Crowdfunding is where a large number of individuals finance a new business venture with small amounts of capital. This method of funding takes advantage of how social media and crowdfunding websites make it easy to access vast networks of people. In this way, entrepreneurs and investors are brought together, and there’s the potential to expand the pool of investors beyond relatives, owners and venture capitalists.
What Are the Different Types of Crowdfunding?
There are four main types of crowdfunding:
- Donation-based crowdfunding involves individuals giving a person, company or campaign money for nothing in return.
- Debt-based donations are a form of crowdfunding where peer-to-peer lending occurs – typically, this money is viewed as a loan and therefore accrues interest and must be repaid by a specific date.
- The rewards-based crowdfunding model is where donors receive a perk in return for their donation. This could be an item such as a T-shirt, or a product or service at a discounted price.
- Finally, equity-based crowdfunding campaigns allow start-ups to attain funding in exchange for ownership of a portion of the business. In most cases, investors receive shares in the business commensurate with the level of money given.
Who Can Invest in a Crowdfunding Campaign?
Experienced entrepreneurs like Mario Carrozzo understand that there are no restrictions regarding who can invest in crowdfunding, unlike in private equity markets. Due to this, many see crowdfunding as a means to democratise private investing.
Take a look at the embedded PDF for more information about crowdfunding.
What’s the Difference Between Crowdfunding and Angel Investment?
While crowdfunding is about attracting multiple investors, angel funding typically involves funding from a much smaller group of people, or even a single investor, who have a larger stake. Due to this, angels are usually more inclined to closely monitor their investment and may well require involvement in the running of the business.
Successful Crowdfunding Sites
The Kickstarter website has been in operation since 2009 and has, to date, raised more than $5 billion for over 182,000 projects. Entrepreneurs and start-ups can use the site to tell their company story or big idea, set a monetary goal, and set a deadline by which they’d like to meet it. The project is then shared with the Kickstarter community, with the aim of finding backers.
The donations-based crowdfunding platform GoFundMe is used by both charities and businesses and is particularly useful for start-ups offering service-based initiatives. According to statistics, 1 in 10 campaigns featured on the site achieve full funding.