Crowdfunding is a modern method of funding projects as well as business ventures by raising capital from a large number of people often through Internet-mediated sites.
However, crowdfunding can also be executed via mail-order subscriptions and benefits events. The financing strategy is based on three major types of actors. They include the project initiator or the proposer of the venture, individuals or groups endorsing the idea and the platform that pools the parties together to implement the idea.
Popularisation of Crowdfunding
Crowdfunding gained popularity when ArtistShare was launched in 2003. After the success of ArtistShare, more crowdfunding websites mushroomed on the internet. They included EquityNet, Pledgie, Sellaband, IndieGoGo, and GiveForward.
Other popular crowdfunding websites that were launched after the year 2009 are:
The Crowdfunding websites helped individuals and companies collect over $2.66 billion globally from the public by the year 2012 through one million individual campaigns.
The industry was estimated to grow to about $5.1 billion in the year 2013. During March 2014 alone, more than $60,000 was collected on an hourly basis through global crowdfunding campaigns.
During the same month also, an overwhelming 442 crowdfunding initiatives were launched on a daily basis internationally.
The Major Models of Crowdfunding
Here is a comprehensive insight into the major categories of crowdfunding and their performances. Through the assessment, capital seekers can be able to identify the model that best fit their interests.
The rewards-based crowdfunding option is where monetary contributions are exchanged for current or future performance of services or goods. The crowd pledges some money to the project and in return, the project offers them something such as a poster, t-shirt or an early copy of the product.More About Rewards-Based Crowdfunding
Charity crowdfunding is currently a very popular model of crowdfunding. Charity crowdfunding occurs when a company, individual or organization accepts donations. It is the collective effort of philanthropic individuals to support charitable initiatives.More About Charity Crowdfunding
In the equity model, the project’s management gives a share of its profits to the crowd funders. It is the model involving the exchange of company equity or firm ownership rather than goods or services. Once the initial target is reached or the project is sold, those who pledged to the campaign get a share of the proceeds.More About Equity Crowdfunding
The Debt-Based model is similar to acquiring a loan from a bank. The only difference here is that you acquire the loan from a crowd of people based on your favourite terms rather than the creditors’.More About Debt-Based Crowdfunding Model
The mixed crowdfunding strategy just operates as its name suggest. It mixes tactics of several crowdfunding models. For instance, the Crowdbnk website offers you a chance to get a reward or start an equity campaign.More About Mixed Crowdfunding Model
Litigation crowdfunding enables individuals to invest globally in legal disputes. Hence, it allows those in need of legal funding all over the world to access it from the masses. In this model, donors are offered a stake in the claim they fund.More About Litigation Crowdfunding
1. Rewards-Based Crowdfunding
The rewards-based crowdfunding option is where monetary contributions are exchanged for current or future performance of services or goods. The crowd pledges some money to the project and in return, the project offers them something such as a poster, t-shirt or an early copy of the product.
The rewards-based crowdfunding model is currently among the most popular options of crowdfunding in the world. Indiegogo and Kickstarter help all people to create pages on these websites to launch their worthy ideas to the public.
Most of these sites support artists and other innovative players in the creative industries. However, this crowdfunding strategy applies to a wide range of courses like motion picture promotion, free software engineering, inventions development, civic projects and scientific research.
There are two types of reward-based crowdfunding techniques that have been recently identified.
Potential investors prefer the AON initiatives since a substandard product cannot be released if the set funding goal is not achieved. Another advantage of this subtype is that the proposed projects typically offer more detailed information regarding the entire venture.
Pebble – a reward-based crowdfunding project
A remarkable example of a successful campaign is the Pebble watch. Pebble used Kickstarter to introduce the idea of a fairly inexpensive e-paper watch. The watch could be customised with varied apps to display things like calendar reminders and emails notifications.
They launched their idea by making a video about the project and set a $100,000-goal to complete its research and development. In this case, a donation of $100 attracted a promise of receiving the watch when they were ready.
Different amounts of donations attracted different rewards. If the $100,000 was not achieved, the donors were to get their money back.
There are unique rules in every crowdfunding website. In the Pebble case, the target was met and hence the money was transferred to Pebble by the Kickstarter after being charged a five percent commission.
