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Comparing The Different Types Of Crowdfunding

October 28, 2013

Crowdfunding is a word that was unknown a few years ago; now almost everyone has at least an idea of what it means. It’s a way to leverage social media and other high tech platforms to raise money in a short time. This is a technique used by many startups recently.

Who might use crowdfunding? Someone trying to start a small business; a band wanting to put out a CD; an independent filmmaker needing funds for a movie; an inventor who wants to make a prototype for a new invention. These are just a few examples, but they illustrate how broad the concept is. Almost anyone with an idea can launch a crowdfunding campaign.

Crowdfunding is a good option for people who may not be able to raise money via more conventional means. With this method, you don’t need the type of credit or collateral you would need to get a bank loan. Nor is it as complicated as applying for most grants. At the same time, you must have some public relations and media savvy if you want your campaign to succeed.

There are a few different types of crowdfunding. It’s essential that anyone considering this path finds the most appropriate type for his or her project.

Donation Crowdfunding

This is the type of crowdfunding where donors simply give money to the person running the campaign with no expectation of receiving anything in return. This is usually used for charities or causes, as opposed to for profit endeavors.

Donation crowdfunding operates similarly to a traditional fundraising campaign. The main difference is that it uses a more efficient platform that enables the cause to raise money quickly.

Rewards Crowdfunding

In this scenario, the people sending in their money do not get a financial return, but they do receive some type of reward. In some cases, this is mainly symbolic, such as a t-shirt or novelty item with the name of the organization or cause. This is typical for charities or causes where the primary motivation is to support the cause but some additional incentive is created.

In other cases, however, the rewards might be something more substantial. A company selling products or services may offer coupons or discounts to people who donate. Some filmmakers or musicians offer “producer” status to people who give a certain amount. Rewards are generally staggered based on the amount given.

Lending or Debt Crowdfunding

This type of crowdfunding is a loan rather than a gift. The crowd in this case is lending their money to the person or organization with the expectation that they will be repaid with interest. The participants in this type of scenario are investors rather than donors.

This method is used by companies who need to raise money but may not qualify for traditional loans. It presents a certain risk, as not all endeavors turn out as planned. Investors must be informed about the default policy in case the project runs out of money or fails in any way.

Equity Crowdfunding

This is similar to purchasing stock in a company. Investors are tapped to purchase ownership stakes in the business, company or project. The legal status of this type of crowdfunding is still uncertain in the U.S. It will be up to the SEC to determine whether this type of crowdfunding will be allowed to exist, and if so what the parameters and regulations will be.

Royalty Crowdfunding

With this model, backers will receive a certain royalty once the enterprise starts generating a profit. For investors, this is a speculative type of investing as people invest in projects they hope will turn out to be successful. This is a method that can be used by a company or artist that is planning to release a product.

Choosing the Best Type of Crowdfunding

There is no single model for crowdfunding that is right for everyone. Since the whole idea is quite new, we can expect to see many new developments in the near future. You have to decide which type is most appropriate for your needs. Put yourself in the shoes of potential donors/investors. What would motivate you to help fund this project?

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Denise Laurel is blogging for Startupvalley, an equity crowdfunding platform. She enjoys blogging about crowdfunding news, different platforms and trends in the crowdfunding world.

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