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Crowdfunding
Crowdfunding refers to as a process by which a project or a venture is funded by raising many little amounts of capital by a large group of people through the internet. It is a combination of crowdsourcing, a practice of engaging a group of people for a common goal especially innovation, and micro-financing. The entire act is made possible by three groups of people namely the project initiator, a person who gives out an idea about the project and how the money will be contributed, individuals or groups who second the initiator's idea and lastly a moderating organization that gathers the two parties to launch the concept. Undoubtedly, the crowding process has grown significantly in recent years helping individuals who have business ideas but lack capital to be funded. However, global business analysts still consider the process to be in its early stage of development because many people globally have not embraced the method of project funding. For instance, in 2015, approximately $ 34 billion was raised globally from crowdfunding. This amount is meager as compared to America’s total income which nearly16.01 trillion meaning that many people are still ignorant about the crowdfunding. This essay intends to discuss the various categories of the crowdfunding practice and the advantages each has.
Reward-based overcrowding is a type of crowdfunding where the individuals taking part in an initiated project contribute a certain agreed amount of money for a reward. Most of the time, the token is usually the commodity being produced. There are two leading platforms of overcrowding that are reward-based namely the Kickstarter and Indiegogo.
It is believed that the reward based technique is more rewarding than the other categories for it focuses more on the act of only donating to come up with the money required to run the project. This implies that one does not have to seek funds from other sources for there is no fixed amount of money a backer is required to contribute sparing him from the risks that might be associated with taking bank loans.
The method of crowdfunding is also user-friendly for it charges one a small amount of money. They are also easy to operate and manage and therefore, no person can be discouraged to use it due to it being complex. The ability to quickly use the reward-based method of crowdfunding makes it possible for investors and people coming up with business ideas to consume little amount of time and money that will be required to access the internet.
The reward-based method allows an individual or a group of people participating in a particular venture to have a personal connection with people who are interested in knowing it entails. This enables the project to be funded through charity from the interested parties, joining of new members who add up on the already collected contributions in other ways. Moreover, the group project will be known for the curious individuals who accessed information about the organization through their platform have a likelihood of spreading the news via word of mouth.
The fact that the reward based activity of crowdfunding does not set boundaries for one on what to contribute makes it compelling. No participant has a likelihood of leaving the project because he or she cannot raise funds required for one gives out what he can raise. Moreover, no individual in the group carrying out the activity feels belittled or intimidated because he cannot raise the required fee leading to all members feeling important towards the general contribution of the goal they had in mind.
Peer to peer lending category of crowdfunding entails the process whereby a peer to peer lending sites links borrowers with possible investors via the internet. The peer to peer lending sites ensures they have all the relevant details about a borrower to avoid circumstance of cons taking advantage. The lending services also act as an intermediary of the interest rates to be paid by a borrower.
This method of raising capital to run an errand has benefits; for instance, an investor can get vast returns of interest as compared to if he took his money in the bank. Also, he can gain personal-satisfaction in knowing who borrowed his money and for what purpose he intended to use it for, an act that he would not have been able to get if he had given the money to the bank.
Certainly, if an investor has a direct connection with the borrower, the interest cannot be fixed. The borrower and lender negotiate on the interest rates, and they are able to come up with the one which will favor the two parties. Some of the key factors that influence the setting of the interest rates are the period taken for the borrower to pay it back, the security the borrower gave to the investor, the amount of money given out, government policies, the rate of inflation among others.
On the other hand, the borrower who gets loans via the peer to peer lending sites spares more time as compared to a borrower who seeks financial support from banks because the banks have lengthy processes required for one to be given loans. Moreover, a borrower can request sympathy from the borrower by telling him of his financial constraints leading to him being charged a little amount of interest.
The method of overcrowding favors those individuals who are excluded from taking loans, for instance, those with no credit profile, those with a below average credit rating among other reasons. Therefore, unlike banks, it gives people of all kinds of financial status equal opportunities to access the same amount of loans.
The act of someone financially stable or just not in dire need of money giving another who needs to run his errands results to the steady rise of the country's economy. This will have a positive impact on all the aspects of the social amenities due to increasing in tax which is used for development purposes.
In peer to peer lending, lenders are able to spread out their risks through the various transaction they carry out by the end of the required period. This implies that the risk he incurs after a period he does meditation and calculations about his venture is indirectly proportional to the number of transactions; therefore, he is at liberty to carry out as many money lending activities as possible.
Another critical category of crowdfunding is the donation based. In this category, the backer receives a token for what he has contributed towards the project being carried out. The main difference between this method of crowdfunding and reward-based is that in donation based, one may not get the token. Also, the donation-based is most of the time carried out to raise funds for charitable activities. Therefore, the backers do not receive any legal ownership for any share of the project for the funds are perceived as donations. Examples of donation-based crowdfunding platforms are the Rockethub, Crowdfunder among others.