After the money had been dispatched, Pebble was obligated to supply every donor with the number of watches that they promised. This rewards-based model was so popular that by the time the Pebble campaign was over, they had collected 100 times their minimum.
The crowdfunding model is most suitable for projects in the arts industries such as movies, painting, music or companies testing their markets. It can also be appropriate for charitable groups.
Advantages of Reward-based Crowdfunding
One of the benefits of reward-based crowdfunding is its potential to centralize and streamline entrepreneur’s fundraising efforts. You can eliminate the need to pursue every sponsor individually through building a centralized and comprehensive profile where you can funnel your idea to all potential investors interested in your venture. Through such a crowdfunding model, you can do away with repetitive and monotonous tasks such as printing multiple proposals, formulating binders and updating every other potential sponsor on the progress of your project. Which, of course, allows you more time to concentrate on other aspects of your start-up business other than just fundraising.
- Low Cost
Compared to Angel investing, Reward-based Crowdfunding is much less taxing and less demanding. In fact, most crowdfunding platforms under this model can easily allow you to set up your fundraising campaign and just for a meager percentage of what you manage to accrue.
- Offers a Platform Of Building Potentially Useful Platforms
It’s one of the few crowdfunding models where you or your company can make valuable connections with high-profile individuals interested in your project.
As a result, not only will the same people ( your new connections ) help you in marketing your project to others, but they can also play a pivotal role in helping reach your target within a very short timeframe.
- Highly Effective
Like most other crowdfunding models, the Rewards-based method makes heavy use of the internet and related platforms. Which means that you’re more likely to reach thousands of potential investors from all corners of the earth through this model compared to other available fundraising options.
Disadvantages of Reward-Based Crowdfunding
- Capital Limit
The main demerit of raising capital through reward-based crowdfunding is that you can only raise so much cash through a platform that over 75% of start-up entrepreneurs depend on. In short, the chances of the success of your campaign seeing the light of the day (for the average entrepreneur) are very slim compared to other crowdfunding methods.
- Exposure of Classified Business information
It goes without saying that you can’t persuade your investors to bank on your project without you exposing the vital elements that make your project tick. And so there’s always the risk of a shrewd entrepreneur beating you to implementing your own project by stealing your idea before you find the means to actualize it.
Major Players of Reward-Based Crowdfunding
The Indiegogo Crowdfunding platform was started by filmmakers to fund their projects. However, they serve various ventures like dance groups and small businesses. The platform is most suitable for indie-type projects since it operates on fixed, flexible and non-profit financing models. The flexible model sends the funds every time a person pledges and cuts nine percent of the funds. But once you reach your target, you are refunded the five percent of the total.
Kickstarter is a crowdfunding platform that is mostly oriented towards gaming, design, and technology. It is, in fact, one of the most popular crowdfunding options that are helping new, upcoming promising projects break internet obscurity.
Reward-Based Crowdfunding Success Story – Coolest CoolerOne of the most successful campaigns funded through this crowdfunding model is the Coolest Cooler project. It was a project to make a state-of-the-art portable cooler. The cooler featured an inbuilt Bluetooth speaker, optional blender, space to place plates and other picnic paraphernalia. The campaign collected $13,285,226, which was a whopping 26,570 percent of its target by August 2014. (after only two years of fundraising)
2. Charity Crowdfunding
Charity crowdfunding is currently a very popular model of crowdfunding. Charity crowdfunding occurs when a company, individual or organisation accepts donations. It is the collective effort of philanthropic individuals to support charitable initiatives.
The crowdfunding model is most suitable for non-profit-making ventures.
Advantages of Charity Crowdfunding.
In case you’re wondering if there are any unique benefits of pursuing the funding of your project through such a model then here are some of them;
- Organised and effective
Unlike other ways of pooling massive monetary contributions, the charity way of crowdfunding makes use of already existing mechanisms of fundraising or raising money for a cause. A good example is the already common way of raising money by auctioning off goods at an exorbitant profit – a practice that has been proven to generate millions of dollars, especially where antique items and jewelry is concerned.
- Reduces an Entrepreneur’s workload considerably.
