Throughout history the average guy has made some of the greatest boons to mankind. Whether it was an engine that could run on electricity or that little piece of plastic that allows you to suck the juice right out of an orange, turning an idea into a reality required funding. Today, funding for projects can come in any number of sources, but in a tight economy it can be difficult to obtain needed venture capital. For this reason among others many have turned to Crowdfunding to get their projects and charities funded, with Equity Crowdfunding soon to play a huge role for expansion and start-ups.
What is Crowdfunding?
Traditionally when someone needed capital to start or expand a company they went to a bank or some other form of investment banking to raise those funds. Perhaps one or two venture capitalists would provide the funds needed at a substantial cost, such as a percentage of the company. Today, through Crowdfunding and the more advanced Equity Crowdfunding, a large group of individuals (the crowd) can each supply small amounts of capital to assist in backing that project. Think of it as the combined effort of many people to support the ideas or passions of another.
Crowdfunding is not a new concept and has actually existed in one form or another for well over a century, in fact for those who have traveled to New York City and have seen the Statue of Liberty, you have seen Crowdfunding at its finest as the base of that great lady was paid for by over one hundred and twenty-five thousand people, each donating a single dollar to ensure it’s completion.
Types of Crowdfunding
Donation based Crowdfunding is currently the most widely used and the original model from which other forms of Crowdfunding are based. People often expect something in return for a donation but not necessarily a vested interest in the company or project they donate to. They may believe so strongly in an endeavor that just being part of it is reward enough, or perhaps they receive a small token or gift to show their participation, examples may be donations to things such as a local band or an independent film.
Equity Crowdfunding is the model by which those who seek venture capital offer an ownership stake in a company in the form of shares of common or preferred stock. This will allow investors to actually purchase these shares via the Internet from companies searching for capital. This is significant as never before have non-accredited investors had the opportunity to invest in private companies online while making it conceivably easier for businesses to raise needed capital.
How does the Crowd get paid?
As mentioned previously, with donation based Crowdfunding, for those who participate the payback is in assisting a project or cause that they really believe in by helping raise funds for those on the front lines of a project. When a goal is reached, individuals who donated may receive some sort of reward or perk but have no real stake in the project. Since Equity Crowdfunding is primarily an effort to raise capital for business growth, expansion or perhaps even a start-up company, investors anticipate a financial gain by having an actually financial stake in that company through the purchase of stock.
Through social media outlets such as Facebook, Twitter and others, those looking for financial support can reach a great many potential contributors. Although Crowdfunding in it’s current stage is used primarily for smaller projects such as donations for charities and small projects, newer scenarios such as Equity Crowdfunding made possible though a provision in President Barak Obama’s Jobs Act will allow “emerging growth companies” to seek investors online in order raise their needed venture capital.