Debitoor's accounting dictionary

Crowdfunding - What is crowdfunding?

Crowdfunding is a method of raising funding for a business or project from many individuals who make modest contributions

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Through crowdfunding, a particular project or business can be funded by contributions from many (sometimes several thousand) individuals in amounts lower than those often provided by a venture capitalist or a business angel.

The total amount provides the capital for a business or project to get off the ground. The individuals who provide the contributions may often not be involved in the business in any way, and might be total strangers who simply wish to support a vision or production of a particular product or service.

The crowdfunding boom

Crowdfunding has experienced a massive surge in recent years. With the development of social media and other networking sites specifically designed to connect those with a great idea to likeminded people who are interested in supporting interesting projects and ideas.

This increase in activity has resulted in the founding of dozens of new sites dedicated to help people raise financial support through crowdfunding.

Can crowdfunding work for you? See if a certain type of crowdfunding is best for your next project.

Three types of crowdfunding

Raising funds through crowdfunding is not a free resource of capital, however. As in all types of funding, there is something expected in return, in exchange for the money provided.

What is provided in return determines the type of crowdfunding:

  • Equity based: when individuals contribute amounts in exchange for a small amount of equity in the business or project.
  • Donation based: when individuals contribute amounts in exchange for a product. This is the type most often seen on the crowdfunding platform Kickstarter.
  • Debt based: when individuals contribute amounts that will eventually be paid back once the product or business generate income.

The positives

There are some real positives to choosing a crowdfunding approach to raising money for a business or project. Not only is crowdfunding a fast and easy way to raise funds and minimise risk, other positives include that it is:

  • Applicable to a wide variety of project and businesses
  • Easy-to-use websites that immediately allow you to connect with potential funders
  • Access to endless feedback about your idea, business, or project.

The negatives

Crowdfunding is not without its downsides. Some of the main downsides to crowdfunding include its public nature - putting your ideas out there puts them at risk of being copied or stolen by others.

New changes and regulations have also been implemented in response to the increase in crowdfunding platforms that may limit the amount of funds that can be received as well as put complicated tax regulations on the funding.

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