What is Crowdfunding?

Crowdfunding is the method of raising capital from a large number of individuals to support a new business venture or project.

7 minute read
What is crowdfunding blog post cover photo by Crowdbase

What is Crowdfunding?

Traditionally, if you wanted to raise capital for a new business, project, or venture, you would have limited options. You could secure a loan from a bank. You could persuade friends and family, Venture Capital (VC) funds or angel investors to invest in your business. Or, if you have saved enough money over the years, you could bootstrap the business yourself. During the last decade, a new option emerged for entrepreneurs looking to raise money: crowdfunding.

Simply put, crowdfunding is the method of raising capital from a large number of individuals. Each individual is investing a relatively small amount of money, which is pooled together to provide the funds needed for the project. In return, investors receive financial and/or non-financial benefits, depending on the type of crowdfunding campaign.

Types of Crowdfunding

There are five major types of crowdfunding, each one with various features, appeal, and rewards for backers. Crowdbase is currently offering EquityDebt, and Real Estate crowdfunding.

  • Equity crowdfunding: Allows backers to acquire an ownership stake in a private business, proportional to the total amount invested. As equity holders of the business, investors enjoy financial benefits in dividends or returns (e.g. company sale). This type is popular among startups that struggle to secure financing through traditional sources due to their high risk-return profile.
  • Debt crowdfunding: In this type, companies borrow money from investors and repay them over time with interest. Debt crowdfunding is popular among small and medium-sized enterprises (SMEs), with relatively steady cash flows.
  • Real estate crowdfunding: Offers individuals the opportunity to invest in real estate properties with far less money than previously required (as low as €100). Depending on the amount of money invested, profits from the property are distributed proportionally to investors.
  • Rewards-based crowdfunding: Backers receive different non-financial benefits in exchange for their money. This could range from a small thank you note to a final product delivered to your doorstep. One of the most established platforms for this type is Kickstarter.
  • Donation-based crowdfunding: This is when individuals donate money for specific causes and charities. With a donation, individuals have the opportunity of effecting positive change in their communities, indirectly receiving non-financial benefits.

Equity-based crowdfunding is growing in popularity because it allows startup companies to raise money without giving up control to venture capital investors.

Investopedia

What’s in it for the investor?

Beyond the obvious potential for returns, crowdfunding offers a range of side benefits to investors, such as:

  • Accessibility: Allows individuals to invest in otherwise inaccessible investment opportunities with small amounts of money. In the past, these investments were reserved for high-net-worth individuals and institutional investors willing to tolerate high risk. However, through a crowdfunding platform like Crowdbase, anyone can own a piece of real estate or the next startup unicorn.
  • Quality and security: By using a reputable platform like Crowdbase, investors can benefit from the extensive due diligence process that each business undergoes before being accepted onto the platform. As a result, this guarantees transparency of information and high standards of all investment opportunities found on the platform. In addition, this saves investors the time and effort required to crunch the numbers themselves to determine whether this would be a viable investment.
  • Social impact: Other than the financial benefits of investing through the platform, investors can positively influence their community’s development. Backers are endorsing and enabling innovative ideas to flourish in their community with their investment, indirectly benefiting them. With crowdfunding, the power lies with investors to take action and deploy capital in socially impactful projects without waiting for local authorities or the government to act.

You can find additional details on investing on our dedicated investing page.

What’s in it for the entrepreneur?

Although raising capital is the main goal of a crowdfunding campaign, it offers additional perks like:

  • Concept validation: A successful campaign is a perfect proof of concept and validation of a potential market for your product. Using the momentum of a successful campaign, the entrepreneur can raise additional funds from institutional investors.
  • Marketing and customer base engagement: Regardless of the campaign’s outcome, your business will gain significant exposure to Crowdbase’s customer base. Intense marketing efforts and constant attention to the customer base are required to increase the probability of a successful campaign. Crowdbase will be with you every step of the way.
  • Crowdsourcing of ideas: By presenting your business ideas in front of thousands of potential investors, customers, and community members, you can source suggestions and feedback from all kinds of different perspectives. Then, it is up to you to evaluate the information and update your plan accordingly.
  • Efficiency: Crowdbase helps you centralise all information required for the campaign that potential investors would need. Having all investors gathered to a single contact point eliminates the need for the entrepreneur to contact individuals, send/receive documents, explain how the business works, or negotiate the price. At Crowdbase, we take care of all of that for you, allowing you to focus on running your business.

You can find additional details on fundraising on our dedicated fundraising page.

OK, so how does it actually work?

  • A business wants to raise capital for a new project or venture. It applies for a crowdfunding campaign through the Crowdbase platform.
  • Crowdbase performs extensive due diligence checks to ensure the authenticity of information and the project’s viability.
  • Crowdbase works with the business’s management to finalise the specifics of the campaign (valuation, interest rate, repayment schedule etc.).
  • We produce the Key Investor Information Document (KIID), used by investors to find all relevant campaign information.
  • A crowdfunding campaign is created on our platform. Here, investors can assess whether this would be a worthwhile investment opportunity for them.
  • Investors start investing in the campaign through the platform. Investors’ money is kept by Crowdbase until the target funding amount is met.
  • Once the funding target is met, Crowdbase transfers the money to the business. Investors receive their securities based on the amount they invested and the type of campaign.

Risks of Crowdfunding

Crowdfunding does not differ a lot from any other investment platform in that any capital invested is at risk. Common crowdfunding risks include:

  • Investment risk: It’s essential to assess the level of risk associated with the investment opportunity before investing. The KIIS should give you a clear indication of the potential investment risks of the campaign. You should then decide whether this investment fits in your investment portfolio.
  • Unsuccessful campaign: This is the risk of investing in a campaign that eventually does not meet its target amount. The industry standard, and Crowdbase’s policy, is to return all funds to investors without penalties or fees. 
  • Regulation: As crowdfunding is still developing, especially in Europe, each platform’s degree of sophistication can vary greatly. Regulation is, therefore, an important aspect that also changes as the industry develops. Crowdbase is an investment services company regulated by the Cyprus Securities and Exchange Commission (CySEC), which dictates measures to protect investors and their money.

Key Takeaways

  • Crowdfunding is an innovative way for individuals to invest in new and exciting ventures that were previously inaccessible to them.
  • Companies can raise capital through crowdfunding more efficiently than other traditional methods such as banks or VC funds.
  • Allows investors to effect positive change by investing in socially impactful projects within their communities.
  • Ambitious, innovative ideas and green energy projects, traditionally underfunded, can now flourish through crowdfunding.

More from Crowdbase

Discover more from our blog guides and more

Sign up for our newsletter

Subscribe to our newsletter to receive the latest blog posts, guides and Crowdbase updates!