What types of crowdfunding are there?
It is difficult to give a uniform definition of crowdfunding as there are different variants of this form of financing. However, the following four have proven to be particularly common and effective:
The most common form of crowdfunding is reward-based crowdfunding. All donors receive a certain donation for their investment. This can be one of the products or a special bonus, for example. The various rewards are often staggered. Depending on the size of the investment , the reward is bigger or smaller. In this way, even the smallest investments are rewarded, but larger investments are still attractive.
According to Eshaoxing, equity-based crowdfunding or crowd investing is a special form of crowdfunding . It is basically similar to buying shares on the stock exchange. With their investment, the donors get a small share in the respective company. This means that they have a say and can influence the company and its business concept. This right to have a say depends, among other things, on how big the investment in the company is. However, since many startups and companies want to maintain their independence and want to keep the decision-making power in their own hands, this form of crowdfunding is rather rare.
Lending based crowdfunding or crowdlending is a type of lending. Here the donors give a special type of loan. These loans are provided with clearly defined and written conditions. These concern, for example, the term and the accruing interest. As soon as the project is completed and the first money is paid, the companies pay back the borrowed amount plus interest to the lenders.
Donation-based crowdfunding is based on donations. The procedure for this form of financing is the same as for reward-based crowdfunding. However, the donors are not offered any consideration for this. Instead, it is a pure donation for a project that they consider worthy of support.
How does crowdfunding work?
Before a project can be started, a minimum amount of capital must come together, which is raised by the financiers. Every crowdfunder is a member of the mass of financiers and only contributes a small financial share to the amount of capital. The crowdfunders do not give the financial means unselfishly, they receive something in return with a monetizable value. Such considerations can
- Funds such as profit sharing
- Benefits in kind
The consideration for the crowdfunding can also have an ideal value. The communication between the crowdfunders and the borrower takes place via an internet platform. The borrower usually creates an open invitation to tender via the Internet platform and thus addresses all Internet users who are capable of business. The funds that are raised through crowdfunding are earmarked, they can only be used for the respective campaign. There is still no legal basis for crowdfunding in Germany, while in the USA, where crowdfunding originated, there is a legal basis that was signed by President Barack Obama.
A crowdfunding campaign usually consists of six steps:
First of all, a funding amount must be determined. It is important to determine exactly how much money is required for which tasks. It is helpful to explain this funding requirement in detail in the project description. In this way, investors know exactly what they are making their money available for.
In a second step, the suitable crowdfunding platform must then be selected. In the name of reach, is it advisable to choose a general platform on which as many people as possible are represented? Or does it make more sense for an individual project to choose a platform that specializes in projects from a certain sector or industry? Every company has to answer these questions individually.
When these preliminary considerations have been completed, the task is to create the project and make it attractive. The various platforms usually help with a lot of information. It is important to describe the project in a detailed and appealing way. The more precisely investors know what they are getting into, the better.
The fourth step is then to consider consideration for the investment. That applies at least to projects and platforms that are reward-based. In addition, there should be a graduation of the various considerations. Small contributions should receive a smaller reward than high contributions.
Once the crowdfunding campaign is up and running, the most important task is to promote it. For this, various marketing strategies have to be developed and implemented. These should include both the online and the offline area. The more present the project is to the target group and the more people find out about it, the better.
The final step is to successfully complete the project. This means that the funding targets must be achieved. Otherwise, the donated money goes back to the donors due to the “all or nothing” principle, according to which most platforms work. That is why the objective assessment of the financing requirements mentioned in point 1 is so important. As soon as the money has been generated and is in your own account, the actual implementation of the project begins.