Crowdfunding is definitely not an easy or free way of making money. It requires a lot of effort to establish a project that investors will perceive as valuable. In today’s economic climate, particularly in Nigeria, startups can have a hard time proving to potential investors that their idea is viable, and hence, financing can be almost impossible to obtain.
In 2016, equity-based crowdfunding was banned indefinitely in Nigeria by the Securities and Exchange Commission, but donation, reward and lending-based crowdfunding are still legal. However, besides equity-based crowdfunding, which may be particularly risky, here are three other major models to consider:
- Donation-based
- Reward-based
- Lending-based
1. Donation-based crowdfunding
This works on basic philanthropy, where people give money towards a good cause, expecting nothing in return. Most established charities coordinate this through their websites, but crowdfunding platforms can be useful for small organizations and people raising money for specific charitable causes.
This crowdfunding model is specifically designed for social or charitable projects, or those who raise money for charities, to enable them donate to a project. Homegrown donation-based crowdfunding platforms like donate-ng.com and Imeela are worth considering for this.
2. Rewards-based crowdfunding
It is exactly as it sounds –everyone who gives you money, receives a reward based on the amount they invest. They have no financial stake in your company, only the expectation that they’ll receive what they were promised.
It could be small gifts like tickets to a show, a book, or the first edition of a new product by your company. What is important here is that the gift is a tangible item, a one-off deal, and of perceived value. For instance, if you have a tech idea, you would not want to pitch it to a group of senior citizens, unless it was one geared toward them. Kickstarter and Indiegogo are great reward-based crowdfunding platforms.
3. Lending-based crowdfunding
This model makes it possible to give a financial return on investments (ROI); a pre-defined interest rate can be shared with investors. Here, funders receive periodical payments until the whole investment is repaid. The simple goal is to have investors get money back on their investments with interest.
It almost works as traditional banks. Based on the amount of money, duration, product and performance, both parties can mutually agree on the return on investment (ROI).
Whichever model you decide to use for your startup, using the power of the crowd to develop and fund your business idea is a great way to build network, develop your brand, and grow your business.
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