Crowdfunding – Definition

Cite this article as:"Crowdfunding – Definition," in The Business Professor, updated May 20, 2019, last accessed August 4, 2020, https://thebusinessprofessor.com/lesson/crowdfunding-definition/.

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Crowdfunding Definition

Crowdfunding is a financing method where funds are raised from little donations of a large number of people, the donations are often made online. Many individuals or business owners raise funds for their businesses using crowdfunding.

This financing practice entails taking advantage is a vast network of people to raise funds for a project or capital for a business. Using the internet or social media, crowdfunding websites are created to bring in a large number of people together (usually investors and entrepreneurs).

On crowdfunding platforms, small amounts of money is raised from a large number of people, this money is then injected into projects or a business.

A Little More on What is Crowdfunding

Crowdfunding has benefited many businesses and communities (in terms of project). As an alternative financing method, quite a lot of funds have been raised through crowdfunding. In order to protect individuals who donate money on crowdfunding platforms, the United States regulates crowdfunding.

In the U.S, there are certain restrictions on who can fund a startup business and how much fund they can contribute. The regulations are not to stop crowdfunding, rather, they protect investors from losing their funds to falsehood. Also, the regulations prevent non-wealthy investors from putting too much funds into new businesses due to business risks which can cost them their hard-earned funds.

How Crowdfunding Works

More than $34 billion was raised worldwide by crowdfunding in 2015, this shows how much entrepreneurs benefit from crowdfunding. Individuals who have funds to invest sign up on crowdfunding platforms to raise funds for a business through small donations. Investors give a little as $10.

However, investors don’t just donate funds on crowdfunding platforms, entrepreneurs with good business ideas pitch them to investors who then decide whether the business is worth the risk. Investors are selective when it comes to giving funds for a project. An outstanding business idea has the tendency of receiving more funds than it needs of many investors buy the idea.

Crowdfunding Sites

There are many crowdfunding websites but Kickstarter and Indiegogo are two prestigious crowdfunding websites that attract tons of investors. Kickstarter was founded in 2009 while Indiegogo was launched in 2006 but it started fully a year after its launch. The credibility of Kickstarter for instance almost made people use its name in place of crowdfunding.

Over 130,000 projects have been funded and over $3.5 funds pledged on Kickstarter. Indiegogo has flexible models when compared to Kickstarter which has a little strict model. For instance, funds can only be released when campaigns have achieve their funding goals on Kickstarter while an entrepreneur can choose to collect funds as they come in or wait till the goal is reached in Indiegogo.

Crowdfunding Investors

Investors also benefit when they participate in crowdfunding, this can be in form of rewards from entrepreneurs who are funded. The reward can also be equity position of investors in the venture they fund, in cases of equity-based crowdfunding which are regulated by the Securities and Exchange Commission (SEC).

Practical example is an entrepreneur who got funds to produce certain products, the entrepreneur can decide to reward the investors by giving each of them the products for free. In some crowdfunding investments however, investors can have shareholders position in the venture, especially, investors with much funds.

References for Crowdfunding

Research article for Crowdfunding

Crowdfunding: Tapping the right crowd,  Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Journal of business venturing, 29(5), 585-609.

The geography of crowdfunding,  Agrawal, A. K., Catalini, C., & Goldfarb, A. (2011). National bureau of economic research.

Signaling in equity crowdfunding, Ahlers, G. K., Cumming, D., Günther, C., & Schweizer, D. (2015). Entrepreneurship Theory and Practice, 39(4), 955-980.

Crowdfunding of small entrepreneurial ventures, Schwienbacher, A., & Larralde, B. (2010). Handbook of entrepreneurial finance, Oxford University Press, Forthcoming.

Some simple economics of crowdfunding, Agrawal, A., Catalini, C., & Goldfarb, A. (2014). Innovation Policy and the Economy, 14(1), 63-97.

A snapshot on crowdfunding, Hemer, J. (2011). A snapshot on crowdfunding (No. R2/2011). Working papers firms and region.

Individual crowdfunding practices,  Belleflamme, P., Lambert, T., & Schwienbacher, A. (2013). Venture Capital, 15(4), 313-333.

Crowdfunding and the federal securities laws, Bradford, C. S. (2012). Colum. Bus. L. Rev., 1.

Crowdfunding: Motivations and deterrents for participation, Gerber, E. M., & Hui, J. (2013). ACM Transactions on Computer-Human Interaction (TOCHI), 20(6), 34.

Crowdfunding creative ideas: The dynamics of project backers in Kickstarter, Kuppuswamy, V., & Bayus, B. L. (2017).

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