What is investment crowdfunding freelance

Crowdfunding

What is crowdfunding?

The English term is made up of two words: the crowd and the funding. Translated into German, crowd means quantity and funding. If any project has to be financed, it helps to look at the compound word from two sides. On the one hand, the project cannot be financed by an investor or initiator alone because it requires a lot of capital or banks do not want to credit the project. On the other hand, the necessary money can only be raised if numerous, i.e. a large number of private individuals or companies, participate in its capitalization. It is sufficient if many donors only contribute small sums to the implementation of the project. The term “crowd financing” is also used synonymously for this. Funders are predominantly private individuals and small companies, not banks and large corporations. Donations or investments for the project are called for via a platform on the Internet that brings capital seekers together with investors.

How does crowdfunding work?

The projects that are funded are as diverse as life. They range from real estate and startups to music, films, books and humanitarian issues. The swarm's global network is used here. Individuals or the self-employed who are looking for money can present their plans in detail on the platform's website. Other people looking for a meaningful use for their excess capital will find pleasure in one or more of the featured projects. The money is always earmarked for a project or an idea. Ultimately, the project can only be implemented if there are enough supporters for the project or idea. The project initiator, in cooperation with the provider platform, therefore determines the financing volume that must be achieved in advance. If the money does not come together within a defined period of time, the portal users get their capital back.

With a lively crowdfunding campaign that is well presented, it is possible to raise the necessary funds. After registering on the crowdfunding portal under the conditions of the operator, the financier can invest his capital and in return receives the consideration promised by the project initiator. This can be material as well as ideal in nature. Depending on the attitude of the donor, he pursues a profit-oriented and commercial or non-profit and charitable purpose with the contribution of his capital. According to the objective, there are basically four types of crowdfunding.

What types of crowd finance are there?

The distinctions between the types of crowdfunding arise from the different financing purposes pursued by the initiators. Investors also expect various recognitions and compensations for the provision of their money with the following financing models:

  • Reward-based: The classic model of crowdfunding works in such a way that money is collected for projects without any financial consideration. The first financiers of music productions received the finished CD as a reward, i.e. a contribution in kind. Non-material compensation is also possible, for example in the form of a dedication in a book. This enables both artistic and socially relevant ideas to be implemented.
  • Donation-based: This type of crowdfunding involves donations for humane, charitable or social projects without any consideration or donation at all, at most a public acknowledgment. The shape is suitable for goals that are of benefit to the general public.
  • Equity-based: This type is also known as crowd investing. Investors bring in capital because they want to participate in the financial success of the project. The remuneration is paid through shares in or profit distributions from a startup or through loan interest from the financing of property development projects or the revitalization of existing properties. Startups are young companies with an innovative business model that need capital for their business operations and growth. Equity crowdfunding for real estate allows investors to participate in the earnings of a construction project through fixed interest rates. Furthermore, energy projects or business start-ups and new products from small companies can be financed.
  • Lending-based: The model is also known as crowdlending, in which private individuals provide other people with a loan for project implementation. The lender receives a fixed interest rate as compensation for the provision of capital and his money back at the end of the agreed term. This funding is ideal not only for private individuals, but also for the self-employed and freelancers.

Advantages and disadvantages of crowdfunding

If your own funds are not sufficient to implement a new and grandiose idea, it is much easier to find supporters and investors via the Internet. Both sides - project initiators and investors - benefit from the transparency of the digital financing rounds, but must be aware of certain risks. The advantages of crowd financing are obvious:

  • A lot of capital can be collected for promising projects within a short period of time.
  • Supporters, donors and investors act as multipliers for the business and the products of the company seeking capital. A market test is carried out under realistic conditions. Startups can use crowdfunding campaigns as a marketing tool, for example.
  • Donors know which specific project their money goes into.
  • By investing with small amounts of money, the financial risk of the financier is manageable.
  • For the company or the borrower there is no dependency on an individual investor or a credit institution.
  • Investors and borrowers are becoming less dependent on banks, which pays off for lenders in lower fees and higher interest income compared to conventional loans.
  • The dialogue on the platform during the campaign can result in improvements for the idea or project.
  • Capital seekers can concentrate on their project and its marketing; the crowdfunding portal provides the know-how for the technical, legal and contractual processing of the financing.

A funding campaign can also result in disadvantages:

  • A lot of time is required for proper preparation and implementation of the crowdfunding process.
  • A good campaign for larger projects requires planning and some upfront funding.
  • The advertising measures and the disclosure of information about the project can lead to imitators exploiting and developing the idea themselves.
  • If the required level of funding is not achieved, the project will fail.
  • Donors cannot help shape the project directly and have complete insight into all processes and documents. You have to decide for yourself which financing could be worthwhile.
  • The crush's interference in business matters can become an obstacle.
  • Platforms and initiators are not liable for the failure of a project.

Examples of successful crowdfunding projects

Crowdfunding has long been known as a cost-effective financing method in the USA and Great Britain, in Germany it has only been used for approx. 201011 more and more through. For example, Kickstarter is the name of an international market leader. Although only founded in 2009, the provider claims to be the world's largest financing platform for creative projects today. In Germany, too, market leaders have established themselves in every form of crowdfunding. Startnext is the leading digital platform in Germany, Austria and Switzerland for classic crowdfunding campaigns. In crowdlending, for example, Smava and Auxmoney have grown strongly and are the largest German online credit brokers for private individuals.

Conclusion

Both financiers and capital seekers benefit from digital crowdfunding. The contact between them is mediated through internet portals. A large number of people support certain projects with little money, for example art, film productions, business start-ups, further training, real estate renovations or environmental projects. A rapidly growing industry has developed from this in Germany as well. Platforms are successful which, with their know-how, ensure that as many innovative and effective projects as possible can be implemented with the help of crowd financing. In this way, investors achieve a good return and supporters can enjoy the creative benefits of the project.