How does crowdfunding work?

How does crowdfunding work?

What is crowdfunding?


In recent years, particularly since 2019, there has been a boom in crowdfunding, which is why we talk about it more and more in the entrepreneurial world, and beyond. It is the process of raising funds from a large number of people, with the aim of financing a project, a company, or a cause. This financing tool is changing the way in which projects receive investments, allowing a more direct and immediate contact between investors and proponents.


Types of crowdfunding


There are three main types of crowdfunding, which have different fields of application: reward, donation and equity. Each have different aims and different stakeholders, in terms of both proponents and investors. In this article we will concentrate on the latter category: equity crowdfunding, the tool which is most relevant for startups and SMEs. Equity crowdfunding is for startup founders and for the management of more mature companies who are seeking capital to implement industrial development plans. Equity crowdfunding platforms, authorised by Consob, provide an alternative channel to bank loans and debt financing for the these companies. A project uploaded to one of these platforms targets hundreds of investors simultaneously, who can buy shares and become part of the company.


How does equity crowdfunding work?


Before the campaign


On a practical level, an entrepreneur needs to approach one of the dedicated platforms if they want to use equity crowdfunding to finance their project. Many startups choose to appoint a specialist advisor, who can act as an intermediary between the company and the target platforms by giving expert support during the process.

The platforms select which startups and SMEs to host according to various criteria, and most of the time they request to see financial documentation.

Once a startup is selected, it is required to draw up a resolution to raise funds in the presence of a lawyer. It will then need to amend its bylaws to allow investors to join the company through crowdfunding. Furthermore, the company should open an intermediary bank account to hold the campaign funds on a transitional basis.

Once these bureaucratic processes are complete, the entrepreneur or advisor needs to draw up the necessary economic and financial documentation to attract investors online. This varies according to the platform’s requirements and can include the Business Plan, Strategic Plan, Business Presentation and Investor Pitch.

Other than the financial material, the startup must also create a short video presentation in which he describes the company and presents his objectives from raising capital to the public.

Each campaign specifies a minimum amount which the company aims to raise and a maximum desired amount – it goes without saying that the campaign can only be called a success if it reaches the minimum objective.


During the campaign


During the campaign, it is essential that the company publicises the campaign through various forms of marketing, both online and offline, with the aim of capturing the attention of potential investors in order to reach the minimum target.


Concluding the campaign


At the end of a successful campaign, the company is responsible for keeping the new partner investors informed by providing them with the relevant data regarding business performance and company growth.


BizPlace supports many companies during the equity crowdfundning process – contact us to learn more.