Crowdfunding is a practice that has gained popularity. You probably have seen or even donated to a project using this kind of funding. The word itself can be translated to collective financing .
This is the online fundraising process through people who have shown interest in a particular project. How about we learn more about this type of financing and how it works? Keep reading and check it out!
What is crowdfunding?
Crowdfunding, as explained above, is a type of collective financing in which resources are raised online. People also use the term “online fundraiser,” but it is not any other than a way of raising funds for a specific objective. Though the type of fundraising may differ from the other one, it is not wrong to mention that there are some different types of crowdfunding.
This means that crowdfunding can be a method for financing a cultural, social, or even a personal project, or to finance a business project. Depending on the format of the project to be financed, crowdfunding may be in the form of investment or donation.
In donation-based, the person donating contributes in order to execute a project whereas an investor finances a project for getting some return. It is imperative to understand how different crowdfundings work in order to join this system.
How does crowdfunding work?
Generally speaking, the procedure for most crowdfundings is quite similar. In a web site, such projects with fund-raisings needs are exposed, and one simply sets a required sum to get a project off the ground. Whoever wants to receive funding will need to register at some crowdfunding platform he likes best and just convince potential investors enough.
The project has to be detailed on the website concerning what it entails, its planning, and its execution. You have also got to indicate how much you will raise and how long you expect it will take to raise that amount.
Those who view the websites then choose to like or support the projects or not; whether they like the proposal or want to acquire the rewards. Of importance is the fact that the rewards may be benefits, good, even monetary gains.
What happens after the investment?
Anyone who likes the proposal of a project available for crowdfunding makes a financial contribution and waits for the end of the campaign. There are three possible outcomes at the end of the campaign, see below.
“All or nothing” campaigns where the target hasn’t been reached
In such a campaign, the project is not actually carried out unless the total amount of the goal is raised. In other words, whoever put in their money gets their money back and that is the end of the story.
“All or nothing” campaigns with target achieved
When the goal of an “all or nothing” campaign is reached, it results in funding for the project. The project owner receives the money from investors and must move the idea forward.
“Flex” campaign
“Flex” campaigns receive the money regardless of whether they managed to reach their target or not.
Crowdfunding objectives
You can finance, for example, personal projects, an event, a real estate development, and much more. Below, we detail how you can separate the most common types of crowdfunding found here. This will help you decide if any of them fit within your expectations as an investor .
Donation Crowdfunding
This is the most popular type of crowdfunding, when an investor donates money to a project and receives a reward. Such a reward may include having one’s name included in the list of supporters, being offered some gift, or even in the most extreme cases, receiving the financed product itself.
This method can be used to carry out social or cultural projects or even help someone in need. There are crowdfunding campaigns that aim to raise money to help victims of natural disasters, for example. There are also campaigns to help raise funds for homeless people or simply to carry out a project.
Some content producers for YouTube channels or podcasts earn their income from crowdfunding. In this case, people who like the content contribute to the continuation of the program. Donations can be used to finance production and even to pay developers.
Investment Crowdfunding
This method is also known as equity crowdfunding or participatory investment. It is a way of investing online in a project of your interest in order to receive a financial return. Startups use this type of financing to raise funds that will make their ventures viable.
It is a legalized and regulated method that works on the same principle as the public offering of shares but on a relatively small scale. Companies which are just starting find crowdfunding attractive because going public on the stock exchange can be very expensive. Investors receive an equity stake in the business and a share in its profits as a reward.
Real Estate Crowdfunding
A compelling platform for those wanting to diversify their investments, real estate crowdfunding is particularly interesting. In this modality, the model adopted is P2P lending-person-to-person lending. It is closer to a loan than investment at the stock market.
In this modality, the participant invests, with very little money, often R$1,000 as the minimum entry requirement, and it does not entail the bureaucracy of purchasing a property. Of course, an important reminder is that the investor is purchasing no property, but a title that will grant him the right to the result of that asset.
Real estate crowdfunding is widely used for early-stage ventures, those in which banks are not yet investing. Its main advantage is precisely the minimum investment required. It allows a wider range of investors to have access, not just the usual large investors.
This investment does not guarantee a certain return , however, each venture provides an expected return range. The time in which the investor will be able to withdraw the funds and receive their income is also provided. It is important to look for reputable platforms and companies to adopt this type of crowdfunding.