Just as the term suggests, crowd funding is basically a way used to raise money by simply asking a multitude of people to each chip in a small amount of money towards a given cause/project such as disaster management, political campaigns, civic projects and Start-up Company funding among others. This type of funding principally employs the use of the internet whereby an individual seeking to obtain funds for a given cause/project sets up a webpage where they put up a profile for their cause and essentially tries to get people (mainly through social media) to contribute towards the said cause/project. Crowd funding is not only limited to individuals as companies also use it to obtain funds through the sale of minimal amounts of equity to different investors.
The concept is attributed to Joseph Pulitzer; a newspaper publisher who in 1884 urged the American public through his newspaper; New York World to contribute towards the Statue of Liberty’s pedestal after the American Committee for the Statue of Liberty ran out of funds for the same. Since then, the concept has since momentum with the first online initiative occurring in 1997 when American fans of the Marillion rock band raised about $60,000 via the internet to enable the band play in the United States after they were unable to go on tour due to lack of funds.
Types of crowd funding
• Debt crowd funding
This form of funding also referred to as peer to peer lending involves getting people to put their money into a project (as a form of loan) with the guarantee of getting it back with interest. However, in the case that the money is lent to developing Nations, it is usually paid back devoid of any interest with the financier being content at having done some social good.
• Donation/Reward crowd funding
This mainly entails individuals putting their money into a project/cause simply because they have faith in it and thus do not expect to get anything in return. This is the most common form of funding whereby individuals are encouraged to contribute any amount towards a given project.
• Equity crowd funding
In this type of funding, individuals (mainly investors) put their money into a project or business venture in exchange for shares or a stake in the said project or venture.
Benefits of crowd funding
i. Helps validate a project
With crowd funding, individuals are able to know whether their cause and/or project will have an impact on people or if it is a waste of time and money. They get to know this if they actually get financial contribution towards their project.
ii. Exposure for a project/cause
Given that this type of funding is mostly done via the internet, it can actually help get a project to be known by not only potential investors but also potential clients and thus act as a marketing platform.
iii. A mode of capital access
With crowd funding, more so the reward based one, individuals can essentially get money to start up a project without necessarily getting into debts or having to give up any equity.
It also helps individuals to cushion themselves against unforeseen risks, helps one to get additional ideas for their project/cause, and is a way of marketing for a product /service before it is launched and also helps to create goodwill with potential customers.
While it is a good way to obtain funds for a project or a cause it also has its downsides that have essentially weakened the whole concept. As such, the downside to this kind of funding include fraudulence with the aim of fleecing an unsuspecting public, exhaustion of potential contributors and the issue of one’s idea being plagiarized.