An instance where a donation-based crowdfunding technique can help one to get a Nobel price is where one comes up with the idea of raising money for a charitable cause. Examples are educating the girl child on ways to avoid getting pregnant before finishing school, conserving the energy, helping the orphans or the elderly in the society among others. The person can be shortlisted for the Nobel award because of his actions that purposes to make the world a better place.
Donation based has an advantage of enabling one to raise money for his project that is non-profitable through internet sites for example Milaap. This makes it more cost-effective as compared to the traditional way of raising money for a charitable cause that required one to use television or radio stations to advertise. Moreover, the new method of raising fund for charity projects saves one the process of booking space for his advertisement on air.
The rise of the social media trend in the Information technology world makes it easy and effective for one’s charitable project to find funders. Many people nowadays spend most of their times on social media platform. Therefore, the idea of raising money to help a certain population in the society will reach the targeted group who will spread his idea via word of mouth or finance his cause (Nevin, Gleasure, O'Reilly, Feller, & Cristoforo ). Equity crowdfunding entails the process where a pool of investors invests their money in an early stage unlisted company, a company that has not yet been listed in the stock-market. These investors are given profits in the form of dividends if the company makes a profit and they also suffer a loss in case the company experiences a loss. The major importance of the crowding technique is its ability to utilize funds regardless of how small is. The main team players of the equity method of creating a pool of funds include companies such as Ourcrowd, FundersClub, CircleUp, AngelIList among others.
The equity crowdfunding is usually influenced by the investors' ability to see a return in trade sale experienced when a company is sold to another in a hefty sum that is divided amongst them in the form of dividends. Also, it is affected by public offering, the process by which the company is finally placed in the stock market and investors can sell their shares and lastly the percentage the investors yearly get as profits (Butticè,, Colombo, & Wright2017) The Equity crowdfunding has gained popularity as compared to the other categories for it is pocket-friendly. The technique of creating a pool of fund required to run projects has platforms which do not charge any fee for one to raise awareness about his business plans and a little amount of money while raising money. (Kuppuswamy & Bayus 2017). Comment by Grammarly: Deleted: an
Also, it enables the owner of the business idea to get a better one for the various investors will come up with their ideas. This will be manifested in the company’s quality of output and the dividends each investor gets (Packard & Jiang 2017).
In equity crowdfunding, one can establish networks with investors who will open doors for new ventures in future. As one’s projects become successful, his investors have a likelihood of investing in his future business projects and referring people to invest there. Comment by Grammarly: Deleted:is Comment by Grammarly: Deleted:ble to Comment by Grammarly: Deleted:s
One can gain trust from investors if his equity crowdfunding venture moves forward.In cases where one is new in the crowdfunding technique of raising money for his project and is not able to get the exact number of investors he wanted, he can start with the few number he has, and as success becomes a norm, many investors will start to stream in into his business. Comment by Grammarly: Deleted:is Comment by Grammarly: Deleted:ble to
It is simple as compared to the traditional ways of investing one's money. One is only supposed to find the right platform to venture his capital and use it regularly to pass the message about his venture to attract the potential investors. Comment by Grammarly: Deleted:money Comment by Grammarly: Deleted:const Comment by Grammarly: Deleted:nt
It is prudent for investors to first get a full overview of crowdfunding before running a campaign to raise funds. Moreover, it is intuitive for them to know that the campaigning might not be successful and the company might not get the required number of investors or the capital needed to run its errands.In this instance, the investor has to alter with factors that influence the fundcrowding process such as the channels he uses to advertise his ventures. If the investor succeeds in the campaign, he still has a massive task of proving to the backers that their decision of trusting him with their funds was the best they would have made (Lu, L., & Fulk, 2017). Comment by Grammarly: Deleted:ab Comment by Grammarly: Deleted:ut Comment by Grammarly: Deleted:hug Comment by Grammarly: Deleted: decision
References
Butticè, V., Colombo, M. G., & Wright, M. (2017). Serial crowdfunding, social capital, and project success. Entrepreneurship Theory and Practice, 41(2), 183-207.
Kuppuswamy, V., & Bayus, B. L. (2018). Crowdfunding creative ideas: The dynamics of project backers. In The Economics of Crowdfunding (pp. 151-182). Palgrave Macmillan, Cham.
Lu, L., & Fulk, J. (2017, January). Exploring Crowdfunding Projects’ Success through Social Embeddedness and Knowledge Exchange Process. In Academy of Management Proceedings (Vol. 2017, No. 1, p. 15917). Academy of Management.
Nevin, S., Gleasure, R., O'Reilly, P., Feller, J., Li, S., & Cristoforo, J. (2017, August). Social Identity and Social Media Activities in Equity Crowdfunding. In Proceedings of the 13th International Symposium on Open Collaboration (p. 11). ACM.
Packard, M. D., & Jiang, L. (2017, January). Knowledge Signals and Investors’ Funding Decisions: Evidence from Crowdfunding Ventures. In Academy of Management Proceedings (Vol. 2017, No. 1, p. 11911). Academy of Management.