What is crowdfunding? The nuts and bolts of crowdfunding

1 minute read

Crowdfunding is a multibillion-dollar worldwide industry that continues to disrupt the traditional world of corporate finance, as well as change the way products go to market. Businesses new and old, small and large, are now incorporating both rewards crowdfunding and equity crowdfunding. The capital raising playbooks have changed. The interest in how to use crowdfunding and equity crowdfunding effectively is reaching new heights every day.

At its simplest, crowdfunding can be described as a way of financing projects and businesses through small contributions from a large number of sources rather than through large amounts from one or a few.

Crowdfunding is often spoken of as a particular form of the more general practice of crowdsourcing, the use of a crowd to obtain ideas, feedback and solutions in order to develop projects and activities. In the case of crowdfunding, the objective is to obtain funding. This is generally done by using crowdfunding websites or ‘platforms’ that facilitate funding. Instead of raising the money from a very small group of traditional investors, the idea of crowdfunding is to obtain it from a large audience (‘the crowd’), where each individual will provide a very small amount. This can take the form of a donation, equity purchase, loan, or pre-ordering of a product or service being produced.

The majority of platforms operate an ‘all–or–nothing’ funding model where a target amount is set out at the beginning of the fundraising campaign and if this is not met or exceeded in a given time period, funding does not proceed and backers get their money back.