Is Crowdfunding A Practical Approach For Business Funding?

Crowdfunding is a direct funding system. Crowdfunding is a term derived from the Turkish equivalent of the word “crowdfunding“.

It is an attempt to obtain the funds required to promote and realize a product, organization, or project through digital platforms directly through these platforms.

 In short, it is the activity of creating a preliminary demand and collecting business advances as an alternative financing method. 3 important elements of the system: Project owner, Project funders, and Digital platforms which are commonly preferred nowadays.

How Does Crowdfunding Work, And What Types Are Available To Entrepreneurs?

Project Owner: Anyone with a project can request crowdfunding. Since crowdfunding is not a structure created solely to fund profit-oriented activities, the project owner does not have to be an entrepreneur.

A social responsibility project, organization, film, or music video shooting may be the subject of crowdfunding. In this case, the project owner doesn’t need to have certain qualifications.

Project Funders: As the name suggests, the concept of crowdfunding is the financial support given by society to a study.

Those who fund the project may support projects for investment purposes with the expectation of a return depending on the nature of the project, or they may support projects for social purposes for different reasons without expecting a financial return.

Crowdfunding Platform: The platform (web page) contributes to the realization of products and projects by bringing together those who want to support a product or project with the project owners.

A product or project awaiting support is promoted on the platforms. Fund owners support the projects they deem appropriate to support on the platform.

 In line with the infrastructure of the platforms, payments can be made with different payment instruments (credit card, virtual card, EFT, PayPal, etc.) or different financial assets (virtual money, foreign currency, precious metal, etc.).

Platform administrators deduct around 5% of service fees from payments. Some platforms can return the collected funds to the participants without any deduction if the projects do not receive sufficient support.

What Are The Benefits And Drawbacks Of Using Crowdfunding For Business?

There are three types of funding in world practice. Product-based (reward-based), Equity-based, and Debt-based.

It is the most widely used type of crowdfunding and has the highest number of platforms and projects. This type of funding is described as “gift” based. Because project owners are not under any obligation to the funders. 

However, if those who support the project do not donate, they will be given an equivalent compensation in proportion to the project’s output or funding.

In this type of funding, if the project owner’s product or project receives sufficient support (predetermined on the platform) on the platform, the product is delivered to the funders of the project in return for their payment.

Since the amount of funding requested for such projects is low, the realized projects are relatively more numerous and more likely to be realized than others.

Within this system used for initial capital, investors who provide financial support to the project become project partners with the expectation of a return. The funding expected from such projects is larger in scale than product-based projects.

As in other crowdfunding applications, the targeted fund must be at a sufficient level. In projects that do not reach the sufficient level, funds are refunded to backers. 

The expectation of the project supporter (investor) from such projects is to sell its shares to other investors at a certain value when the company reaches a sufficiently profitable level. Such crowdfunding practices are subject to regulation.

In Turkey, its definition has been made in the Capital Markets Law and the Capital Markets Board has been given the authority to make regulations on this subject.

What Are Crowdfunding Success Tips For Entrepreneurs?

This type of funding includes borrowing and lending activities on platforms. Through the platform, project owners aim to borrow the targeted fund from potential investors within a specified period, within the framework of specified interest and maturity conditions.

Its biggest advantage is that an intermediary financial institution is not used for borrowing and therefore borrowing costs are lower.

I can mention the real success tips for entrepreneurs who are interested with crowdfunding as follows:

〉〉  Improved presentation

〉〉  Visual tools

〉〉  Promotions that emphasize the possible profit and benefit

〉〉  Advanced communication skills

Can You Highlight Notable Business Ventures Funded Via Crowdfunding?

Many business models work worldwide and have become brands thanks to the crowdfunding model.

When brands such as Pebble Technology, Exploding Kittens, and Oculus Rift were established, they received the support of thousands of investors thanks to crowdfunding, enabling their business models to develop and turn into real projects.

 For this system to operate safely, the entrepreneur needs to provide the asset subject to the project as collateral to the platform. Although the operating right of the asset belongs to the project owner throughout the maturity of the debt, ownership is not given to him.

The worldwide increase in both the number of platforms, the number of projects screened on platforms, and the amount of funding provided to projects over the years reveals that the system has serious potential.

According to a study by Statista.com, the size of funds collected from crowdfunding platforms, which was worth $14 billion 560 million in 2017, is estimated to increase to $57 billion in 2022.

How Can Entrepreneurs Craft A Compelling Crowdfunding Campaign?

Crowdfunding campaigns are organized for the advantageous contributions of entrepreneurs and investors. Improved presentation, visual support, promotions that emphasize profit and benefit, and improved communication are essential for the most effective crowdfunding campaigns.

If entrepreneurs want to turn the product or idea they have developed into a real and profitable business model, they need resource providers such as crowdfunding.

In these campaigns, promotion and advertising are very critical factors as the idea of ​​the initiative becomes open to support by the whole public. For success in this regard, ideas that reach more people are more prominent.

See you in the next post,

Anil UZUN