4 Different Types of Crowdfunding | All You need to Know

What is Crowdfunding?

Crowdfunding is the method of funding any project or progressing business by raising contribution from other firms and people. Their first aim is to fund enough to the new firm so that it can take a decent place in the market. In most of the cases, the funding is done via internet. The crowdfunded projects include creative and new works, the firms and they also provide many other services such as social networking and media hosting.

The crowdfunding is done in three major steps. The project initiator starts the project, the people behind the project support their idea and crowdfunding platform joins the investors together to finally launch the idea. In 2010, the crowdfunding industry worth around $89 million worldwide which increased to $5.1 billion in 2013. Till May 2014, the crowdfunding platforms raised more than $60,000 an hour, so you can imagine the total amount raised at the end of 2014.

The crowdfunding has many benefits that include providing a boost to the company’s profile. In the case of a low profile company, they provide them good market feedback. They also offer pre-release access to the products so that the company gets good market feedback.

Four different types of Crowdfunding

1. Reward Based Crowdfunding

Reward based crowdfunding is the most common type of crowdfunding all over the world. This involves giving rewards to the funding people or firm. This is used for many purposes including free software development, an invention or scientific research. This is divided into two types; Keep it All (KIA) and All or Nothing (AON). In KIA, the entrepreneurial sets a goal and keeps the entire amount raised whether they meet their goal or not. In AON, the entrepreneurial sets a goal and keeps nothing unless their goal is achieved.

The most common methods for offering the reward are

  • Early and advanced access to the product or service.
  • Give credit to all of your contributors.
  • Give opportunity to meet the people behind the project.
  • Offers special parties as a reward to donors.

2. Equity Based Crowdfunding

Equity based crowdfunding is a new form of crowdfunding where individuals support others efforts. It allows businesses seeking capitals to sell ownership shares via different crowdfunding platforms. This provides opportunities for individuals to become a shareholder. People invest in the firm and in exchange for the equity. They exchange money with stakes or shares in the company. If the company got success, the values of the equity goes up and vice-versa.

3. Debt Based Crowdfunding

Debt based crowdfunding is also known as peer-to-peer lending crowdfunding where a crowd lends their money and expect their money back with some fixed rate of interest. The main advantage of this funding is that it attracts investors easily because they get return money with some credit. Usually, its campaigns are very short (30-60 days) and the best option for entrepreneurs with small budget who doesn’t want to sell their firm’s shares at the beginning. Debt based funding is the general funding where the investors get their money back with interest. This look like a bank loan and this might get you in trouble if your startup fails.

4. Donation Based Crowdfunding

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The donation based crowdfunding is also known as charitable based crowdfunding. It is the most straightforward way of crowdfunding in which the donors contribute to the project and doesn’t get any reward or credit in exchange other than the feeling of entrepreneur. This kind of approach is used in social causes and charities. These crowdfunding campaigns are short in time and hence, it usually raises less money incomparable to other crowdfunding methods. Kickstarter and Indiegogo are the most popular donation based crowdfunding sites which raised the highest fund in the world.

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