What is Crowdfunding?

Javi Fondevila

Crowdfunding—everybody wants it, but what exactly is it? It involves so much more than just making money from the public. Depending on what business you run and what industry you operate in, the very word can mean something entirely different altogether.

Crowdfunding in the “classic” sense means crowdsourcing and microfinancing. It brings together various individuals, lenders, and organizations who commit their money to companies, projects, and start-ups that they want to support. Crowdfunding is still a relatively young market, yet it is growing at an exponential rate and thousands of businesses every year benefit hugely from it.

Crowdfunding is an umbrella term, however—there are many different types of it. We are going to cover some of the more popular types in this blog post.

The Different Types of Crowdfunding and What They Mean

Here are a few different types of crowdfunding. Each of these types are different from one another, however, they all achieve the same goal—funding a business enterprise.

1. Rewards-based crowdfunding

Crowdfunding is most notably related to websites such as Kickstarter and Indiegogo. These are rewards-based crowdfunding websites where people, usually individuals, pledge their own money to a new creative project, a new technology product, or an artist producing a new album.

In return, the people who pledge their money are “rewarded” with something that correlates to the amount of money they pledged if the project is funded. If the project is not funded and does not go ahead, any crowdfunded money is returned. A notable example is the Pebble smartwatch that received $2.6 million in funding after only three days’ worth of crowdfunding on Kickstarter.

2. Peer-to-peer lending

Peer-to-peer lending is a form of crowdfunding that is vastly different to the rewards-based crowdfunding we just looked at.

Have you ever loaned money to somebody? Well, this is peer-to-peer lending. Websites such as Lending Club and Prosper enable budding businesspeople to access huge amounts of money outside of the more traditional and inherently risky banking channels. People who are willing to take a risk with their capital lend money to other individuals who want to fund their business ideas. People lending money can create loan portfolios at the click of a button.

Peer-to-peer lending sites pay out billions of dollars per year to companies such as yours that are looking to launch a new product, expand into a new market, or deploy new digital marketing strategies.

3. Donation-based crowdfunding

Sometimes people just want to give their money to a business without expecting anything in return. Although the classic candidate for this type of funding is a charity, plenty of for-profit organizations have been funded by people handing money over simply because they are passionate about the project.

Kiva.org and GoFundMe are the two most prominent donation-based crowdfunding sites going right now. These two websites have been funding passion projects, charities, and even individual people experiencing hard times for over a decade. Kiva.org even specializes in funding small business owners in emerging markets.

4. Equity crowdfunding

Although the name “equity crowdfunding” may sound somewhat intimidating, it is anything but!

Equity crowdfunding is the smallest “slice” of the overall crowdfunding pie, however, it can change the way that people invest their money. Equity crowdfunding facilitates real investments in private companies.

AngelList is the primary example of an equity crowdfunding platform and it is known as “the Android of venture capital”. Other firms include OurCrowd and CircleUp—these act like online venture capitalists that provide investors with access to start-ups with an initial investment that can be as little as $1000.

Lots of Crowdfunding Options are Available

If you need access to money to get your business off the ground, there are plenty of options that you can explore.

Before turning to traditional banks (who charge huge amounts of interest on loans, by the way!), you should exhaust all other possible funding options. Kickstarter, peer-to-peer lending, and donation-based crowdfunding have all helped businesses with zero capital establish themselves and become multi-million-dollar enterprises.

Could yours be the next one?

You will never know unless you try it out for yourself.

We recommend