Most charity-based crowdfunding platforms do not depend on aggressive marketing and advertising techniques to reach potential investors. In fact, since most of them already have existing platforms, and the means to reach out to potential contributors, the entrepreneur in question doesn’t have to sweat it out to get people to contribute to his cause. I.e as long as the platform can pitch his idea to its ardent followers.
Disadvantages of Charity Crowdfunding
Sadly, many charity-based crowdfunding platforms have the poor reputation of misappropriating the funds raised for noble causes under the guise of relevant and worthwhile projects. And this has made it hard for genuine start-up entrepreneurs to access reasonable funds from such platforms. For instance, a philanthropic individual might feel discouraged to find out that a project he funded with so much zeal just turned to be a scam well orchestrated to rip off generous individuals.
- Not Exactly Prestigious
While it may be admissible (or even fine) for filmmakers as well as artists to raise capital through this easy-to-pull-off method, professionals like high-level scientists and inventors normally do not like revealing that they resulted in such forms of borrowing capital. Some elites in the society including politicians would not like such kind of open solicitation to be associated with them.
It’s one of the very popular charity crowdfunding platforms that have seen over 14000 non-profit projects raise over 100 million in the past decade only.
A UK-based platform dedicated to helping social entrepreneurs and up-and-coming innovators change the world positively.
Based in the USA, Crowdrise has helped bring together more than 2500 of the world’s most respected philanthropists to finance over 150000 non-profit start-ups all over the world. In 2014 it was named among the top 25 Best Global Entrepreneur Philanthropist Platforms among other major players such as CauseVox and Kickstarter.
Success story – The $1,862,500-Save Eliza CampaignPerhaps the most successful charity crowdfunding campaign was the one where parents raised $1,862,500 to save their daughter, Eliza. The 4-year-old Eliza had been diagnosed with a terminal sickness that could eventually lead to loss of her motor functioning. Her parents launched a GoFundMe campaign, a video that went viral and a Twitter hashtag #saveeliza – all of which contributed immensely to the success of this humanitarian campaign.
3. Equity Crowdfunding
In the equity model, the project’s management gives a share of its profits to the crowd funders. It is the model involving the exchange of company equity or firm ownership rather than goods or services. Once the initial target is reached or the project is sold, those who pledged to the campaign get a share of the proceeds. The equity type of crowdfunding is risky to start-ups since most of them often fail. Hence, companies that specialise in this particular model require proposers to pass a test before they can invest in their projects.
It is also not suitable for creative or innovative projects. The model mostly involves relieving some of the control the proposers have over their projects. If you are specialising in a work of art that you are very passionate about, it could be difficult for you to give up control.
When proposers give equity, they also need legal assistance to observe due diligence for their sake and the investors’. That costs money and spends a lot of time to implement. Investors look for high-growth businesses where they can scale up and sell their shares at colossal profits in future. Small-scale artists who operate from their garages are obviously not the kind of businesses the high-flying investors normally consider.
The crowdfunding idea is extremely similar to how common stock is traded on the traditional stock market. The equity type of crowdfunding was previously not applicable in the US at large-scale, but that did not mean that it did not take place at all. There are very complex rules in the current US laws that permit a company to sell its stock to accredited investors. The stiff regulations are deemed necessary since these types of investments are normally very risky.
Another problem for equity crowdfunding experienced in the US is associated with solicitation. In short, in the US, it was illegal to advertise stock sales but these complications were solved after the implementation of the JOBS Act, which was passed into law in April 2012. Securities and Exchange Commission is now in the process of collaborating with the Congress and stakeholders in crowdfunding industry to settle on provisions for equity crowdfunding specially designed for the US.
A few provisions of the bill were the game changers in the US crowdfunding;
- Some small stock offerings like those taking place on upcoming US crowdfunding websites are not be required to register formally with the SEC.
- No one is required to have been an accredited investor to invest in crowdfunding.
- Forming a crowdfunding company does not necessitate the requirements to register with the SEC before they attract more than 500 non-accredited investors or a total of 2,000 investors.
- The general ban on solicitation and stock advertising for equity crowdfunding was lifted. Once the legislation was effected in the US, entrepreneurs were now able to sell a maximum $1 million of their stock to up to 1,999 people without being required to go public.
