What is Crowdfunding ?
“The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet: musicians, filmmakers, and artists have successfully raised funds and fostered awareness through crowdfunding”
Source: Oxford Dictionary
Crowdfunding is a new method for raising funds that combines traditional fundraising with modern technology and modern marketing techniques (i.e. the Internet, software, video, and social media). The general idea of fundraising has been around forever, but never before have these capabilities converged like they have over the past few years. Billions of people around the world (the “crowd”) are all within a few clicks of one another; crowdfunding brings together ideas and funding to enable collective action on a massive scale. Now almost anyone can raise money from a large and potentially unlimited number of people instead of going through only 1 or 2 traditional entities (banks, large investors, etc.)
Crowdfunding has been most prominent in creative areas such as film and music, where supporters receive rewards or perks (often in the form of a copy of the item being crowdfunded) in exchange for their contribution. However, the model has spread to dozens of other industries and continues to expand every day. Even more traditional industries such as banking and real estate have started to adopt some forms of crowdfunding. And with the eventual implementation of the federal JOBS Act and similar state-based laws, “equity” crowdfunding in the United States is set to explode. So instead of receiving a t-shirt, product, or item for your contribution, you may be able to receive actual equity (ownership) in the idea or business. Because of crowdfunding, entrepreneurs and creative minds across the globe are now able to secure funding for ideas that previously would never have seen the light of day.
The Different Crowdfunding Models and Formats
- Rewards / Perks (most popular model, and what most people generally consider traditional “crowdfunding”)
- Donations / Charity
- Equity / Investment (also known as “Equity crowdfunding” or “Investment crowdfunding”)
In this model, entrepreneurs and businesses raise funding from the crowd in exchange for rewards, perks, and maybe the actual item being crowdfunded. These crowdfunding sites allow campaign creators to make a “crowdfunding page”, which contains a pitch video, photos, and written information about the idea or product. There is usually a “comments” section so backers can ask questions, an “updates” section so the creators can provide updates, and a “rewards/perks” section to show what supporters can receive in exchange for their contribution. These are generally creative or business-related endeavors.
Each project and campaign is different, so you will have to read their pitch carefully and understand what you are guaranteed versus what you may or may not receive. Furthermore, every crowdfunding site and platform is different, each with its own rules and terms of service. With reward-based platforms, backers provide financial assistance and support, but are not owners or investors.
Many reward-based platforms require projects to use a model called “all-or-nothing”, in which project creators choose a specific amount of money in advance (the goal / target). The project only succeeds and money only changes hands if this amount is reached within a particular time frame. Other platforms allow you to use the “keep everything” model, in which project creators keep all funds even if the crowdfunding target is not reached. Kickstarter and IndieGoGo are the two largest reward-based crowdfunding platforms in the world at the moment, but many others are becoming popular.
This crowdfunding model is essentially the modern version of charitable fundraising. Using the internet and online marketing techniques, charitable groups, organizations, and individuals can raise crowdfunding for anything. They can reach the crowd all over the world through social media, pictures, and videos. The entire campaign and its progress can be tracked and shown on a crowdfunding page, increasing both reach and transparency. But these are purely donations and no product or item is expected in return.
Equity crowdfunding is crowdfunding in the sense that businesses, companies, and individuals are seeking money from the crowd via an online crowdfunding site. But they are offering actual ownership in their company or idea to ordinary (non-accredited) investors. The idea is that normal backers have the opportunity to become investors (right now this type of early-stage investing is mostly limited by law to accredited high net worth individuals). Opening up this type of investing to everyone – thus allowing startups to seek funding from everyone – is what most people refer to as “equity” or “investment” crowdfunding.