Prospective founders considering how best to realize their idea are often faced with the problem of how to finance it. Only few can cover the financial costs for building a business or first products with equity. Therefore, crowdfunding has become established as an alternative form of financing startup projects. But how exactly does crowdfunding work?
With crowdfunding, the necessary capital is collected from numerous financiers, the so-called crowd, through small contributions. In order to reach potential supporters, projects and business startups present themselves on special online platforms. The specific goal in doing so is to finance and realize the project idea with the help of the crowd.
The first step consists of looking for a suitable platform in order to present oneself as a starter project with one’s product or idea. The selection is large. Today, there are numerous universal but also theme-specific crowdfunding platforms. Once the right platform has been selected, the project is prepared for the crowdfunding campaign. In addition to the content for the project presentation, such as a video, images, and texts, each starter project determines the desired time period, desired target amount, and project purpose for their campaign. Supporters can then make financial contributions within the defined time period.
There are four varieties of crowdfunding that define the type of support and return service more precisely. Depending on the crowdfunding platform, only individual or multiple types are offered.
- Donations: In donation-based crowdfunding, supporters donate a sum to a project and receive a donation receipt but no further return services.
- Sponsoring: In this variation, the supporter makes a financial contribution to a project and, in return, receives an individual service from the project team. This is referred to as “reward-based” crowdfunding.
- Investment: In this case, supporters function like investors and receive a share in the project or founded company in proportion to the funding. “Equity-based crowdfunding” is synonymous with crowdinvesting.
- Financing injection as a “micro” loan: With this, private financiers lend their money to a project. Repayment, incl. interest, takes place according to predetermined rules. This so-called “lending-based” crowdfunding is thus a particular form of crowdinvesting.
In all variations, private individuals but also companies are called upon to contribute financial means. Only those who manage to win over the crowd with their idea achieve the financial benefits in the end. The project ideas are thus immediately on a test bench. Most platforms offer the possibility to give the project team feedback on their ideas. An important side effect of crowdfunding is that the idea spreads and catches media attention. On the one hand, teams advertise their idea. On the other hand, supporters share the idea in their network. This increases the presence on the potential market. Thus, crowdfunding reduces the financial aspects and increased publicity to a common denominator.
Do you have an idea and are you looking for capital? Would crowdfunding be an option for you? Would you like to start a crowdfunding campaign for your project idea? Then look forward to the KIT crowdfunding platform KITcrowd. Beginning in March 2015, you can present your projects there. For more information, contact the KITcrowd team, Thomas Neumann (Innovation Department) or Eric Braun (Relationship Management). We look forward to a lot of exciting projects and numerous supporters!