Introduction.
In developing countries like Nigeria, where there are many vibrant and creative young people, who have great ideas but lack funding from both banks and the government. To bring their ideas to live, they can come together in a community to support each other or that project they believe in.
Crowdfunding is a viable pathway to raise funds for a project. Today, it is a transformative force through which people can access funds to sponsor their projects and ideas.
Crowdfunding defined.
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists. Source
History of crowdfunding.
Crowdfunding have a very long history that dates back to the 1700s. These activities from the past helped shape the modern day crowdfunding.
The first successful crowdfunding was in 1997. That was when a British rock band funded their reunion tour through a donation by fans online.
Thereafter, Artistshare was the first crowdfunding platform, after which many more crowdfunding platforms sprang up which resulted in a continuous growth of the crowdfunding industry.
In 2019, recorded revenues of crowdfunding was at $530 million. This tripled to become $1.5 Billion in 2011.
In 2012, the US President; President Barrack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law, which is otherwise known as the crowdfunding bill.
How crowdfunding works.
Crowdfunding platforms are websites that facilitates interaction between fundraisers and the crowd. Under the platform, people can make pledges and the money pledged are collected through the platform.
When contracted the crowdfunding platform are expected to provide a secured and easy to use platform, while in return, at the end of a successful fundraising campaign, the platform charges the fundraisers a fee for the services rendered.
However, many crowdfunding platforms operates an "all-or-nothing fundraising model." This means that if you meet your target at the end of the fundraising, you will receive the value, but, if you didn't meet your target, everyone that contributed gets a refund, no hard feelings.
Different types of crowdfunding.
There are many types of crowdfunding that I will write about, however, the first three I will write about are the most popular. (They are; peer-to-peer, Equity and reward based crowdfunding).
a. Peer-to-peer crowdfunding:
Here, the crowd lends money to a company, with the agreement that the money would be repaid at a point with interest. This is similar to borrowing from the bank, the only difference is that you are borrowing from many investors in this case.
b. Equity crowdfunding:
Equity crowdfunding is the sale of ones stake in business to other investors in exchange for investment funds. This is very similar to what happens at the venture capital or stock exchange.
c. Reward based crowdfunding:
Here, individuals donate money for the success of a project, with hope to receive a no. Financial reward of either goods or services at a later date in exchange for the funds they had donated.
d. Donation based crowdfunding:
This is where individuals donate small amounts as charity to a project, without any hope of receiving any financial or material gain in return.
e. Profit sharing or revenue sharing:
This is a type of crowdfunding where profit or revenue is shared amongst people that donated money to the success of the business or project, the sharing is according to their stake.. revenue is shared at the end of a period or financial year.
f. Debt security crowdfunding:
This is where individuals invest on a debt security of a company such as Bond.
g. Hybrid models:
This type offers businesses the opportunity to combine more than one crowdfunding type.
Source
Advantages and disadvantages of crowdfunding.
Advantages.
Crowdfunding enables entrepreneurs have access to fund for their businesses or projects without having to rely on traditional sources of funds like banks.
It helps in market validation. This is possible because crowdfunding acts as demand gauge for demand and internet in product or ideas, which in turn provides market validation.
Crowdfunding avails people diverse funding sources.
It enables more creative freedom, because they are no longer restricted to the preferences of the traditional investors.
Crowdfunding helps businesses and projects to reach global audience. This is because their source of support spans beyond the locality.
It also helps in risk Mitigation.
Here, the financial risk of a project is distributed amongst all the contributors, that at the event of any risk, no one person will suffer the whole financial loss.It helps spread the publicity of a project. By so doing helps attract potential investors.
Encourages early customer engagement. This states early enough from the development of the project. This helps build a community and foster community engagement and loyalty.
Disadvantages.
In crowdfunding, there are no guarantees. This means that the project may succeed or fail. And if it fails, investors may not received their return on investment.
There is high competition.
Because if the popularity of crowdfunding, projects have high competition for attention and funding.Because crowdfunding platforms charges service fee, it reduces the amount of money available for the project.
Running a crowdfunding campaign is normally time consuming. This is because it requires lots of time for marketing and communication.
Crowdfunding project are subject to public scrutiny. Any form of shortcomings in form of delay or mis-steps may lead to negative feedback.
Some investors may have very high expectations of the project, because of this, they may not be satisfied at the end of the project.
Conclusion.
In conclusion, in this post, we have tried to discuss the concept of crowdfunding. Including it's history, meaning advantages and disadvantages. And from the foregoing, we established that it has minimal disadvantages and posses less risks because at the event of any risk, the loses is shared amongst component members which will make the effect of the loss bearable.
Having discussed this, in my subsequent post, I will write on "why crowdfunding is better done in cryptocurrency".
Thank you for visiting and reading through my blog. Am grateful.