How crowdfunding platforms work


An online crowdfunding platform usually serves as an intermediary between the project owner (entrepreneur or individual)
and the funder. While this relationship varies from crowdfunding platform to crowdfunding platform and from one applied business model to the next, a simplified scheme would include the following:

  • Online platforms receive applications from project owners who intend to showcase their business idea
    or cause on the platform’s website. Some platforms make a pre-selection of the ideas based on their
    own criteria, while others automatically publish every idea. Platforms that use pre-selection are checking
    the background of the project owner and do a quick review on the feasibility of the crowdfunding plan.
  • After an idea is accepted by the online platform, the project owner is tasked with creating a funding
    goal over a marked period of time and an online “pitch” (most of the times in the form of a video), where
    the project owner pitches his/her idea to potential funders. Project owners often utilise social networks
    to access potential funders on a larger scale. Funders then fund the campaign directly through the
    online crowdfunding platform.
  • During the campaign the project owner will keep his funders/fans updated about the process with
    updates on the online platform.
  • If the funding goal is reached within the allocated fundraising time frame, the project owner receives the
    money. If the funding goal is not reached, most of the platforms will reimburse the money to the funders.
  • In terms of post investment, some funders choose to remain involved in the decision-making and overall
    strategy of the business. Some funders receive voting rights in the business. In most cases the
    communication between the funders and project owners will continue through the online platform.
  • The crowdfunding platform will apply usually a fee structure on the total successful funds raised. In equity crowdfunding a registration fee plus a legal due diligence fee are common, sometimes also an equity participation. Fee structures vary significantly between business models and also countries.

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