- To safeguard the non-accredited investors from being coerced to pledge their entire wealth to risky companies, the law caps the annual contributions. The annual cap to these companies is two percent of someone’s annual earnings. Their net worth should not be less than $40,000 for a cap of $10,000 involving individuals worth or earning a minimum of $100,000.
Advantages of Equity Crowdfunding
Equity crowdfunding model has made it possible for entrepreneurs and innovators looking for donors to present a whole capital raising pitch on a single link. Companies can keep a low profile, post engaging videos, access parties’ profiles, and utilise useful apps that potential investors can understand in a single, easy-to-comprehend web page.
- Reaching Investors Anywhere on Earth
Startup companies that raise capital through equity crowdfunding websites can share their plans with a portfolio of accredited investors centrally on their web pages. That in itself eliminates the need to travel or make endless calls to persuade potential investors.
The traditional methods of seeking capital are by far very expensive as compared to equity crowdfunding. Through this trending option of business funding, you eliminate the need to hire a group of lawyers, facilitators or even paying for air tickets to meet potential investors.
- Fast and Easy
In the past, entrepreneurs had to literally chase investors and marketers singly – one after the another. More time was also spent on identifying and luring target investors. But thanks to equity crowdfunding, potential investors become customers, supporters, and believers of potentially great projects.
The Disadvantages Of Equity Crowdfunding
- Unnecessary Exposure of Vital Financial Details
It goes without saying that should your campaign fail, the details of your unsuccessful project will remain on the web for all to see. As a matter of fact, some investors might get the idea that you resulted in using such a platform after being denied other viable options such a simple bank loan due to a bad credit history.
Just as they offered their support for your venture promptly, investors will also expect you to launch your project promptly. Any little delay might cause an unprecedented public outrage, not to mention that it’s only human for investors to expect a swift return of what they pumped into your idea as soon as they sign their cheque books.
- Deterring Other Financiers
Such crowdfunded ventures are typically funded by large numbers of investors from all walks of life, each with small stakes in the project. That kind of structure is very deterrent to venture capitalists or even angel investors in case you need them in future for funding. Most of these tycoons are leery of investing their money in a firm owned by thousands of inexperienced parties.
Major Players In Equity Crowdfunding.
It is an American website used by entrepreneurs to raise debt or equity investments for startups ventures.
It is a popular equity crowdfunding websites that help small businesses in America receive capital from investors around the world.
It is a British equity-based crowdfunding website that connects needy entrepreneurs and potential investors around the world.
It is a patented crowdfunding platform that was launched in the year 2005. It is utilised by thousands of entrepreneurs, government entities, business incubators, investors and other players in the entrepreneurial industry. The websites help the players plan, analyse, and capitalise privately-owned businesses.
It is an equity crowdfunding website that connects high-flying entrepreneurs with renowned investors who are interested in investing in exciting start-up ventures.
Success story – Beepi
Beepi is a firm offering an alternative way to buying and selling of used as well as pre-owned cars. It collected over $2 million on the AngelList, a website that connects startups and angel investors. Through integrating crowdfunding efforts with traditional funding methods, they were able to raise $12.7 million in their funding campaign. As much as this is not exactly pure equity crowdfunding, the model still played a significant role in helping the project become a reality.
4. Debt-Based Crowdfunding Model
The Debt-Based model is similar to acquiring a loan from a bank. The only difference here is that you acquire the loan from a crowd of people based on your favourite terms rather than the creditors’.
When it comes to equity, you may encounter a serious lack of enthusiasm for your venture unless you prove it has the promising potential for high growth. Another challenge here is that the interest rates may be a little bit higher than in the commercial banks. The headline numbers may look similar, but you have to consider the fees charged by the crowdfunding website as well as to the payment processor. Popular crowdfunding websites that specialise in this model are Ratesetter and Zopa.
The websites enable individuals to borrow funds for private use such as buying new cars to pay back later with an interest. Interest rates on these websites are usually aligned with those of high street banks. To borrow or lend funds here, you are required to be credit evaluated and approved to prevent fraud.
The debt-based crowdfunding model is also a little bit controversial since there are now payday lending companies. The firms are The Lending Well and PiggyBank that both offer short-term loans involving very high-interest rates.
