Difference Between Crowdfunding and Traditional Fundraising

Edited by Diffzy | Updated on: March 25, 2022

       

Difference Between Crowdfunding and Traditional Fundraising Difference Between Crowdfunding and Traditional Fundraising

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Introduction

Both fundraising methods have been used recently for nearly anything including personal causes, financial support to entrepreneurship, or even a dream start-up to take off the ground. Traditional fundraising includes creating a marketing campaign and, an appeal to a specific person, company, or group in the direction of your marketing campaign. This might not have a mass beneficiary goal and is usually a more subjective goal. At the same time might turn out with profits, losses, or neither to investors. But, Crowdfunding on the other flip comes from numerous those who agree with your purpose. Crowdfunding has gained rapid popularity over conventional fundraising techniques these days considering recent developments in communication and technology making it much easier for both investors and person, or group seeking.

Differences Between Crowdfunding and Traditional Fundraising in Tabular Form

Table: Crowdfunding and Traditional Fundraising
Parameters of Comparison
Crowdfunding
Traditional Fundraising
Rights and ownership
Held by the mediator who upholds the fundraiser and not with the investors.
Belongs equally to the investors due to their huge contributions in consideration.
Reach
A massive reach the best possible by social media.
Limits to the few investors whom they appeal to.
Effort
Efforts are least required, and don’t require much skill, and are much easy even for a person with primary knowledge in social media.
Require proper planning and skillful execution while appealing to the concerned.
Privacy and disclosure
Not maintained and ideas are disclosed unbiased.
Ideas and plans remain with people part of it including investors.
Main objective
Mass community benefiting goal.
Mostly subjective and profits targeted.
Ideas
More innovative, creative, or charity causes.
Invoking ideas that can return some profits and turnovers to the investors.
Profit and loss
Investors are not affected by the sum collected.
Investors can be both highly benefited with profit margins or suffer huge losses.
Amount
The collected sum remain public, however, investors don’t participate directly while the collected funds are given to the seeker.
Profits and amount acquired remain between the investors and the benefited may be also stored as official documents verifying all the cash in-flow and profit margins.

What is Crowdfunding?

Crowdfunding uses social media to reach a mass of people at a time and has a goal to benefit an idea rewarding a whole community or a person who seeks financial help. Crowdfunding includes an idea and whole crowd contributing in belief or support of same thought, comes forward with small amounts but the final grab can be very rewarding despite the wait or time it shall take. However, this demands skilful, passionate, and hardworking staff and proper execution of plans for a greater catch early. Following the 20th century, Anyone who has primary know-how on media and net leverage can easily make a profile and get timely investment for his or her purpose. This was not as easy as today until these advanced developments f easy social media and smartphones in every hand ideas came in.

despite the massive amount raised, these numerous contributors suffer no losses. There is now a whole bunch of websites and non-government organizations working for the same. Online malpractice can be prevented by seeing verified profiles and the organization it belongs to. Even with all security offered, it is possible to expect an intrusion as the reach is wide and unlimited.

Budding entrepreneurs use Crowdfunding to showcase their idea by posts, videos, articles, posters describing their thought and their need to acquire a lump sum beyond their reach. And other details include personally verified information like bank accounts on an online platform. It can easily connect thought and exhibit the possible cash inflow and asset it can gain, and present it to a mass community to help raise support.

However, in spite it's also important to know that excluding the seeker and the numerous investors, the middleman or the negotiator also plays a vital role who assists in finding investors, expanding their possible reach, and raising support. This can be online websites of non-government organizations or just a group of people who come together for a better cause. These set a far catch by including celebrities and known people of the same community to promote the idea or the cause.

Categories of Crowdfunding

Charity-based

This works solely for an empathetic cause, and no benefit, profit, or reward is intended by the investors. Usually raised for the financially viable or the dependent population requiring support. The cause of fundraising can be to begin a small start-up to support a family for a daily wage, or in support of their education or medical treatment that might require immediate help. This can help many poor families to save their loved ones or avoid being bankrupt. This also improves the overall outlook of a whole community by providing good health, education, and finance to all people.

Partnership-based

In this, a crowd of people who support the same intuition comes together to support and fund a cause or a start-up. Also, unlike charity or reward-based, these investors are granted part of rights or ownership to the firm. Also, they receive a part of the profit margin received following the start-up and are dependent on the amount of their contribution. Each applicant or investor part of the project receives their rights in official documentation so that they can claim using this once the startup starts crossing the profit margins.

Reward-based

The mass investors invest for a particular cause and in turn, receive a service or product as an appreciation of their contribution or if they also belong to a group that requires support under the same cause of funds raised.

What is Traditional fundraising?

