What is crowdfunding? Benefits, risks and applications

The simple act of getting a crowd to invest in a business venture, crowdfunding is relatively easy for obtaining large sums of money quickly and without much of the sales-pitching and polishing that is required for attracting big investors. Because the contributors are people who individually have limited investment capital, no one investor has enough share in the venture to significantly influence it. Therefore, while angel investors and venture capitalists keenly monitor, audit and analyze their sponsored companies and provide guidance on streamlining and cost cutting, crowdfunded projects are largely controlled by the business venture owners.

The “crowd” is composed of mostly middle-class investors drawn to the prospect of receiving a share from a robust and promising startup. They may be driven by motivations other than investment; in fact, many people may decide to donate to a worthy social cause, or they might find a product or service to be highly desirable. Some may be attracted to the idea of being a part of an up-and-coming company or technology, and therefore strive to increase their investment so as to become responsible shareholders in the venture. Although the crowd is often generated through specialized online networks which connect micro-level investors with startups, investors may also be found through friends, family and social media.


The highly dynamic nature of crowdfunding makes it an excellent marketing tool as well. Each investor is highly likely to take interest in the company, which translates into more word-of-mouth discussions and personal advertising possibilities. Some proactive investors may try to improve their investment profits by getting more people to join the crowd, which not just increases funding for the company but also public awareness about it.

These investors are also likely to become loyal customers of the company in the future. The company’s management may receive input and suggestions from the crowd, which in turn provides useful boots-on-the-ground information about how best to tweak products and maybe even operations.

Besides the ease in acquiring funding, crowdfunding also reduces some of the inherent risks of investment. Individual investors are unlikely to invest too much in these ventures, and therefore only lose a manageable amount if the startup fails. In such a case, the owners of the venture get a chance to learn from their mistakes and are less hesitant to try again, since there will be many more investors willing to replace the old ones.



Those crowdfunding a venture are vulnerable to overspending without understanding the risk of their investment. Large investors have entire teams dedicated to investigating the companies they sponsor, and can accurately judge the probability of success and of turning a profit on their investment. Startups have a notoriously high failure rate, and because of the relative ease in acquiring crowdfunding, unscrupulous “companies” with no business plans may misuse the investment. Moreover, startups with very weak plans that were initially held back because of lack of sponsorship may be able to fund their ideas through easy crowdfunding.

With traditional channels of large investments such as incubation and angel investment, startups get a significant amount of mentorship and industry insight from the sponsors, who are often experienced entrepreneurs themselves. This kind of guidance, which can be highly helpful to a fledgling company’s growth, is missing from crowdfunding.

Crowdfunding is not limited to small startups. Real estate investors, for example, often turn to crowdfunding for buying and then renting out property, with the rental returns and appreciation yielding the profits. Independent films, music albums and magazines are just a few other applications.

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