What is crowdfunding and how to do it?

Por: Pedro Ferreira - June 3, 2022

What is crowdfunding and how to do it?

Crowdfunding is a relatively recent digital mechanism for raising money by asking many people to contribute with funds, usually in small amounts, to a specific venture or cause. This fundraising procedure aimed at its genesis to finance, independently projects, such as films, books or software ideas presented through special crowdfunding platforms and sought after by supporters, that is, specific funders. But as important as knowing what is crowdfunding, it to know how to implement it.

Thanks to the advancement of the internet, crowdfunding has developed rapidly and massively as a form of alternative financing. From the origins of crowdfunding until today, the profile of investors has evolved, as well as the very nature of projects. In its beginnings, projects in the areas of art, music, cinema or literature were mainly financed, since their promoters were not able through bank loans, or other more traditional methods of financing, often to raise the necessary funds, so they used crowdfunding as an alternative and reliable medium.

What is crowdfunding nowadays?

Currently, the concept of crowdfunding has expanded and become a little more comprehensive. Today, there are different ways to finance the same project with various crowdfunding platforms and the projects themselves are not limited to artistic or small-scale initiatives.

In comparative terms, crowdfunding is similar to a donation. Investors, in return, do not receive interest or dividends, but the assets themselves or certain privileges. For example, the investor can receive an exclusive version of a book or receive unique information and even mentions in the credits of a movie that is about to be released. In some cases, donors also receive proof of donation, thus being able to enjoy tax advantages. The privileges given are, as a rule, proportional to the value of the investment: whoever gives more money, receives a more exclusive reward.

It is important to note that crowdfunding does not replace traditional financing solutions, but is positioned as an alternative form of investment in a global context predominantly marked by collaborative consumption and participatory production.

The different types of crowdfunding

Crowdfunding, while a relatively new phenomenon for entrepreneurial companies raising funds or equity, is growing rapidly across the world. The research and analysis company Massolution estimated in 2015 that the crowdfunding market worldwide was 16.2 billion dollars, today this market is around 34.4 billion. However, there are several types of crowdfunding platforms and each of these platforms responds to a very specific type of crowdfunding and therefore works according to a specific model. Among them, three types are distinguished:

Donation ( with or without reward principle)

The first and oldest type of crowdfunding is donation. The principle is simple: an individual or legal person donates a certain amount to finance a project or product without expecting a financial return. This practice is most often applied to associative or personal areas. Certain platforms specialize in collecting donations for associations. But, in itself, each association that launches donation campaigns is itself an actor within the principle of crowdfunding. There are also platforms that operate on the principle of rewards, but not financial, donation. In this model, a person provides funding to the project leader in exchange for a reward, which may be a gift of appreciation for the donation.

Loans (free or paid)

The second type of crowdfunding is the loan. Commonly known as crowdlending, it is a symbiosis between crowdfunding and, at the same time, an investment. The approach in this type of crowdfunding is quite close to that of banking institutions. A legal or natural person lends an amount to finance a specific project. This amount is returned with or without interest according to the terms established by the project leader. Here, it is important to distinguish between the platforms, which are divided into: special loan – made to private individuals, without the need for interest, and commercial loan – made for businesses, in which interest repayments and legal obligations are associated in the event of a failure among borrowers. In both cases, a third party is required to ensure the transparency of the transaction.

Participatory investment or financing through the signing of equity or debt securities

Finally, the last type of crowdfunding is participatory investment. Likewise, certain distinctions may be made regarding the nature of the investment and the method of remuneration, which may, for example, be linked to the financing of startups, and in exchange, the investor receives shares in this company and, therefore, becomes a shareholder. Financial remuneration occurs through dividends or added value. In the same way, the investor can also finance a specific project , and the investor's remuneration is also made by interest payments after signing bonds for the financing of that project.

Read also: Import and export in Mozambique

How to make a crowdfunding campaign?

The first step in starting a crowdfunding campaign is to understand very well what crowdfunding is and which paths to follow. The second step will be to choose a crowdfunding platform. There are several platform options and various types of commissioning, which generally range from 5% to 15%.

When creating an account on a platform, you can include in your funding campaign the description of the project, the desired value and also the rewards that each one can earn depending on the type of funding.

Project description

The description of the project is the essential moment to make the investor understand the idea or product in which he will invest. It is necessary to invest in good communication and use the text space well and include images, videos and statements that can help convince the potential investor / donor.

Value and modality of crowdfunding

Defining the value is a very important step. It needs to be consistent with what is proposed and at the same time be attractive to those who want to help. Another important point when defining the campaign is to know what the modality will be. Usually platforms offer two types: “all or nothing” and “flexible”. In the first, the project leader only receives the amount if he reaches the total within the stipulated period. Otherwise, the amount is returned to the funder. In the flexible modality, at the end of the term, the amount that was donated will be received by the promoter, regardless of having reached the goal or not.

Rewards scheme and funding levels

Another part that determines the success of a crowdfunding is how the rewards will work. Each funding tier may have a reward that is chosen by the campaign owner. However, there is also the possibility of being a platform where each amount delivered for financing is actually an investment. In this case, the reward will be the profits from the amount invested, with the nuances already explained.

With all the steps completed, the campaign can go online and start receiving the values. It is important to emphasize that the owner of the campaign is responsible for the dissemination. Therefore, it is necessary to publicize using the means available to convince as many people as possible to help your project.

In summary, crowdfunding implies a large number of donors, who finance a project with amounts of smaller individual value. Participation in crowdfunding, in principle, is comparable to a donation. In return, funders generally receive material goods or certain project -related privileges . However, the concept has expanded and now includes the possibility of a loan on which the investor expects to earn interest or a share in the profits.

crowdfunding campaign , you inform yourself about what will happen with your money if the project fails or does not come to fruition.

Read also: How to register a company in Mozambique, step by step

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