Crowdfunding has a wide reach and may be utilized by businesses, nonprofit organizations, an individual, group, or an organization. However, success is not guaranteed. Funds may be sought out to start a business, to support a cause, or to reach a fundraising goal. Crowdfunding provides an opportunity to gain financial support from others for individuals or organizations that may not qualify for traditional funding.
Types of Crowdfunding
There are four main types of crowdfunding:
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Rewards-based crowdfunding offers rewards to donors based on the amount they contribute. This method is often used by startups and organizations offering a new product or service.
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Equity crowdfunding gives contributors a stake or share in the company. This allows startups to raise funds without taking loans.
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Debt crowdfunding works like a traditional business loan that must be paid back with interest over time. The interest rates are typically smaller than standard business loans.
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Donation-based crowdfunding does not provide financial returns or rewards to contributors. This method relies on contributors donating solely to support the project or cause.
Platforms like Kickstarter and Indiegogo allow users to create fundraising campaigns easily. Kickstarter releases funds only if the campaign goal amount is reached, while Indiegogo allows users to receive prorated funding as it comes in. With careful planning and promotion, crowdfunding has helped many startups and projects raise substantial funding.
Popular Crowdfunding Platforms
The most popular types are rewards-based and equity crowdfunding. Kickstarter releases funds only if the campaign goal amount is reached, while Indiegogo allows users to receive prorated funding as it comes in.
Equity-based crowdfunding is an increasingly popular method. In 2012, the Jumpstart Our Business Startups Act eased some regulations to encourage startups to seek different funding types.
Indiegogo is seen as more flexible than Kickstarter. It gives backers control over fixed or flexible models. This is a key difference.
For non-profits, donation-based crowdfunding can suitably raise funds for a cause without giving back shares or proceeds.
It is important to decide the crowdfunding type before choosing a platform, as many sites suit specific methods. Real estate crowdfunding lets investors contribute smaller amounts to pay for property. They then receive payouts based on revenue. Investors can diversify instead of owning a single property.
Best Practices and Uses of Crowdfunding
Crowdfunding uses social media and crowdfunding websites to connect investors and entrepreneurs. The surge in crowdfunding in recent years is a clear indicator of its potential for success.
Using crowdfunding, investors can choose from hundreds of projects and put as little as $10 into each. It’s no longer uncommon to see people using platforms like Kickstarter and Indiegogo, or creating a dedicated business website to raise funding for a new venture.
For non-profits, donation-based crowdfunding can suitably raise funds for a cause. With rewards crowdfunding, businesses provide information on funding needs and minimum pledge amounts. Investors do not get equity but may receive rewards or perks. Equity-based crowdfunding is an increasingly popular method.