Crowdfunding is a method of raising capital where a large number of individuals each contribute a relatively small amount of money to support a specific project or idea and is an alternative to traditional methods of financing.
Crowdfunding can be used to fund a wide array of projects and operates through specialised online platforms that connect project creators with potential backers.
There are several crowdfunding models, including:
- Reward-based: Individuals receive non-equity rewards.
- Equity-based: Individuals receive a share of ownership or equity in the project or business.
- Donation-based: Individuals contribute without expecting any financial return.
- Debt-based (peer-to-peer lending): Individuals provide loans to the project creator, expecting to be repaid with interest.
Project creators set a specific funding goal and determine a campaign duration. If the funding goal is not met within the set duration, the project may not receive any funds. Crowdfunding campaigns can operate on an “all-or-nothing” or “keep-what-you-raise” basis. In an all-or-nothing model, the project must meet or exceed its funding goal to receive any funds. In a keep-what-you-raise model, the project creator retains all funds raised, regardless of whether the goal is met.
While crowdfunding offers opportunities for individuals to support innovative projects, there are risks involved. Projects may face delays, encounter unexpected challenges, or even fail to deliver on promised rewards.