Crowdfunding seems to be a hot topic these days – you hear about it all the time, but chances are you might not know exactly what it is. According to the Oxford Dictionary, 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.”
In a way, the crowdfunding concept has been around for centuries, but it only became a popular term in recent years due to changes in social and economic factors. During the financial crisis, small businesses needed more help than ever to stay afloat and along with the emergence of the Internet, business owners could maximise their social reach and achieve their funding goals by crowdfunding online. This is a change from the past, where small businesses would turn to banks for loans, but due to the economic downturn their access to these loans is more limited as banks now find startups or small businesses too risky.
Many people have heard of big crowdfunding websites like Kickstarter and Indiegogo who have pioneered the rewards-based crowdfunding model. However, there are actually four main types of crowdfunding, which break down into Donation, Rewards, Loans and Equity. They are explained below:
People can donate money to a charity, personal cause or a project that has ethical or moral value and is beneficial to the community. Anyone can start or support a campaign and supporters typically donate money as they believe in a cause. You can find this type of crowdfunding on websites like Gofundme.
Rewards-based crowdfunding refers to crowdfunding projects where supporters receive an item, business product or service in return for pledging their valuable funds. For example, when the Pebble Watch first came out, supporters received an early edition watch as a reward for their pledge. Anyone can start a campaign and the appeal to supporters is that they are either getting access to a product or service at a discount price or it is unique or not available anywhere else yet. You can find this type of crowdfunding on Kickstarter and Indiegogo.
In lending-based crowdfunding, investors do not receive a stake in the company, but instead they are repaid for their investment over a period of time and receive interest as income.
Equity-based crowdfunding refers to a more long-term investment opportunity – investors are encouraged to fund early stage startups in order to receive a stake in the company. In return for their investment, they can also expect to receive dividends or investment appreciation based on profits of the business. These opportunities are typically limited to accredited investors.
Due to the explosive growth of crowdfunding and the large demand on crowdfunding platforms, more niche and country-specific ones have emerged to cater to a more targeted community. For products that are extremely localised, raising funds on a niche platform may in turn be more effective than a large global platform.
So there you have it – crowdfunding easily explained! With a better understanding of the topic, you may have a few questions on crowdfunding, such as the usual success rate of projects completing their funding goal or whether it is a viable and effective business solution. In the end it comes down to the nature of your business and product – the most successful projects tend to identify a gap in the market and have potential to disrupt the status quo. However, marketing the product and maximising its reach is also very important – the crowdfunder may have a great product, but if investors cannot discover it online easily, this will affect the success rate of the business.
By Nicole Denholder. Nicole is the Founder and CEO of Next Chapter, a Hong Kong-based funding portal and rewards-based crowdfunding platform for female entrepreneurs.