Crowdfunding definition explained by ForexSQ experts, Learn what is Crowd funding and how dose it work, You will also know about Crowdfunding for start ups and how to invest with the best Crowdfunding websites.
What is crowd funding and how does it work
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Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people. Crowdfunding is a form of crowdsourcing and of alternative finance. In 2015, it was estimated that worldwide over US$34 billion was raised this way.
Although the concept can also be executed through mail-order subscriptions, benefit events, and other methods, it is now often performed via Internet-mediated registries. This modern crowdfunding model is generally based on three types of actors: the project initiator who proposes the idea and/or project to be funded, individuals or groups who support the idea, and a moderating organization (the “platform”) that brings the parties together to launch the idea.
Crowd funding has been used to fund a wide range for-profit entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, or community-oriented social entrepreneurship projects.
Best Crowdfunding websites
If you want to invest big amount above $100.000 dollars then you can invest with “Fxstay” team, their team finding the best start ups companies in the world and invest million dollars in them then share the profit with the investors, Using companies service like Fxstay.com team decrease risk of your investment and increase success rate of your funding.
If you want to invest lower than $100.000 you can use other Crowd funding websites like KickStarter or Indiegogo.
Crowdfunding advantages and disadvantages
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Benefits for the creator
Crowdfunding campaigns provide producers with a number of benefits, beyond the strict financial gains. The following are non financial benefits of crowdfunding.
- Profile – a compelling project can raise a producer’s profile and provide a boost to their reputation.
- Marketing – project initiators can show there is an audience and market for their project. In the case of an unsuccessful campaign, it provides good market feedback.
- Audience engagement – crowd funding creates a forum where project initiators can engage with their audiences. Audience can engage in the production process by following progress through updates from the creators and sharing feedback via comment features on the project’s crowdfunding page.
- Feedback – offering pre-release access to content or the opportunity to beta-test content to project backers as a part of the funding incentives provides the project initiators with instant access to good market testing feedback.
There are also financial benefits to the creator. For one, crowdfunding allows creators to attain low-cost capital. Traditionally, a creator would need to look to “personal savings, home equity loans, personal credit cards, friends and family members, angel investors, and venture capitalists.” With crowd funding, creators can find funders from around the world, sell both their product and equity, and benefit from increased information flow. Additionally, crowdfunding that supports pre-buying allows creators to obtain early feedback on the product. Proponents of the crowdfunding approach argue that it allows good ideas which do not fit the pattern required by conventional financiers to break through and attract cash through the wisdom of the crowd. If it does achieve “traction” in this way, not only can the enterprise secure seed funding to begin its project, but it may also secure evidence of backing from potential customers and benefit from word of mouth promotion in order to reach the fundraising goal. Another potential positive effect is the propensity of groups to “produce an accurate aggregate prediction” about market outcomes as identified by author James Surowiecki in his book The Wisdom of Crowds, thereby placing financial backing behind ventures likely to succeed.
Proponents also identify a potential outcome of crowdfunding as an exponential increase in available venture capital. One report claims that If every American family gave one percent of their investable assets to crowdfunding, $300 billion (a 10X increase) would come into venture capital. Proponents also cite that a benefit for companies receiving crowdfunding support is that they retain control of their operations, as voting rights are not conveyed along with ownership when crowdfunding. As part of his response to the Amanda Palmer Kickstarter controversy, Albini expressed his supportive views of crowd funding for musicians, explaining: “I’ve said many times that I think they’re part of the new way bands and their audience interact and they can be a fantastic resource, enabling bands to do things essentially in cooperation with their audience.” Albini described the concept of crowd funding as “pretty amazing.”
Crowdfunding Risks and barriers for the creator
Crowdfunding also comes with a number of potential risks or barriers. For the creator, as well as the investor, studies show that crowdfunding contains “high levels of risk, uncertainty, and information asymmetry.”
- Reputation – failure to meet campaign goals or to generate interest results in a public failure. Reaching financial goals and successfully gathering substantial public support but being unable to deliver on a project for some reason can severely negatively impact one’s reputation.
- IP protection – many Interactive Digital Media developers and content producers are reluctant to publicly announce the details of a project before production due to concerns about idea theft and protecting their IP from plagiarism. Creators who engage in crowdfunding are required to release their product to the public in early stages of funding and development, exposing themselves to the risk of copy by competitors.
- Donor exhaustion – there is a risk that if the same network of supporters is reached out to multiple times, that network will eventually cease to supply necessary support.
- Public fear of abuse – concern among supporters that without a regulatory framework, the likelihood of a scam or an abuse of funds is high. The concern may become a barrier to public engagement.
For crowdfunding of equity stock purchases, there is some research in social psychology that indicates that, like in all investments, people don’t always do their due diligence to determine if it’s a sound investment before investing, which leads to making investment decisions based on emotion rather than financial logic.
By using crowd funding, creators also forgo potential support and value that a single angel investor or venture capitalist might offer. Likewise, crowdfunding requires that creators manage their investors. This can be time-consuming and financially burdensome as the number of investors in the crowd rises. Crowdvfunding draws a crowd: investors and other interested observers who follow the progress, or lack of progress, of a project. Sometimes it proves easier to raise the money for a project than to make the project a success. Managing communications with a large number of possibly disappointed investors and supporters can be a substantial, and potentially diverting, task.
Some of the most popular fundraisings are for commercial companies which use the process to reach customers and at the same time market their products and services. This favors companies like microbreweries and specialist restaurants – in effect creating a “club” of people who are customers as well as investors. In the USA in 2015, new rules from the SEC to regulate equity crowdfunding will mean that larger businesses with more than 500 investors and more than $25 million in assets will have to file reports like a public company. The Wall Street Journal commented “It is all the pain of an IPO without the benefits of the IPO.” These two trends may mean crowdfunding is most suited to small consumer-facing companies rather than tech start-ups.
Crowdfunding Benefits for the investor
There are several ways in which a well-regulated crowdfunding platform can provide attractive returns for investors:
- Crowdfunding Reduces Costs – The platforms reduce search and transaction costs, which allows a higher participation in the market. Many individual investors would otherwise have a hard time to invest in early-stage companies because of the difficulty of identifying a company directly and the high costs of joining an Angel Group or doing it through a professional venture firm.
- Current Early Stage Investing Isn’t Efficient – Venture capital firms often neglect the consumer sector and focus mainly on high-tech companies. Crowdfunding opens up some of these neglected markets to individual investors. Crowdfunding doesn’t make sense in every industry, but for some, like retail and consumer, it does.
- Value of New Investors – Another reason why crowdfunding is attractive is that the investors add value to companies. They act as brand advocates and can even be used as a focus group. Crowd funding allows individual investors to be a valuable part of the company they invest in.
Risks for the investor
On crowdfunding platforms, the problem of information asymmetry is exacerbated due to the reduced ability of the investor to conduct due diligence. Early stage investing is typically localized, as the costs of conducting due diligence before making investment decisions and the costs of monitoring after investing both rise with distance. However, this trend is not observed on crowdfunding platforms – these platforms are not geographically constrained and bring in investors from near and far. On non-equity or reward-based platforms, investors try to mitigate this risk by using the amount of capital raised as a signal of performance or quality. On equity-based platforms, crowdfunding syndicates reduce information asymmetry through dual channels – through portfolio diversification and better due diligence as in the case of offline early-stage investing, but also by allowing lead investors with more information and better networks to lead crowds of backers to make investment decisions.