The lending firms are often used by entrepreneurs who need a fairly small amount of cash to fix urgent situations and who struggle to acquire loans from high street financial institutions. The main controversy is only associated with the interest rates they charge.
However, there is quite a demand for this model but some people claim that their higher interest rates take advantage of people struggling financially. The debt-based crowdfunding is also known as Peer-to-Peer, P2P, marketplace lending or even crowdlending.
In this crowdfunding model, borrowers apply for free on the Internet, and the applications are reviewed by an automated system. The automated system also determines the borrower’s interest rate and their credit risk. Investors then buy securities in the fund that forms the loans to individual proposers or an assortment of borrowers. Investors ultimately benefit from interest earned from the unsecured loans. System operators benefit by deducting the loan servicing fee that is a percentage of the loan.
Institutional investors started the peer-to-peer lending arena in the year 2009. A historic example occurred in 2013 when Google invested colossal $125 million in the Lending Club. In the year 2014, the P2P lending amounted to about five billion dollars in the US alone. In the year 2014, P2P platforms loaned businesses £749 million that was a growth of 250 percent between 2012 and 2014.
In 2014, in both countries, approximately 75 percent of all the funds transferred via crowdfunding used P2P platforms. Lending Club later went public in 2014 and was valued at around $9 billion.
Advantages of Debt-based Crowdfunding
- Unlimited Access to Investors
Companies that seek capital through the debt-based crowdfunding platforms can share their proposals with an array of accredited potential investors at a common point. That eliminates the requirement to travel or deliver endless documents to persuade potential investors.
The traditional ways of seeking capital are very expensive as compared to debt-based crowdfunding. Through this trendy alternative to business funding, you do not have to hire a group of advocates, facilitators or pay air tickets while pursuing potential financiers.
While using this modern online technique, you will be able to access different kinds of investors in different countries to support your cause. It is also a superb way of luring benefactors from diverse backgrounds to help you raise funds. If you cannot successfully persuade an angel investor, 1000 small investors through this platform will help.
Disadvantages of Debt-based Crowdfunding
Debt-based crowdfunding is not exactly something any start-up entrepreneur (especially one who intends to associate themselves with high-flying brands) can brag about. In fact, come to think of it, angel investors and seriously loaded backers might get the idea that you’re only using such a platform as the last resort of unsuccessful fundraising attempts.
Major Players In Debt-Based Crowdfunding
It’s a capital borrowing platform where start-up entrepreneurs can receive pledges to their ideas without necessarily ruining or marring their credit scores. So instead of taking a loan from the bank, investors interested in your project can pledge cash in return for a sizable stake in your upcoming enterprise.
The Funding Circle was launched with an ambitious idea of transforming the traditional banking system to secure handsome deals for every entrepreneur. Funding Circle is currently among the leading online marketplace lender in the world. It is exclusively specialised on small enterprises.
The Prosper website is the leader in the debt-based lending that has proved to be a worthy alternative to traditional investing and loans. It cuts out the middleman who typically requires a slice of what is raised to connect start-up entrepreneurs with investors.
Success stories in Debt-Based Crowdfunding
Amanda Palmer, a musician, raised more than $1.2 million from 24,883 investors in June 2012 to release an album and a book through such a crowdfunding model.
Hans Fex collected more than $1.2 million from 5,030 investors in March 2015 for his small collection of unusual specimens through a debt-based crowdfunding platform. His was a portable assortment of curiosities where each item was iconic, authentic and labelled. The rare items included shards of lunar rock, mummy wrap, dinosaur eggshell and tiny fragments of the historic London Bridge.
5. Mixed Crowdfunding Model
The mixed crowdfunding strategy just operates as its name suggest. It mixes tactics of several crowdfunding models. For instance, the Crowdbnk website offers you a chance to get a reward or start an equity campaign.
One has to put several things into consideration before crowdfunding a project through this model. Additionally, you should check if the crowdfunding websites are regulated by the FSA. That ensures that you are wholly compensated should the crowdfunding platform go bankrupt or if you later find out that a campaign is fraudulent.
