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Crowdfunding Explained

Updated on June 19, 2013

Crowdfunding

Introduction

There are all kinds of alternative sources of funding that are emerging these days and one that is really taking off is crowdfunding. This type of funding provides for a specific product in exchange for some kind of benefit other than payback of the cash given for the funding. As an example, a start up movie producer wishes to obtain funding for a movie. He goes to the crowd funding sources in which interested parties will contribute cash to the project. Instead of paying these investors back, the producer will set up a schedule of benefits that the investor can receive (usually associated with the project) based on the amount of money the investor has pledge. It is much like the pledge drives from PBS and the more you give the more benefits you get.

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Alternative Funding Sources Are Growing

Alternative funding sources such as crowdfunding have grown rapidly due to the credit crisis and the fact that banks have been very stingy in making loans, especially for start up projects. This has motivated individuals to set up crowdfunding channels and now they are popping up all over the place.

Right For All Types of Businesses

Typically, they are geared towards the arts (such as the movie producer example above) but they really could be for just about any start up venture that makes sense for people to get involved with. As long as the start up seeking funds can put together a decent case for why the money is needed and how it is going to be used, funds via crowdfunding should become easily available.

Unintended Consequence

Another unintended consequence (in a good way) is that you get an interested audience in anyone who has pledged money. They will want your venture to succeed and will probably help you promote it by word of mouth.

Some Downsides to Crowdfunding

As with most things, there are some downsides to crowdfunding. One is that you are opening up your ideas for others to poach. Continuing on with the movie producer example, the producer in order to pitch his idea would have to release a good portion of what the movie is about. This sets the stage for anyone reading the pitch to simply steal the idea and produce their the movie before you.

Another downside is that the SEC has strict rules on funds obtained for the purposes of investment and crowdfunding is on a slippery slope in that regard.

Conclusion

All in all, it's great to have alternative funding sources and crowdfunding is a great way to either invest in a worthwhile project or if you are the one seeking funding, as a means to bypass the banks.

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