What is crowdfunding?


What is crowdfunding?

What is crowdfunding? Why people love this kind of financing projects?

Nowadays all the time there appear new words, that at the beginning may be completely unclear for many. First we had start-ups, that at the start seemed to be very something innovative or even exotic and today it has become a part of our everyday language. Now in turn more and more often we hear the expression “crowdfunding”. What does it actually mean? Where did the huge popularity of this form of financing different project come from?

Probably most of us at least sometimes dream about having our own company and putting into practice our ideas for new products or services. In the majority of such cases it ends up as a dream, without any serious plans to make it real. It does not mean, that it has to always be that way – we have to admit, that some people can proudly boast about really amazing ideas, that could do fantastically on the market. What very often stops them is the cost of such an enterprise. But is it worth to give up on your dreams and ambition only because of financial reasons?

Obviously, it is not. That is why there are many different ways of external financing newly-established businesses. One can get a loan, use Union grants or turn to so called Business Angels for help. For some time crowdfunding became also quite popular. What is interesting, it is not a new invention, the first examples of using it have appeared in the 90s. The pioneers in this matter were representatives of… music industry.

What actually is crowdfunding? We have to admit, that modern language of business changes and develops very dynamically, what makes it difficult to keep up with new terms. Mentioned “crowdfunding” is simply a combination of words “crowd” and funding”. It is easy to figure out, that this idea is to organize a fund raiser for a particular venture.  A sum that may seem extremely high for a one person becomes achievable, when we break it up into many much smaller contributions.

In the 90s  a rock band Marillion got a financial support from their fans, what enabled them to organize a tour around United States. In 2000 an ArtistShare.net site was created. It enabled artists to have fund-raisers for implementation of their projects. Today’s popularity of crowdfunding has a direct connection with common access to the Internet. It is the way how originators of different enterprises ask their audience for the help in financing it. Undeniably the Internet is the fastest and most convenient form of getting through to investors. In return artists, scientists and future businessmen often offer their supporters some advantages and perks whenever the effect of the cooperation appears on the market.

 

It can be a discount, free product, autograph etc. In this way it is possible to finance and put into practice no only artistic projects, but also scientific studies, experiments, electronic novelties, innovative products and services. Simply and broadly speaking: everything what Internet users would consider interesting and worth investing in.

How does crowdfunding differ from public fund-raisers? In the case of donations and charity we simply give the money for a particular organization or group of people, while the crowdfunding has a very specific purpose. In other words: we raise money for a pre-determined project. We don’t support artist, scientist or businessman for our own satisfaction. We do it, because we want to help them to reach the goal, that we also care about: realizing an album or a book, producing a new item etc. Generally we can count on getting something in return, and if the initiative would for any reason not eventuate, we will get our money back. Crowdfunding is treated as an investment, not a disinterested contribution for a given cause. Especially, that the originator is also not selfless and usually they plan on ear money from their initiative.

 

Described above type of crowdfunding is so called non-equity model. There also exists a different kind of it, which id equity type, which assumes that people who invest in a given project get its shares. This scheme fits into the idea of investment even more, when as a result investors can expect a specific financial recompensation.

How can we be sure, that people who we support will approach the situation honestly? In order to provide security it is the best to use specialized websites dedicated to fund-raisers. Their owners verify each project before making it public and originators are obliged to follow the site’s rules. It is also worth to keep the common sense and check if the person that we plan on support has given their contact data, if they have expertise necessary to realize their idea, if they update their website on a regular basis and keep the audience posted with the progress of the fund-raiser.