What is crowdfunding? Crowdfunding is by definition, “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.” Let’s explore some common types of crowdfunding.
First, the most common type of crowdfunding, is donation-based. Donation-based crowdfunding is a way to source money for a project by asking a large number of contributors to individually donate a small amount to the project. What do these backers get in return for their contribution? They may receive token rewards that increase in prestige as the size of the donation increases; for the smallest sums, however, the funder also may receive nothing at all. This is the risk they take with donation-based crowdfunding.
Rewards-based crowdfunding has been a source of funding for small businesses for a long time but has surged in popularity recently. The Jumpstart Our Business Startups (JOBS) Act, passed in 2012, paved the way for a real regulatory approach to protecting donors to crowdfunding projects and enabling businesses to turn to crowdfunding as a significant source of funding. Since then, rewards-based crowdfunding has risen massively in popularity. Businesses and non-profits post projects on a crowdfunding portal, such as Kickstarter, targeting a certain amount of capital to raise. In exchange for a donation from fans of a project, the business or non-profit typically gives some type of incentive for participating.
One of the less common types of crowdfunding is equity crowdfunding. Equity crowdfunding is the act of investors giving large amounts of money, typically $1,000 or more in exchange for equity in the company. As a result, equity crowdfunding is typically used to raise money to fund the launch or growth of a company, not just initiate a creative project or cause. Often, these companies go on to raise money from angel investors or venture capitalists. AngelList and Crowdfunder are two of the most popular equity-crowdfunding platforms in the United States, but Fundable, EarlyShares and CircleUp are other popular platforms.
Crowdfunding is not a new concept, but with the dawn of our digital age, it has become one of the most popular forms of fundraising in 2018. Whether it be donation based, reward based or equity crowdfunding, small businesses are relying on the crowd to help them get off the ground!