Advantages of Mixed Crowdfunding
Given that such a crowdfunding option encompasses all the benefits of various other diverse models, it’s obvious that an entrepreneur will be much better off with such a platform than with any other single option. Additionally, platforms that promote mixed crowdfunding are known to have less stringent terms as far as the technicalities surrounding fundraising go.
- Low Cost
Just like any other modern crowdfunding model, the mixed option eliminates the inconvenience of going from door-to-door soliciting for funds to start a company or finance an idea. This way, an entrepreneur can access sizable funds from a wide-array of backers from all over the globe just for a fraction of what needs to get the job done.
Disadvantages of Mixed Crowdfunding
- Capital Limit
Unfortunately, some of the major players that advocate for mixed crowdfunding place limits to how much an entrepreneur can raise within a certain timeframe. As a result, this option is recommended to aggressive innovators who may have several ideas to bankroll per year or month.
Major Players In Mixed Crowdfunding
Probably the leading crowdfunding site that uses the mixed crowdfunding model is Kickstarter. It has raised more than $220 million from 61,000 campaigns so far. Thousands of investors explore its listed ventures constantly waiting to invest their money in the ideas they view as most valuable. Kickstarter is known to accept most kinds of creative projects except charity campaigns.
The IndieGoGo crowdfunding website aims at helping innovative entrepreneurs raise funds to realise their personal project without any complications. The website’s format is similar to the Kickstarter’s and is easy to adapt to after using it for a short time. Unlike the Kickstarter though, one can kick-start any project including charity campaigns.
Success Stories Associated with Mixed Crowdfunding
The 3D printable clothing that is expected to come soon has elicited the need for an affordable house printer unit. As a consequence, Tech researchers from the renowned MIT Media Lab have already taken up the challenge. They are developing the FORM1, an innovative project to manufacture a low-cost, professional 3D printer for the clothing industry. The FORM1, in its mixed crowdfunding campaign, surpassed its original $100,000 goal from more than 2,000 backers by January 2015. Currently, the campaign has yielded more than $3 million of funding and hence the long-awaited dream of 3D printing at the comfort of our homes may soon become a reality.
Spike Lee Campaign
Spike Lee, a veteran filmmaker, raised $1.4 million from 6,421 investors in August 2013 to produce a film. He emphasised his independent to counter various criticism leveled against the campaign. He explained that he had used a similar method of raising capital even before the invention of the internet and finally decided to use the trendy way in using Kickstarter. The movie is a thriller but with the structure and flow of a horror film featuring people addicted to blood (legendary vampires).
6. Litigation Crowdfunding
Litigation crowdfunding enables individuals to invest globally in legal disputes. Hence, it allows those in need of legal funding all over the world to access it from the masses. In this model, donors are offered a stake in the claim they fund. That enables them to earn more than their investment if the court verdict is made in their favour.
Advantages of Litigation Crowdfunding
- Easy Funding
One of the main advantages of litigation crowdfunding is that you need not risk any money to fund your suit. You can finance your claim using other people’s money courtesy of this model. Also, if you are sued or you want to sue but you happen to be not so financially stable, you can still sponsor your case through this method.
- Lucrative To Funders
As a tech entrepreneur, this might be directly advantageous to you but it’s still worth noting that litigation crowdfunding can be a real cash cow for a smart investor. If the case (your case for instance) is ruled in their favour, such a funder can pocket sizable earnings from the compensation or fines paid with regards to the case.
Disadvantages of Litigation Crowdfunding
Although widely present and accepted, it is still a form of solicitation that does not paint a good picture of a public figure.
Major Players in Litigation Crowdfunding
The following are the websites that exclusively deal with litigation crowdfunding.
Invest4Justice has sponsored numerous legal cases since it started its operations in 2014 as the first litigation crowdfunding website in the world. It is easy and free to use by lawyers, plaintiffs, defendants, investors, donors or any interested parties. It promotes legal rights, make profits for investors and enables access to justice by less privileged plaintiffs.
It revolutionises access to the justice. LexShares assist investments in litigation by linking plaintiffs with sponsors. In short, it levels the playing field for all seekers of justice while making a profit to investors.
Well, there you have it – the various models of crowdfunding and the major players in each category. So at this juncture, anyone interested in sourcing funds for an upcoming project should have a good idea of the various options available both online and offline.