What is crowdfunding and how does it work?

What is crowdfunding? Like many others, crowdfunding is a funding/investment tool used by many people around the world. Nowadays, it has become very popular among startup founders. When starting a project, it is difficult to obtain external financing, and crowdfunding is a good solution to that problem. Early stages are always the most difficult ones regarding the economic situation of the business, but you can learn about how to raise funding for your startup by reading our article.

Going back to crowdfunding, it is very likely that the term sounds familiar to you, but what exactly is it about? Crowdfunding platforms allow people from all over the world to contribute their money to all those projects they have found interesting. You could say that these small investors are like micro-sponsors.

What is crowdfunding?

The main feature that differentiates crowdfunding from other financing tools for startups is that an online platform is usually used. In this way, the entrepreneur can promote his project by reaching people in any country in the world.

Crowdfunding is a successful financing system for all those people who need money to start up a project which they want to transform into a potential business. They can do this thanks to the small contributions made by many “cyberstars” found on these platforms.

It is a good solution for entrepreneurs who have a project at a very early stage. In these cases, it is difficult to obtain a bank loan or a very important economic contribution from venture capital companies.

The potential characteristic of crowdfunding is that thanks to the fact that it is an online platform, a community is created. Sponsors see how many contributions have been made to each project and will bet on the one with the highest number. So the community is crucial for the entrepreneur to get the money he needs.

Types of crowdfunding

As expected, there are different types of crowdfunding which are determined by the type of input being made. Specifically, we find five groups (which can be both long and short term):

Donation Crowdfunding

The sponsors contribute the money for the interest of the project, not for wanting to receive anything in return. The contributions are made by people who have an interest in the project and want to help it grow if they need to be part of it at an official level. They are satisfied with the fact that they have been able to do their bit to develop this idea.

Investment Crowdfunding

In this case, the people who decide to contribute money do so in an investment format. In other words, economic support is made in exchange for receiving a part of the shares of the company that is being promoted in the crowdfunding. Therefore, the investor will become a partner in the project.

Crowdfunding of lenders

This type of crowdfunding is also known as crowdlending. The difference in this scenario is that those who contribute money act as lenders. The entrepreneur must return the contribution made by the investor within a certain period of time and with previously agreed interest.

Crowdfunding of royalties

Crowdfunding of royalties has the characteristic that the patron obtains a symbolic part of the profits produced thanks to his contribution. The difference with investment crowdfunding is that in this case you are not a partner in the company, you simply receive financial compensation proportional to the contribution made.

Reward Crowdfunding

Investors who contribute to this type of crowdfunding receive in return a non-financial reward such as a gift, the product or service of the project or others.

How does crowdfunding work?

Through a crowdfunding campaign, the entrepreneur is validating his project while obtaining funding. But how does a campaign work?

First, the entrepreneur must send his project to the crowdfunding platform through which he wants to obtain funding. Then, the team behind the platform will validate the project. Depending on their conclusions, they will allow the entrepreneur to choose one type of crowdfunding or another. At this point, the project is published on the platform for a specific period of time (usually between 30 and 120 days) during which people can invest in it. Once the promotion of the project is finished, the possibility of receiving contributions is closed and the amount of money obtained is checked. If the established objective is reached, the money will be deposited in the entrepreneur’s account, and in the opposite case, the money will be returned to the sponsors.

In summary, the campaign has 5 phases:

1. Sending the project to the crowdfunding platform
2. Project validation
3. Publication of the project on the crowdfunding platform
4. Closing of contributions
5. Verification of funding obtained

Crowdfunding platforms

There are currently various crowdfunding platforms on the Internet, and each one specializes in different types of projects.

Kickstarter

Kickstarter is a crowdfunding platform with worldwide recognition. Founded in the United States, the website shows different prototypes of entrepreneurs’ projects that are analysed by investors to decide whether or not to contribute money.

To apply to the platform, you can start a project through the following link.

Ulule

Ulule is the crowdfunding platform par excellence in Europe. To date, more than 24,000 projects have been financed and more than 100 million euros invested. The projects presented are grouped into 16 different categories from which sponsors can choose to invest.

If you wish to invest, you can do so via the following link. If you are looking for funding you can fill in the following form.

Goteo.org

The projects that we find in the crowdfunding platform Goteo.org generate social impact. They currently have more than 130,000 users and more than 6.5 million euros have been invested in projects through this platform.

To create a project and find investment, you can create an account on the platform.

Verkami

Entrepreneurs seeking funding through Verkami present projects focused on cultural, creative and social purposes. Some examples of proposals in which to invest are video games, short films, comics, etc.

To start a campaign on this platform you can create an account using the following link.

Indiegogo

Indiegogo is one of the most recognized platforms to help entrepreneurs grow their business as well as individual initiatives since it has a marketplace. The advantage of this crowdfunding platform over the rest is that no economic objective is required, so everything collected during the promotion period will be paid into the entrepreneur’s account.

At Indiegogo, you can start a campaign to raise funds for a project or a cause. To do so, you must create an account on the platform.

FutureFunded

FutureFunded was created in 2017 and specialised in promoting female entrepreneurship within the ICT sector. To date, they are the first crowdfunding platform to help women get the resources they need for entrepreneurship in the world of technology.

The Crowd Angel

The Crowd Angel is becoming one of the early-stage financing alternatives for many startup founders. Projects can raise up to 3,000 euros to accelerate business growth. To date, over 9 million has been invested through this platform.
If you are an entrepreneur and looking for funding you can do so by registering on their platform.

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Itnig has an investment fund for early-stage projects. So, if you are looking for a type of financing other than crowdfunding, we encourage you to apply to the Itnig fund.

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