Entrepreneurial spirits are increasingly enticed by the idea of crowdfunding their projects. Simply put, crowdfunding is a way to raise funds from the general public, often through online platforms and social media. Its appeal is obvious: setting up a crowdfunding campaign and having the vox populi decide is a breeze compared to the paperwork and nervous breakdowns associated with traditional bank loans and investments. While the crowd always remains crucial, the relationship between entrepreneurs and their supporters comes in many shapes and forms. From no-strings attached donations to equity investments, we’ve put together the 5 most common crowdfunding models out there. By Shila Meyer-Behjat and Irene Broer
1. Donation based crowdfunding
Donations are the most straightforward way to crowdfund a project. In its purest form, donations-based crowdfunding runs on philanthropy. The incentive to make a contribution is not financial return or gain. Instead, donators might find their reward in the satisfaction of knowing that their money is going to be used for a good cause, for instance in support of a local charity or by helping a band to record their first album. The public donation model is anything but new (think charity fundraisers), but online platforms have drastically widened the scope of this traditional subsidizing method. Directly supporting a charitable project in columbia or a project that changes child’s life has never been easier.
2. Reward based crowdfunding
The reward system takes donation one step further and is probably the best-known model in crowdfunding. This is what websites such as Kickstarter and IndieGoGo specialize in: supporters are given the opportunity to choose the size of their support and receive special perks in return. The more money is spent, the perkier is the reward. Besides the rewards being a great incentive for people to support, sending out merchandise, invitations to a launch party or mentioning donators in the credits of a crowdfunded film is a wonderful way to thank investors for their contributions.
3. Pre-sales based crowdfunding
Offering pre-sales is another popular method to enthuse the crowd for a project. It’s similar to the reward system in the sense that investors receive the finished product in return for their contributions. However, instead of the supporters deciding the size of their investment themselves, pre-sales come with a fixed price based on market value and production costs. Before offering pre-sales, entrepreneurs should therefore have thoroughly calculated the costs of manufacturing and shipment and be reasonably sure that their business plan allows for timely production.
4. Lending based crowdfunding
In countries that legally allow for it, crowdfunding platforms offer lending possibilities to entrepreneurs and investors. Unlike traditional lending agreements, peer-to-peer lending, or P2PL, cuts the institutional “middle man”, allowing lenders to choose an investment themselves and entrepreneurs to benefit from lower interest rates. Investors can opt for a social lending model with minimal or no interest at all, or even a forgivable loan where they receive their money back only if and when the project has become profitable. The downside of P2PL is that loans are not contract-based and that consequently, legal guarantees for either party are not easily obtained.
5. Investment based crowdfunding
Crowdinvestment, sometimes jokingly dubbed crowdfunding for grownups, allows for interested parties to receive equity in the companies they support. Investors are able to choose a project based on its future potential or even shared values. Typically, contributors buy shares, which may give them some kind of say in the project. Sometimes, investors only buy a share of the revenue. In this case, contributors don’t have ownership but instead receive a financial reward in case of profit. Obviously, entrepreneurs interested in crowdinvestment require a solid business plan and should be willing to give up some decision-making power to their shareholders.