Starting up a business requires capital. There are many sources from which any potential business owner can get this capital, these include crowd funding.
Crowd funding is a process where funds are collected by approaching various individuals or organizations for various purposes. Most charity campaigns are funded through crowd funding. Today, it is not only to get donations but also to fund various business activities and also educational campaigns. It is also a common way through which most travel writers fund their trips.
Crowd Funding Websites
Imagine a website where you can login and browse through a pool of courses and business ideas that lets you choose one that appeals to you best, giving a contribution towards that course. You can from time to time login in and make more contributions or check the impact of what your contribution has done. You become a member of a community that funds business ideas or charity causes.
The crowd funding websites offer the means for any individual to start up a business idea and for investors to invest without the hassle of a middle man.
The Pros and Cons of Crowd Funding
There are three main realities in crowd funding. These are;
- Entrepreneurs need to raise funds from their family, friends and angel investors
- More Investors get to partake in the financing of a business
- Many business ideas that would have been forgotten can finally be funded.
Each of these realities has its own high and low points
Pros of Crowd Funding
- Entrepreneur gets to spend their time in the running and planning of the business. Less time is spent in getting the required cash that keeps the business afloat.
- Makes it possible for entrepreneurs with humble beginnings to have their business ideas funded.
- Anybody can choose to invest in a business. It is no longer the rich getting richer but the smart getting rich.
- Ideas that seem complex and difficult still get to be funded. There is no limit or boundaries to the business ideas that can be invested upon.
Cons of Crowd Funding
- The entrepreneur loses the opportunity of facing the prospective investor on a one-on-one basis. He or she does not get to have a chance to convince the investors to believe in his ideas.
- Entrepreneurs have less feedback from the investors; hence they are unable to modify their business ideas and models to that which might attract more investors.
- The investors do not get to have a clear idea of the risks that are associated with the business. They are liable to making bad investments. All the necessary facts that will help the investor make a good decision or understand the concept of the business idea in details are not made available.
- Investors are susceptible to fraud.
- With all sort of ideas getting funding, both the possible and the impossible. There are more chances of investors being discouraged with the percentage of success on the low side.
The Mechanics of Crowd funding
There are four basic ways that Crowd funding works
1. Donation: You get to donate any amount of your choice to a course you want to support, or a business idea that you fancy.
Pro: The donor feels good
Con: The amount donated goes off without anything in return. If the donation is to a profit company you still get to pay tax on the donated amount.
2. Pre-Sales: Here you get to pay $100 and get $100 worth of service goods in return. These goods and service will be rendered at a later date.
Pro: You get to support a business and still get some rewards in return.
Con: You have to wait for months before gratification of the cash spent is realized. There also is the risk that the service or goods might not be exactly as promised.
3. Loans: Here you give a loan to an individual or for a cause or business. You get to be repaid when the agreed time for repayment arrives.
Pro: There is little risk involved. You get to invest into a local business and have a predictable interest on your money. Better than having you cash in your bank account with no interest.
Con: Your funds is tied up without any guarantee of interest
4. Revenue Sharing: In this scenario, you invest a little amount and get equity shares or percentage of the profit made for the amount invested.
Pro: Has a potential of giving you more money than loan.
Con: The probability of success in the invested company is uncertain.
Crowd funding is one of the best ways that budding entrepreneurs can get the much needed funds to get the business off the ground. The investors all get a chance to contribute to a worth course that might change lives.