What is Crowdfunding?
Crowdfunding is a financing strategy that allows businesses and individuals to raise funds directly from a large number of people. Dedicated fintech platforms are available for running crowdfunding campaigns.
Crowdfunding is therefore an alternative funding channel compared with banks and other financial intermediaries.
It is the perfect tool for businesses that want to develop innovative solutions, because it does not depend on the assessment of a single intermediary, but on the ability to generate enthusiasm and respond to market needs among many small investors.
Crowdfunding is mainly used by startups and expanding businesses as an alternative way to access funding.
In this way, beneficiary businesses gain access to the liquidity needed to launch projects, entrepreneurial initiatives, and develop new ideas, achieving their business goals. Many of these projects involve the support of an Innovation Manager to carry out research and development activities or Business Process Reengineering.
Crowdfunding platforms allow fundraisers to interact with the public (the crowd), collecting funds through the platform operated by the crowdfunding company, which will usually charge a fee if the campaign is successful.
Other forms of funding that are well suited to achieving your business goals include bank loans and subsidised finance, both of which offer numerous advantageous opportunities for startups and SMEs.
The main types of crowdfunding are:
Lending-based crowdfunding
Lending-based crowdfunding involves people investing their money with the expectation that it will be repaid with interest. It therefore works through debt capital and is very similar to a bank loan, with the difference that the funds are borrowed from a large number of investors rather than a single source.
For each loan request, crowdfunding platforms have a duty to protect the interests of both businesses and investors by requiring due diligence, financial statements, and business results. The main advantage of this type of funding is the high flexibility of interest rates. In addition, loan amounts can vary significantly, encouraging broad participation from investors, even with relatively small sums.
Equity crowdfunding
This type of crowdfunding involves selling shares in a company to multiple investors in exchange for their investment.
Equity-based financing is a widespread practice among business angels, venture capitalists, and in private equity. The difference with equity crowdfunding is that the investment can be made by a wide range of investors, without the need to establish a direct relationship with the company seeking funding.
In this case, it is necessary to determine the number of shares to be sold, the price, how investors will be rewarded, and the commission payable to the crowdfunding platform.
Reward-based crowdfunding
Reward-based crowdfunding involves private investors making a contribution to a company or entrepreneurial project, expecting to receive non-financial benefits in return, such as products or services that the company will produce in the future.
A typical case is when the company offers an exclusive service or an innovative new product in exchange for an investment. This option is particularly advantageous for new businesses and startups because it allows them to begin with orders already recorded and with an assured cash flow, even before the product or service has been launched.
The advantages of Crowdfunding
The benefits of crowdfunding are numerous and are not limited to financial advantages alone.
It is clear that crowdfunding requires preparation and effort, and investors expect to recover their funds with a solid return on investment.
However, a successful crowdfunding campaign not only allows you to unlock the potential of your business, but also brings major benefits in terms of marketing and brand visibility.
- Further validation of the idea: a successful crowdfunding campaign is proof that people share confidence in your project, recognise its potential, and are willing to invest money in it. This confirms that the market believes in your idea.
- A starting point for obtaining other forms of funding: beyond proving the validity of your idea, a successful campaign also shows that there is a potential market for your business. Having already secured investment is highly valuable information for other financiers, such as banks, venture capital funds, and angel investors, who will perceive investing in your business as less risky and more likely to generate returns.
- Interaction with a large audience: during a crowdfunding campaign, you will engage with a wide audience, some of whom may have specific knowledge and experience in your sector. This effectively becomes a form of zero-cost feedback.
- A marketing tool: crowdfunding is an effective way to present a new product even before it is available on the market or actually produced. A new business or a company in expansion can benefit greatly from this advantage by interacting directly with people who may become future customers.