4 Types of Crowdfunding: Which is Right for You?
Crowdfunding is a phenomenon that has taken the world by storm. Websites such as Kickstarter and Indiegogo have allowed people to fund everything from films to inventions to start-up businesses. Crowdfunding is a way to raise money for a project or venture by gathering contributions from many people. With more than 500 crowdfunding platforms across the globe, crowdfunding has become a billion-dollar industry in just a few years.
The term crowdfunding can be used broadly to include any fundraising activity, but most people think of it as campaigns launched online where interested people contribute small amounts of money, typically via the Internet.
Yet there are different types of crowdfunding sites, and you might wonder which one is right for you and your business. Let's look at the types of crowdfunding available.
Donation
Donation crowdfunding differs from other types of crowdfunding since there are no rewards or perks for donating. There is no special access to the creator, no special edition of the product or service being created, and no one gets a "thank you." Some platforms like Patreon have rewards built into their platform, but those are not inherent to donation crowdfunding.
To clarify, donation crowdfunding sites such as GoFundMe may offer perks to encourage donations. For example, a donor might receive a t-shirt, coffee mug, or another item with the company logo after donating a certain amount of money. These are not rewards for donating, however. It's simply a way to say "thank you" by offering something small in return.
Why do people participate in donation crowdfunding campaigns? They either want to donate to help a cause they believe in, or they support the creator's cause and want them to succeed in making their project happen so that they can enjoy whatever it is the creator creates.
The donation crowdfunding model is popular because it's free to set up a campaign and requires little overhead. Yet, there are drawbacks to donation crowdsourcing. Campaigns often attract well-meaning but inexperienced donors unfamiliar with the cause who may not be willing or able to fulfill their pledge commitments. In addition, donation crowdsourcing sites take a percentage of each donation made through their site, so they are not always the most cost-effective option for raising money.
Reward
Reward Crowdfunding is where a business offers rewards in exchange for donations. The most popular type is Kickstarter, which has been successfully used by tens of thousands of start-ups and entrepreneurs to raise millions of dollars every year.
Rewards can be anything from pre-ordering the funded product, a donor getting their name listed in the credits, or special custom-made items. Rewards-based crowdfunding is a popular way for entrepreneurial-minded people to raise money for projects including films and technology. Reward-based crowdfunding is like a donation, but the donor receives a reward for their donation.
Reward-based crowdfunding is a great way to get your project or company up and running with little to no risk involved. It also gives you a chance to interact with people who are interested in your project or company.
There are two ways to use reward-based crowdfunding:
1) As a means of pre-selling your product or service; and
2) As a way to raise financial support for your project without giving away equity (known as 'non-equity crowdfunding').
Equity
Equity crowdfunding is a new way to raise capital for a business (or any other venture) where the public invests by buying small equity stakes in new companies. This differs from donations, as the investor expects to receive returns on their investment as well as rewards or perks.
Equity crowdfunding platforms allow almost anyone to invest in startups. There are no minimum investment requirements, so even small investments can make a difference for early-stage companies. In fact, many startups prefer small investments from many people rather than one big investment from a single investor.
Equity crowdfunding makes it easier for startups to raise much-needed funds. It also allows startups to focus more on the mission than raising money. This means more innovation and better products for consumers around the world.
Debt
Debt crowdfunding, also known as peer-to-peer lending, is a relatively new way to raise money. It's a more accessible way to do it than traditional bank loans, and it allows you to potentially get better rates than you would with credit cards or personal loans.
Tapping into debt crowdfunding to fund your business is one of the best ways to raise money in a pinch. If you have good collateral and a solid business plan, it's a great way to get the funding you need in a hurry.
How does debt crowdfunding work? Debt crowdfunding works by connecting businesses seeking funding with individual investors who can contribute small sums of money toward the project. Rather than going through banks or other financial institutions, businesses using debt crowdfunding solicit funds directly from their communities. This is a viable strategy if you need capital but don't want to give out equity in your business. By using the Internet, you can connect with people willing to lend you money at a much lower cost than going through traditional lenders.
The Bottom Line
Crowdfunding has been around for ages. It's a great way to get an idea off the ground without having to convince investors or banks that your business is worth their time. And it's an increasingly viable way to fund larger projects such as films and even real estate construction.
Crowdfunding is all the rage these days, and for good reason. It's a great way to raise money for your business or project, and if you're successful at it, you can also use it to build your consumer base. But, in the end, it's still about building relationships with people so they want to donate and be part of what you're offering.
References:
"The Benefits of Crowdfunding | Fundable." fundable.com/crowdfunding101/benefits-of-crowdfunding.
"Top 10 Benefits of Crowdfunding - Forbes." 12 Oct. 2012, www.forbes.com/sites/tanyaprive/2012/10/12/top-10-benefits-of-crowdfunding-2/.