have lost a bulk of their savings.
Investors may not get the actual value: the actual value of the business is unknown to the investors. This is because little or no due diligence report is received by the many investors who seek to grab a share of the business. For instance, a startup may be valued at $1 million and crowdfund for a $100,000 investment for a 2% stake in the business rather than a 10% stake, which is the actual value of the investment compared to the business.

Conclusion

Crowdfunding is a technique that allows businesses to thrive. Small businesses can today access funding from the public within a short timeframe through crowdfunding.