Crowdfunding is a brilliant technique of arranging for funds for a project that would probably go unfunded otherwise. The textbook definition of crowdfunding would be a process where a section of a region’s population donates money in whatever capacity they can, to fuel someone’s project. This project could be anything and everything. From a start-up business idea to an NGO, crowdfunding can help several projects get on their feet and soar high. However, that does not mean that every project funded by the crowd has the potential of faring well in the market. It depends on how credible the project sounds and how well they can implement their ideas in the long-run. And in case you are fishing for more details on crowdfunding, how it works and who owns the money in a crowdfund, read on to understand the process better.
There are several types of crowdfunding out there and depending on the type you select, the ownership of the money in a crowdfund might vary.
In this type of crowdfunding, people invest in a business venture and are entitled to receive a stake in return for their donation. The donation is nothing less than an investment, and therefore, the crowd has a fair share of their money in it.
Loan-based crowdfunding, just like its name indicates, can be treated as a loan where the crowd of people who have invested into the venture shall charge interests on the loan. This type of crowdfunding is also known as peer-to-peer or business-to-peer lending.
Donation-based crowdfunding sets no interest rate and expects no rewards in return. The cause is noble, and the entire amount of money that has been invested in the project is treated as a donation. In such a case, there is no ownership of the money by the public.
This type of crowdfunding works on the idea that people who donate money to the project get something in return, like a reward or free products. These rewards can be treated as a token of gratitude for the support lent by the public towards the cause of the project.
The Inherent Risks of Crowdfunding:
Crowdfunding, as noble and innovative as it might sound, has a few inherent risks. There is hardly any project that does not have risks associated with it. For instance, there is no certainty that the business that the people are investing in shall fare well in real-time. The entire venture could see a cataclysmic downfall or might not even grow to a stature as expected. Plus, the shares promised by the venture to the public might be tedious to sell. The crowdfunding platform itself might just shut down for several reasons. Therefore, these risks must always be entertained before someone goes forward with their crowdfunding ideas.
Crowdfunding is an amazing way to fund projects. But there are also risks that must be taken into consideration. The best way to go forward with crowdfunding projects is by understanding the risks and then selecting the right type of crowdfunding. This could help in minimizing the risks and promise a high return, if that is the kind of crowdfund one is opting for.