Q. I often receive email messages and see Internet advertising requests seeking donations by crowdfunding. Is this money raising method legitimate?
A. Crowdfunding to raise money has been in the marketplace for several months. Crowdfunding as defined by Wikipedia is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet.
Not unlike any donation you may consider for a charity or worthy cause the Better Business Bureau recommends doing diligent research before helping fund a new charity or investing in a new business venture through crowdfunding. Unlike the typical model for raising capital through a single lender, crowdfunding is a way for entrepreneurs, nonprofit fundraisers and others to raise money from many different sources. These are usually on crowdfunding Internet sites where they can introduce their product or charitable cause to the world.
The two most common types are donation-based crowdfunding to raise money for novel charities, disaster relief efforts and to help individuals pay for medical bills and get through hard financial times. The other main category is equity-based crowdfunding, which involves investing in a concept, becoming part owner and receiving a financial return on a successful venture.
Benefits for entrepreneurs include the ability to pitch to and interact directly with potential investors and raise considerable sums of money, even though the individual donations may be small. Crowdfunding interactions also help them tailor their pitch and validate the potential of a product.