Crowdfunding 101: Financial Backing For Modern Entrepreneurs

In a time when banks are skeptical about lending money, entrepreneurs are faced with a hefty challenge when it comes to finding capital to back startups. Instead of selling off ideas or stock in the company, entrepreneurs can now find backing through crowdfunding sites such as Fundageek.com or Kickstarter.com

Crowdfunding is a relatively new strategy for startups, but the concept comes from fundraising techniques common with charities and nonprofit organizations. The way it works is the entrepreneur creates a profile on the crowdfunding site explaining the business concept, financial goal, and why the funds are needed. The concept is to ask a large amount of people for a small contribution that doesn’t have to be repaid, versus asking a bank for a loan that does.

While some crowdfunding sites simply provide the donor with the gratification of helping someone’s dream come true, other models reward donors based on the amount they contribute to the idea. Kickstarter.com caters strictly to creative ideas (films, music, fashion, and the arts). One of the featured projects was Paz that wants to record his first studio album, “Dubstep in Starbucks” and has a goal of $10,000 to fund this project. Some of his notable contribution reward levels include:

$10 – free digital download of his album once it’s recorded

$2,500 – will fly anywhere and personally perform at your event

$10,000 – will grant you appearances in music videos, opportunities to collaborate with, and lifetime backstage and on stage access at any DJ Paz concert.

While some projects prove to be very successful, more than doubling their goals, others fall short. By featuring a concept on a crowdfunding site, entrepreneurs are able to see the potential success of their idea. Crowdfunding sites collect anywhere from 5%-25% of total funds raised, so sites tend to feature projects that they find more popular. The funds are held in an escrow account until the goal is reached. For projects that “fail” or do not meet their goal, 100% of funds are returned to the donors. Therefore, the entrepreneur is able to abandon the project without the financial woes of bad credit.

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