The 6 Types Of Crowdfunding
(And Which Is Best?)
Rewards crowdfunding? Equity crowdfunding? Donation crowdfunding? So many different types of crowdfunding. This guide clears up the differences between them all, as well as provides some useful advice as to which one might be best to fund your project. Even though most people naturally think of Kickstarter or Indiegogo when they hear the term “crowdfunding”, there is far more to crowdfunding than that.
All forms of crowdfunding are using the Internet, and are raising finance from the collective efforts of many small backers.
There are six main categories of crowdfunding based on the sort of project being funded and what (if anything) is being promised in return.
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Table of Contents
1. Equity Crowdfunding 🚀
The crowd become investors. This type of crowdfunding is often employed by founders to raise capital for fast-growing, early-stage ventures – the kinds of companies which were once the exclusive domain of angel investors and venture capital. As small shareholders, the crowd backers stand to profit if the business later increases in value.
Works best for: startups and growing companies with high growth potential in any sector – e.g. B2B, B2C, products, services – as long as the business model has the potential to be attractive to investors.
The crowd become lenders. The money is borrowed from the crowd backers in the expectation of being repaid later, with interest. Instead of a bank acting as an intermediary between those with savings and those who need to borrow, the debt-based crowdfunding platform fulfills this role. It means that individuals get a greater say over the exact companies they want to lend to.
Works best for: more-established businesses with reliable cashflows, and/or physical assets which can be recovered in the event of defaulting on their obligations.
The crowd become customers and supporters. Unlike the first two types of crowdfunding, rewards crowdfunding backers are not motivated by financial returns. However, it is not a ‘something for nothing’ proposition either. Instead, backers are promised a perk in exchange for their pledge, such as a physical item, a digital download, or an experience. Rewards crowdfunding helps to get creative projects off the ground by getting the early input and financial support of people who want to see the project succeed.
Works best for: B2C products and artistic projects. Ideally, the basic product should lend itself to being an impulse purchase, and should have a strong cool factor or sustainability angle.
The crowd become charitable donors. In this type of crowdfunding, the money is being given purely out of the kindness of the backer’s hearts without expectation of getting anything in return. It may be used by those in need for projects such as funding a medical procedure, paying for education, or for humanitarian relief efforts.
Works best for: Individuals and organizations in need who can tell a particularly heart-rending story, and are willing to seek contributions.
The crowd become partial-owners of properties. This type of crowdfunding connects property developers with investors. It gives individuals a way of getting on the property ladder, even if they don’t have sufficient capital to purchase a property by themselves. Real estate crowdfunding can also give investors greater portfolio diversification thanks to the smaller investment sizes it makes possible. (e.g. instead of purchasing a single property for $500,000, investors could instead use real estate crowdfunding to invest in twenty partial stakes of different properties at $25,000 each).
Works best for: Real estate developers.
The crowd become owners of crypto tokens. Not traditionally thought of as one of the types of crowdfunding, initial coin offerings nonetheless have many of the characterisitcs of crowdfunding – seeking backing for a project using the Internet. Instead of asking for pledges of fiat currencies (such as US dollars, euros, etc.), initial coin offerings ask for crypto.
Works best for: technology projects seeking “investment” with a strong use case, and an understanding of the technical side of crypto tokens.
Conclusion – Which Types Of Crowdfunding Are Best?
If you are looking for pure charity, then donation crowdfunding is going to be your only option.
If you are willing to offer backers something in return, ask yourself if you would rather deliver them a one-time reward (in which case, rewards crowdfunding will be best), or if you are happy to offer them financial incentives. Financial incentives come with more rules, as they are generally considered an offering of securities, but can often be better for raising very large sums of money (6 – 7 figures, in US dollar terms).
If you decide to offer financial incentives, each of them have their pros and cons. Real-estate crowdfunding is obviously quite specialized for property projects. Equity crowdfunding is easier for early-stage startups, while debt-crowdfunding is possible for those with reliable cashflows. Initial coin offerings are a bit of a wild card, because since fiat money is never involved, they are much harder to regulate. Initial coin offerings can raise very large amounts of capital when executed properly, but they don’t have the same trust factor among ordinary people as traditional debt or equity securities.
The types of crowdfunding best for you is going to depend on your situation and your goals.
The New Book - Rewards Crowdfunding.
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