Deep Dive – How does Crowdfunding work and why you should go for it?

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September 23, 2020
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The following crowdfunding series is a collaboration between TechJuice and Startup Early.

Previously we covered the basics of crowdfunding. As the term suggests, crowdfunding is exactly that, connecting “crowds” to those who need “funds”. It is to help co-fund projects and startup ventures through tens, hundreds or thousands of investors. A crowdfunding transaction typically involves three parties: a startup, an investor, and a crowdfunding platform.

For the Startup or Project Owner who may be an entrepreneur, a non-profit owner or a creative thinker looking for funds, it is a simple registration with a crowdfunding platform, and running a crowdfunding campaign to jumpstart. To put it plainly, it is a fundraising campaign hosted over social media that helps spread the story behind the idea, cause or the product being pitched. It is a bridge between the seeker and those on the crowdfunding platform looking for an opportunity to fund a project. It helps sponsors learn about the product or service they would be supporting financially and even includes details like the total estimated funds that the startup plans to raise.

The startup chooses a Crowdfunding Platform according to the type of crowdfunding model that best suits its business model and uses this online platform for moderating transactions. The platform then publishes and promotes projects according to terms and helps the Startup establish trust and attract sponsors in return for a fee.

As for the investor, in return for their pledge, they receive a reward as a token of gratitude for their support. Employing this model, the investor not only gets interesting services/perks but also a chance to support small businesses at the same time. Rewards-based crowdfunding is a popular type of crowdfunding model today and has gained popularity through sites like Kickstarter and Indiegogo.

So what’s in it for me?

In essence, crowdfunding is a true catalyst of entrepreneurship and is a great way to make exciting and impactful dreams come to life with even access. It levels the playing field for anyone looking to fund a project and brings everything down to actualizing the product or service. It eliminates many biases and opens doors for an average fund seeker and not just for a “lucky” trust fund-inheritor.

As mentioned earlier, it is not only easily accessible to everyone, but it encompasses the entire process of marketing a product or a service, making outreach easier, with the online platform mediating crowdfunding transactions and prepositioning funders.

To add to the benefits, crowdfunding enables the pre-selling of products upfront and exempts the owner from the need of buying and storing large stocks. This in turn reduces cash flow challenges and cuts down on the chances of over-ordering. To sum, crowdfunding reduces the financial risk in a business and helps capitalize on economies of scale.

One of the major benefits of crowdfunding is the fact that it allows the product owners to validate their product beforehand. This feedback buys a young business, time to improve the product before it is shipped and reduces the risk of failure significantly.

While reward-based crowdfunding focuses on benefits or perks or a pre-sale, other crowdfunding models have even created an amazing opportunity for investors to potentially make some money all the while supporting a cause they believe in. Crowdfunding has the potential to be a solid investment platform that is here to stay.

Author: Fatima Ansar

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