DEFINITION OF CROWDFUNDING

By | July 10, 2022

The term crowdfunding is not part of the dictionary prepared by the Royal Spanish Academy ( RAE ). The notion refers to a financing mechanism that consists of the contribution of small amounts of money by many people.

Crowdfunding is therefore also known as crowdfunding. It is a collective financing, where an entrepreneur receives limited support (in financial terms) from numerous investors.

Crowdfunding is usually developed through the Internet. Whoever is interested in receiving funding publicizes their project, setting a goal to achieve and requesting support. Suppose a musician needs 2,000 pesos to record an album. Through crowdfunding, twenty of his followers could contribute 100 pesos each and thus raise the necessary money. The musician, as a reward, agrees to give an autographed record to each investor and give a private concert for all of them.

Those who contribute money through crowdfunding usually do so in exchange for some type of prize or benefit, although it can also be a solidarity decision to support a cause. With this methodology, it is not usual for the investor to seek to recover the money with interest.

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It is possible to list several advantages of crowdfunding compared to other financing systems. The most noticeable is that the contribution does not fall on a single person, but on many, a particularity that allows reducing the amount of money to be disbursed. Another point in favor is that it makes it possible to access financing for projects that, for various reasons, fail to enter the traditional financial system (banks).

In most cases, the person or company that presents a project on a crowdfunding platform offers its potential investors a well-detailed list of the benefits or rewards that they will obtain in exchange for the various possible amounts. For example, in the case of video game developers, it is common that from the smallest investments one of the rewards is a digital copy of the product, generally at a price considerably lower than what it will have on the market once it is launched.

As the amount of money offered by investors increases, the rewards of a crowdfunding campaign can become very interesting. One of the most common practices is to invite the people who have contributed the most to visit the company’s facilities in a private meeting.

Crowdfunding not only allows people with great ideas to fulfill their dreams without financial means, but also opens the door to massive collaborations between creators and investors. Returning to the case of video games, the most successful type of project on these platforms, it is not uncommon for developers to open forums where investors can contribute their own ideas and evaluate the product while it is in full development.

This brings us to one of the biggest risks of crowdfunding: the loss of control over the project. Given that anyone can start a campaign of this type, regardless of whether they have previous experience in the performance of their profession or in the creation of a similar proposal, it is very common that shortly after the fundraising process is finished the structure begins to decay and the future becomes bleak.

When a crowdfunding campaign starts well, with the support of many people and a favorable rate of fundraising, it often happens that the organizers get too excited and start making more and more promises, many of which they will never be able to keep. In some cases, the confusion leads to radical changes in the project, leaving a significant part of the investors without reward.

CROWDFUNDING