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What is Crowdfunding? And how does it benefit the Economy?

What if 15 years ago someone told you it was possible to raise half a million dollars online in just a matter of days from people you’ve never met, let alone see, for that fine idea you have whose only missing ingredient for success is capital? Would have sounded preposterous, right?

Well, it could, given the infrastructure itself that would have facilitated collaboration was a challenge then (ever heard of static web pages?). Things began changing with Web 2.0. Today, it’s possible to raise unthinkable sums of money through the Internet from people a world away from you, thanks to crowdfunding.

A quick search in the old dictionary won’t give you anything (just as you won’t find selfie, or sexting, or vaping) because it didn’t exist some years back. Some may argue it did, but not in its current form – the online way. Thus, crowdfunding is defined as the practice to raise funds for a project or idea from a large number of people, usually through the Internet.

Typically, a campaign is set up on the available platforms with a goal of how much money needs to be raised within ‘x’ number of days. Following its launch, each day and the corresponding figure raised are counted and tallied to show progress as well as serve as a model of success for future projects.

In fact, there’s never been a better time to become an entrepreneur. Crowdfunding has made it easy to raise capital that couldn’t have been accessible a couple of years ago.

The truth is money is abundant today, with trillions lying idle in every country in the name of long-term savings: money just sitting in the accounts of everyday people who might be interested in investing in your company. As much as not all of it can be directed to crowdfunding efforts – obviously – it goes to show there is a new source of funding if you can get your idea right and sell it to like-minded individuals.

Don’t forget the hundreds of billions invested every year by institutional investors and the more experienced professionals – banks, venture capitalists and angel investors.

It’s how world-famous companies like Google, Amazon, Yahoo, Facebook and Starbucks started – because people were willing to invest in those ideas; ideas that started small. Today, more people have disposable income to throw at good ideas, if you happen to have one. Ready money is already there, the crowdfunding platforms are already in place – even by niche if you want.

Now, the onus is on you to convince investors why your idea is worth investing in.

Crowdfunding and the Economy

Now that you know what crowdfunding is, what positive correlation does it have on the economy?

Crowdfunding is not a passing cloud – it is here to stay, make no mistake about it. In fact, more and more people are getting in on the act because there is something in it for them too. The benefits to investors are many, and these could come in various shapes depending on the type of funding:

    • Rewards-based crowdfunding: The best example of rewards-based crowdfunding is technology and art products. You have a good idea, get it out there on reward-based platforms such as Kickstarter and IndieGoGo, and anyone who invests in it will be an early adopter when the product begins rolling out (without having to pay).

 

    • Donation-based crowdfunding: As the name suggests, this form of crowdfunding offers no tangible benefits and is usually geared towards a noble cause.

 

    • Equity-based crowdfunding: Contributors get a stake in the company based on the amount contributed, and are eligible for dividends.

 

  • Lending-based crowdfunding: Just like lending, investors here receive back their money over a period of time. Yes, like a loan with a fixed repayment period and specified interest rate.

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Regardless of the form of crowdfunding, many ideas, projects and businesses have been able to succeed, and this can only have a positive effect on the economy. The more successful businesses there are in a given country, the more jobs are able to be created. The more jobs are available every year, the more income available to the locals. The moreincome available to the people, the more the spending per household.

This boosts not just the local community’s economy alone, but the entire country’s through taxes and greater demand in the various sectors since there is more money circulating: retail, agriculture, education, health, banking, insurance, real estate, gambling you name it.

Lastly, crowdfunding has changed the world as we know it today – and this has certainly reverberated across the banking sector. Entrepreneurs and businesses now have a great avenue of funding which while beneficial to their cause, has an overall positive impact on the people and economy of their country.