Crowdfunding is an alternative finance practice where a group of individuals or organizations pool together a sum of money to fund a pitched venture or project. It is typically an online practice.
How crowdfunding works
Raising capital in the traditional sense would mean drafting a business plan, developing a proof of concept (POC), and pitching to individuals with the capital to land investment. These individuals could be angel investors, venture capitalists, or even banks. While the process may successfully secure funding, there may be limitations on who to approach for investment.
The crowdfunding model secures funds differently. The entrepreneur still makes a pitch on their business plan but through a crowdfunding platform or website. All the information about the venture is available on a web page, from prototype or PoC images to a breakdown of spending plans. The entrepreneur also sets a target price for the funding amount as well as a deadline.
Anyone can visit the funding page to contribute as much as they choose to the venture. Contributors can give as much as they want. Although individual investment amounts tend to be smaller than those of traditional fundraising efforts, the available market for attracting investment is much greater.
There are several types of crowdfunding:
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- Donation-based Crowdfunding: One of the most popular forms of crowdfunding, where contributors raise funds to support shared interests such as disaster relief, social campaigns, and charity.
- Equity-based Crowdfunding: Contributors receive a stake or equity in the business in return for their investments. They can also receive a share of the profits through a dividend or distribution.
- Rewards-based Crowdfunding: Contributors receive payment or reward for investing. The reward is usually the funded product.
Crowdfunding becomes popular
The first notable crowdfunding phenomenon dates back to 1997 when fans of the British rock band Marillion raised 60,000 dollars for a United States tour. Marillion later used the same method to fund their following studio albums. The music and arts community has continued to follow suit in crowdfunding creative endeavors.
Websites adopting the crowdfunding business model have since been launched, the first of which was ArtistShare (2001). By the mid-2000s, the maturing model was paving the way for newer crowdfunding platforms like Kiva (2005), IndieGoGo (2008), Kickstarter (2009), and GoFundMe (2010).
Over the recent years, online crowdfunding has seen massive success. Crowdfunding has been instrumental in launching many startups and turning them into multi-million-dollar ventures. Statista valued the global crowdfunding industry at 10.2 billion dollars in 2018. That value will most likely triple in seven years, reaching as high as 28.8 billion dollars by 2025.
Cafe24’s crowdfunding service
Cafe24 offers merchants a crowdfunding service on its platform. It works in the same way as crowdfunding websites, allowing merchants to set a funding target, collect investments, and begin manufacturing once the target is met. It helps merchants to bring their ideas to life as well as test market response.