Definition
Crowdsourcing in finance is a funding method where individuals or businesses gather small amounts of capital from a large number of individuals, typically through the internet. This approach is often used to fund a new venture, allowing entrepreneurs to reach out to the public instead of traditional investors or lenders. It is a popular method because it can bypass barriers like rigorous credit checks and business plans normally required by banks.
Key Takeaways
- Crowdsourcing is a method of raising capital, where funds are collected from a large number of people, primarily through online platforms. It enables entrepreneurs, charities, artists, and individuals to raise money for their projects directly from the public.
- This financial model often involves a reward-based system where backers receive a product or service in return for their investment. However, it can also take on models such as equity-based, where contributors receive a stake in the company, or lending-based, where the crowd becomes the creditor.
- Crowdsourcing has opened up opportunities for entrepreneurs and startup companies to overcome traditional barriers to funding. However, it also presents risks as not all crowdsourced projects succeed and there may be limited regulatory protection for individual contributors.
Importance
Crowdsourcing is regarded as a significant term in finance due to its enormous potential to accumulate capital for businesses and projects.
Essentially, it serves as a method to raise funds by seeking contributions from a large group of people, typically from online communities.
Crowdsourcing allows entrepreneurs, start-ups, and established corporations to tap into the power of the internet community for fundraising, eliminating the limitations and requirements imposed by traditional methods of raising funds such as through banks and private investors.
As such, it democratizes the funding process, making it accessible to virtually anyone and fostering innovation and entrepreneurship.
Explanation
Crowdsourcing is a strategy commonly used in the finance field as an innovative way to fund a variety of ventures, enabling people with great ideas but limited financial resources to bring their ideas to life. It harnesses the power of the collective by pooling resources, often small amounts of money from a large number of individuals, through the use of online platforms.
The purpose of utilizing crowdsourcing is to access larger capital than what could be possibly obtained from traditional methods of fundraising. Projects that might typically fall outside of traditional investment parameters, because they are viewed as too risky or do not meet the minimum return requirements, may find willing investors through crowdfunding.
Besides sourcing of funds, the use of crowdsourcing in finance also holds the capability to read the market’s response to a proposed idea. It provides a platform where entrepreneurs can present their projects to the public and hence access direct market feedback, significantly reducing the risks of failure due to misjudgment of market demand.
In the modern world where innovation is a vital component of business survival and growth, crowdsourcing serves as a viable avenue for sourcing capital, generating market awareness, and validating the feasibility of business ideas before the actual production or launch.
Examples of Crowdsourcing
Kickstarter: Kickstarter is one of the most widely recognized examples of crowdsourcing in finance. It allows inventors, filmmakers, artists, and others to pitch their ideas or projects to the public. If people like the idea, they can contribute money to help bring it to life. It’s a clear example of how the financial burden of starting a new project can be spread across a large group of people.
Indiegogo: Similar to Kickstarter, Indiegogo is another popular crowdfunding platform where individuals and groups can raise funds for projects or initiatives. It has a broader scope than Kickstarter, accepting campaigns in a wider range of categories and allowing more flexibility in funding rules.
GoFundMe: A platform often used for personal causes and life events. Rather than focusing on creative or entrepreneurial projects, GoFundMe is typically used by individuals raising money for personal emergencies, medical expenses, education costs, and other life events. This gives people a way to share their stories and request financial support from the crowd.
Crowdsourcing FAQ
What is Crowdsourcing?
Crowdsourcing is a business model that involves getting work, ideas, or money from a crowd of people, often online. In finance, it typically refers to pooling funds from a large group of individuals to support a new business venture or project.
What are some popular platforms for Crowdsourcing?
Popular platforms for Crowdsourcing include Kickstarter, Indiegogo, and GoFundMe. These platforms allow people to pitch their business ideas, projects, or causes to a vast online audience.
What type of projects can be Crowdsourced?
Any kind of project can be crowdsourced – from creative endeavors like movies, music, and arts to technological innovations, nonprofits, and even personal causes.
What are the benefits of Crowdsourcing?
Benefits of crowdsourcing include access to capital, risk minimization, validation of concept, and the potential to gather a strong fan base or customer base even before a product is launched.
What are the potential risks of Crowdsourcing?
Risks include failure to meet funding goals, potential loss of control over the project, the public nature of success or failure, and possible legal issues or disputes.
Related Entrepreneurship Terms
- Peer-to-Peer Lending
- Kickstarter Campaign
- Equity Crowdfunding
- Reward-Based Crowdfunding
- Donation-Based Crowdfunding
Sources for More Information
- Forbes: A global media company, focusing on business, investing, technology, entrepreneurship, leadership, and lifestyle.
- Investopedia: Offers a comprehensive dictionary of financial terms and articles on finance topics, investing, and markets.
- Entrepreneur: Provides news stories about entrepreneurship, small business management, and business.
- Harvard Business Review: Offers articles on strategy, innovation, and leadership for global leaders.