When an individual or firm uses traditional methods like organizing a campaign or presenting the article of interest or start-up plan to acquire funds for the execution, or expansion of a business, this is known as traditional fundraising. In Traditional or conventional fundraising, sourcing might be a little different. You could apply to improve the price range by taking a loan from a bank, a company, or in particular a VC to look up to your startup. Nevertheless, it includes a limited lump of people working towards benefaction and hence secrecy and privacy of goal, amount maintained for just the purpose of it. Investors can decide what should happen next in the firm most of the time due to their huge contribution and the seeker is always obliged to him. If it is a bank then he should rightly meet all the interest rates, deadlines, and conditions that are applied. The main target of such investors is solely profits and least of supporting innovative ideas. Instead assumes the benefits that these investments can return to them. Despite receiving a hefty sum instantly, this can be a huge burden and the obligation could last for many years, especially for financially viable people. Hence is better when such people move to raise Crowdfunding.  

This involves larger participation or a whole group that usually works behind it to coordinate, communicate, deal with accounts, verify details provided by the seeker, assist in finding sponsors, and ensure safe and secure transfer to the needy. The teammates must be trustworthy, faithful, and passionate about working for a charity or helping others.

Neither of the methods above can claim to be perfect and hence has its own loopholes and pros considering the field or cause of fundraiser.

Most common methods of fundraising in traditional ways include

  1. Bank Loan: This is perhaps the most chosen method to raise funds, which provides you with an instant hefty sum, or cash but also comes with deadlines, obligations, interests, and conditions that must be strictly followed and accepted by the seekers. This is strictly followed with documentation and official statements stating the span of time, money lent, investor's detail, cause of the financing requirement. It might also be necessary to keep some of your asset, or property as a security in case you fail to pay it back to the lender.
  2. Venture capital is also offered on a long-term agreement of previously defined years. These can be provided by individuals, investment banks, non-government, or charitable organizations to support dependent people to attain their dream of starting their own firm, company, or business
  3. Angel investors are rich investors who provide financial aid and assistance to start a small start-up and small entrepreneurship

Main Differences Between Crowdfunding and Traditional Fundraising (in Points)

  • Authority and ownership in Crowdfunding remain in the hands of mediators or ones who uphold the fundraiser who also receive some margin of the total sum raised from the fundraiser and not actually with the investors. But in conventional fundraising, the rights belong equally to the investors, and they have a say and power to make decisions in all further events happening.
  • Diplomacy and privacy of personal information and ideas presented cant be maintained in Crowd-funding, whereas the invoking concepts and ideas remain with the few people part of the business.
  • The goal in traditional fundraising is more subjective or in support of a minority goal with profit ideologies. In contrast, Crowdfunding raises money mostly more charities or to promote innovative and creative ideas and has more of a community goal.
  • The reach is very small in traditional fundraising as in it, ideas or causes are appealed only to specific investors related to the cause or banks in general. But in Crowdfunding, the reach is beyond what we can actually imagine despite the slower process. In crowdfunding platforms, the information, concept, or ideas immediately reach millions of people, out of which all people sharing similar thoughts on it can come forward to support it. You can also receive honest reviews and critics on your ideas and innovations shared. However, for the same reason, it can result in the risk of theft of the ideas that actually belong to a particular individual only. In the case of traditional fundraising, the innovations and ideas are only expressed in front of specific people like the bank managers, investors, and others and are dependent on them whether they contribute for it, or not. This can sometimes be defying as some good innovative minds or ideas can go unknown due to failure in financial support. If such funds can help in their research, production, and infrastructure, this can be both beneficial to individuals and can add to the advancing and developing community.
  • Profits and losses: Investors have no associated loss or gain, mostly in Crowdfunding; instead, traditional fundraising offers mass turnovers, benefits, and cash in-flow to the investors, small or big, with time. 
  • Methods used:  The conventional method, just like its name, follows the old procedures that include personal meetups and is based on agreements, policies, and guarantees offered between the seeker and the investors that are often signed by official statements and documents stating it. Rather Crowdfunding does not require time-consuming meetups personally. Instead, a single platform can help in communication with one another and is based on belief and empathy, and the investors often like to remain unknown or anonymous for a good cause.
  • Considering the expansion of unbiased reach, it is possible to find some malpractices being done and hence is recommended to contribute to only Crowdfunding raised by authorized or verified firms, organizations, or charity associations. On the other hand, Traditional fundraising involves proper data sources, including the details of the seeker, investors, and the start-up plan for which the money has been lent.

Conclusion

Traditional business fundraising entails appealing to companies, venture capitalists, or a few investors, banks for a large lump sum. However, in crowdfunding, the 'Mass of people' funds the concept or project on social media and can communicate and bring together people who can give small amounts to help a business idea, project, or endeavour the concept to come true. Both these techniques of financing can be of great help to the needy who can be benefited and present back as an asset to the community. With many developing advancements in online and net banking and communications, it will be surely possible to prevent even the slightest of artefacts, technical issues, and any loopholes of a security breach that exist anymore. This can help in arranging financial support within a short period of time and thereby save many families or firms from being bankrupt or suffering huge losses.

Despite the path through which the funds are raised, it is important that these funds are used efficiently and as beneficial for the clients.

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"Difference Between Crowdfunding and Traditional Fundraising." Diffzy.com, 2022. Sun. 02 Oct. 2022. <https://www.diffzy.com/article/difference-between-crowdfunding-and-traditional-fundraising-6>.



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