When people see a “crowd” gathered around something they tend to immediately think that it is popular or something good. That is just human nature, and this same approach can be said for Crowdfunding, because the more that support the idea and donate as well as share through social media, the more “credible” it becomes and in turn it leads more people to donate to the cause as well! The general population is well aware of Crowdfunding and even if they are not 100% sure what it is, the fact that it is being mentioned on every major media network and through out social media they know they want to be a part of it. That is how our generation reacts; when they sense something is popular then they want a piece of the action, often before they even know what it is.
The majority of Crowdfunding projects are related to entertainment in some capacity. Whether it is a new video game in development, an album getting recorded, or a film production seeking capital in order to film and distribute the picture. These types of “finished products” are also ones that can clearly be identified as good or bad once finished. The people seeking the funding enjoy this approach more because they are interacting with the people that will be using their finished product. Think about this for a moment: if a video game developer walks into a bank and sits down to explain his or her project do you think they are going to stand a chance? The odds of the banker being able to comprehend or even understand what they are trying to accomplish is slim to none. Now, take the Crowdfunding audience, which is well aware of video games and will be able to comprehend the goals and visions of the project and then make an informed decision on whether to help fund the goal or not based on what they see and hear.
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There are large general Crowdfunding websites that accept a large variety of projects and then there are very niche specific Crowdfunding sites that cater to a very specific type of project. Each platform will have their own rules and guidelines when it comes to what types of projects that they will accept and what restrictions are applicable as far as meeting funding goals and what can be offered to potential donors. For example, the larger and more mainstream Crowdfunding websites will make it an “all or nothing” situation, where the project must reach their goal in order to collect the funds, as this helps them set a realistic goal and not just set a high goal knowing that they will get whatever is pledged regardless. Also, many Crowdfunding sites will not allow equity stakes in the company to be given. Instead, they allow rewards for donating at certain levels.
These rewards are set by the project and can include pre-launch discounts, actual merchandise or just a virtual “thanks” for the contribution. Many of the Crowdfunding websites do not want to tread in the gray area of offering a percentage of ownership, as that constitutes an investment and could be subject to SEC regulation. When someone makes a pledge of money in exchange for a return they are expecting to make money. This would also require investment contracts and when contracts are involved it can get messy. That is why the top sites stand firm on their “no equity” clauses. This way there is no confusion in the future. The donors know ahead of time that they get their reward only if the project is a success, and they are made aware that there is a chance the project could fail. So, they need to treat their pledge as a risk they don’t mind taking, and many of the people that participate in Crowdfunding projects are doing so because they genuinely believe in the project that they have pledged funding for. They want to be part of it, and knowing that it has the chance to become popular in our culture is satisfying and part of the chase.
There is where the social aspect of Crowdfunding comes into play. Most projects start with friends and family members sharing the details via popular social sites and then it starting to spread through those networks, attracting visitors to the Crowdfunding site to see what all the buzz is about. All of the funding sites allow the details of the project to be shared very easily, and the project should really encourage those why donate and pledge to share with their friends as well. Once there is a little buzz about an idea it will spread naturally if it is unique and interesting.
That is why this option of funding is so popular right now. There are plenty of ideas that make sense to the general population, but it might not make sense to a financial institutions underwriters or decision makers. There isn’t a better way to see if there is a real interest in your idea than presenting it to the public before all of the hard work and money is spent. If there is a warm welcome and the pledges come in and meet the goal then obviously there is a need and want for the product. There isn’t a better way to test the waters!
Another reason Crowdfunding is so appealing is that the money doesn’t have to be repaid like a traditional loan. Yes, there are rewards and gifts for donating at certain levels, but that is a much more appealing offer to a start-up rather than having to stress about repayment or having to give up majority ownership to a venture capital company. When you take all of that into consideration it makes Crowdfunding look like the best option! While many used to turn to Crowdfunding as a last resort option that may soon change and it may be the first choice of many. The benefits are abundant and the company can come out ahead by raising the funding this way.