Crowdfunding is the use of small amounts of capital from a large number of indzfgzduals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists.
The crowdfunding market is expected to grow by USD 196.36 billion during 2021-2025, expanding at a CAGR of over 15%. The report also throws light on the impact of the COVID-19 pandemic on the market and the new opportunities and challenges market players can expect. The impact can be expected to be significant in the first quarter but gradually lessen in subsequent quarters – with a limited impact on the full-year economic growth.
One of the major factors driving the global crowdfunding market is that it is used as a means of free promotion. It provides an opportunity to pre-sell a product and acts as a free-of-cost marketing tool. Campaigns are designed to communicate the mission and vision of the venture easily. With social media, an enterprise can promote an idea free of cost, which is likely to drive the global crowdfunding market during the forecast period. The increasing presence of crowdfunding campaigns in social media platforms such as Facebook, Twitter, WhatsApp, and Instagram have made it easier and convenient for people to share information and raise funds.
Crowdfunding may take different forms:
- Crowd-donation: donation by the crowd, with or without a reward (usually symbolic). It is generally used during a test or a pilot phase ;
- Crowd-lending: loan by the crowd with or without interest. It is a solution to finance specific, usually one-time expenses ;
- Crowd-equity: acquisition of a stake in the project by the crowd. It is popular with small businesses.
The chart below represents funding modes according to the capital share and the impact on net results.
- Prizes / Grants: a financial contribution given as a reward ;
- Bank loan: a debt given by a bank usually with interest ;
- Business Angel / VC: an organization or an indzfgzdual who provides capital, usually in exchange for equity.
Apart from raising funds, crowdfunding is used by an increasing number of project holders to launch new products on the market before they have been produced i.e. (Pre-sale).
This form allows projects to:
- Create cashflow. In this instance crowdfunding platforms will require you to specify the stage at which your product is. This option has the advantage of raising cash through sales that can be used to fund production.
- Introduce new products to a global market. This option is used to increase visibility on projects and CSOs holding them.
The chart below helps decide which crowdfunding type to choose depending on your project stage and progress.