Crowdfunding is a new trend that has emerged within the last decade and has been a huge part of the Millennial culture. Crowdfunding is defined as, “the practice of funding a project or venture by raising many small amounts of money from a large number of people.” According to Goldman Sachs, crowdfunding raised $34.4 billion dollars in 2015 and is only expected to raise more in the coming years.
There are four major forms of crowdfunding which differ drastically; however, they are all included in the general term “crowdfunding.” Let’s take a look at the differences between each form of crowdfunding including the different ways you can gain by participating in them.
The Most Known Type of Crowdfunding: Reward Crowdfunding
Initially, the crowdfunding industry was dominated by reward-based platforms such as Kickstarter and Indiegogo. Individuals are able to contribute to entrepreneurs and their prototypes in order to help launch projects into market. With hugely successful projects that which quickly went viral, (the most successful project on Kickstarter raised over $20 Million by over 75,000 individuals) reward-based crowdfunding is typically thought of when “crowdfunding” is mentioned.
If you’re looking for a way to discover new innovative prototype products which could become reality very soon, reward crowdfunding is a great way to do so. Since these are prototype projects, there is of course, some risk in terms of getting what you paid for. Issues in manufacturing and shipping often arise and depending on which reward-based crowdfunding platform you use, you may not be able to get your contribution refunded.
Feel Good by Doing Good: Charity Crowdfunding
Probably the least well known, charity crowdfunding is the act of raising funds for charitable causes. Sites such as GoFundMe are known for helping those facing financial issues. Medical bills, college tuition, the purpose of charity crowdfunding offers can differ drastically.
As the name implies, you are participating in charity when you use this form of crowdfunding. Expect no incentive besides the fact that you knew you helped those in need. This form of crowdfunding is a great way to give back to your community or support a friend in need since you can raise funds for them without their knowledge.
A New Form of Crowdfunding Is Now Open: Equity Crowdfunding:
Equity-based crowdfunding is exactly like it sounds. Individuals can help raise money for a company in return for equity (part ownership) of the company. The more you contribute, the larger the part of the company you own. In October 2015, new legislation was passed which changed who could participate in equity crowdfunding. What was once restricted solely to accredited investors (those with huge quantities of money) is now open to the masses.
Unlike reward-based crowdfunding, when you contribute, you don’t receive a physical repayment. Your compensation comes in the form of shares of a company and the potential dividends paid back in future years. There are stacks and stacks of paper regarding the SEC regulations regarding equity crowdfunding since its direct comparison to public trading.
Marketplace Crowdfunding (a.k.a. Peer to Peer Lending)
Also known as Peer to Peer Lending, this form of lending dominates the overall emerging crowdfunding industry in regards to the total amount of capital funded. Marketplace crowdfunding is based on the idea of lending capital to a business with the understanding that the capital will be repaid with interest or profit.
With marketplace crowdfunding, you are rewarded with the repaid profit offered by the businesses. This form of compensation is often considered one of the best ways to grow your wealth considering the high profits offered by companies utilizing marketplace crowdfunding. However, with most marketplace crowdfunding platforms, your contribution could be at risk as the companies you contribute to could default completely and stop paying back. In most cases, collections agencies are involved with limited success.
New companies are emerging which take the benefits of marketplace crowdfunding. Kickfurther, a Top 10 Company in Richard Branson’s 2015 Extreme Tech Challenge, takes the business model of marketplace crowdfunding and applies it to physical inventory. Instead of lending capital, you purchase physical products through a consignment agreement and earn profit as the product you supported sells. These new business models show the potential impact that crowds could have to the $2.6 trillion dollar retail market.
So to recap…
Rewards-based crowdfunding: You give an amount of money in exchange for a reward (often a physical product which was still in prototype stages).
Donation-based crowdfunding: You donate a small amount of money for a charitable purpose without any expectation of being compensated.
Equity crowdfunding: You invest money in a company of your choosing in exchange for equity in the company and possible dividends.
Debt crowdfunding: You lend money to a business with the expectation that they will pay back your support with interest or profit.