What Is Crowdfunding?

Funding a business requires a significant amount of capital and hard work. While putting in the effort is in the entrepreneur's control, getting the funds can become a bottleneck for a newcomer. Securing business loans and bootstrapping may not be enough to inject the venture with the necessary capital. Thus, many must bury their dreams and continue working for others with a heavy heart. However, with changing times, the methods of funding have also evolved.

Crowdfunding may sound like a complicated technical term. On the contrary, it is anything but complex. The meaning of the term is self-evident. The process of acquiring funds from the crowd is called crowdfunding. It is a relatively new way of injecting capital into an existing entity or launching a start-up with the help of people. Let us understand this in detail to leverage it perfectly.

What Is Crowdfunding?

Crowdfunding, also known as crowd-sourced funding, involves asking many people to finance a business with small amounts of capital. These people who put their money into the business are entrepreneurs and investors willing to fund various ventures.

It is a form of public fundraising to start or expand a business, completed online using social media sites and crowdfunding websites. It can be used to start a business or grow an existing business. However, you must be able to pitch the project or idea so that the investors are keen to fund it. Thus, the entrepreneur creates a campaign on the crowdfunding website and selects a fundraising target. They usually offer rewards to the investors for the money, such as shares or incentives. For example, if you have purchased a business for sale in New Zealand and need more funds to expand it, you can use crowdfunding to get the capital.

A vital thing to consider here is that you will put confidential business information in the public domain to attract them. Thus, you must ensure that you utilise credible crowdfunding sites that protect your Intellectual Property. Also, you must register your trademarks, designs and patents to avoid their unlawful use. Some well-known crowdfunding sites in New Zealand are Indiegogo, GoFundMe, PledgeMe, Kickstarter, GiveALittle and SnowballEffect.

Different Types of Crowdfunding

There are four types of crowdfunding – donation, rewards, P2P lending and equity funding. Let us understand how they are different from each other.

1. Donation-based Crowdfunding

The first type (donation) is the least relevant for business financing because it does not offer anything in exchange to the investors. It is like donating money to a charity because their vision resonates with you. However, very few entrepreneurs are interested in donations. Thus, this type of crowdfunding does not work in the commercial world.

2. Rewards-based Crowdfunding

It offers the investors some incentive for their contribution. If the investor puts in a higher amount, he gets a better incentive. Some borrowers offer brand merchandise or the product at a discounted price or free to the moneylender. For example, if they launch a tech-based tool, it will be offered at a discounted rate to the donor with a lower amount and for free to the donor with a higher amount.

The reward-based system helps determine whether the customers will accept the product or not. If it can find a large number of donors who want the product in exchange for their contribution, it is evident that the product will be well-accepted.

3. P2P or Peer-to-Peer Lending

It is also known as debt crowdfunding. It is similar to taking out a business loan. Thus, the donors offer money that must be repaid with interest within a definite period. It is preferred by budding entrepreneurs because many banks are not willing to back their idea.

4. Equity Crowdfunding

A business can secure up to $2 million in a year using equity crowdfunding through any licenced website in New Zealand. It involves offering unlisted shares in the company to the donors. These shares are not listed on the stock exchange. The cap of $2 million does not restrict the amount that an individual investor can contribute.

Businesses utilise this method when they need a considerable amount of money. However, the website that offers equity crowdfunding must be licenced. These platforms are regulated by Financial Markets Authority in New Zealand. The most prominent websites for equity crowdfunding are PledgeMe.Equity and SnowballEffect.

How to Raise Capital Through Crowdfunding?

Whether you are starting-up or looking for investors for a new business project, you can take advantage of crowdfunding by following the steps given below.

1. Identify the Right Platform

You must pick the type of crowdfunding you want to do to raise capital. The next step is to shortlist the platforms running these crowdfunding campaigns. You must research the type of investors on these sites and their interests to choose correctly. You will be able to find backers quickly if you have done your homework and make business decisions easily.

2. Create A Campaign

To create a campaign on the site, you need to provide all your details and information about the project or business. It is essential for the site to gather this information to confirm your legitimacy as a fund seeker. They will help you with all the details, such as the risks associated with the process and the benefits. You must determine the funding goal and create a promotional campaign to entice investors. For example, if you are looking for equity crowdfunding for a recently purchased business for sale in New Zealand, you will have to share the financial information of the business.

3. Communicate With Investors

Once the targeted funds are raised, the site will help transfer the funds and the reward or equity that needs to be given to the investors. However, you must maintain constant communication with the contributors after the campaign ends to let them know how the project is progressing.

Benefits of Crowdfunding

Crowdfunding is highly advantageous for new entrepreneurs who cannot secure business loans from banks. It does not require proving your financial stability and creditworthiness. Another essential benefit of this method is that you can test your idea on these platforms and gain a sizeable customer base. Many business owners prefer these over loans because it keeps them debt-free. In addition, it is considered better than getting investment from venture capitalists because there is no interference from the investors, and the ownership is not diluted.

Conclusion

Crowdfunding is a straightforward process that helps entrepreneurs to get funds for their businesses. If you have been pondering this type of fundraising, you must begin your search by studying crowdfunding platforms.