5 Crowdfunding Types
This was an excerpt from an assignment for my entrepreneurial class đ
Introduction
In general, there are about 5 major types of crowdfunding, including donation-based, debt-based, equity-based, rewards-based, and royalty-based. These 5 major types of crowdfunding approximately cover the options that the Professor has mentioned during the class, for example, product, company non-accredited, accredited, government, charity, and so on. I will be discussing each of the major types in the following sections.
1. Donation-Based Crowdfunding
As the name suggested, donation-based crowdfunding aims to get funded via donations and there is usually no need to provide anything in return, unlike other crowdfunding methods. Donation-based crowdfunding campaigns usually last one to three months with funding goals being less than $10,000 (University Lab Partners, n.d.).
Some popular sites that allow users to create donation-based crowdfunding campaigns include:
GoFundMe.com
This is one of the biggest donation-based crowdfunding platform
For individuals or businesses, thereâs no cost to start a campaign, and GoFundMe will charge 2.9% + $0.30 per transaction
For charities, also no cost to start, with 2.3% + $0.30 per transaction
GiveCampus.com
This is an educational fundraising platform that also provides donor and volunteer management
It implements an annual subscription model based on educational institute sizes
Fundly.com
Digital-first donation-based crowdfunding platform
0% platform fee with 2.9% + $0.30 per transaction
2. Debt-Based Crowdfunding
Debt-Based Crowdfunding is similar to taking out a loan, but instead of getting funded by a financial institute such as a bank, one gets funded from multiple lenders. There are usually pre-determined terms and conditions such as when the funds should be repaid, how much interest to be charged, how the interest will be calculated, and so on. Usually, debt-based crowdfunding amounts are less than $500,000, with lengths of campaigns ranging from weeks to months, repayment frequency being monthly for 6 months to 5 years, and APR from 5% to 27% (Crowdfunding Is an Increasingly Popular Source of Borrowing for Small Businesses Looking to Grow, 2022).
There are several methods of debt-based crowdfunding:
Peer-to-Peer (P2P) â such as LendingClub.com where there is a marketplace for interested borrowers and lenders to participate.
Micro-lending â similar to P2P but with amounts usually less than $50,000.
Mini-bonds â âhave a term of three to five years, require borrowers to make regular interest payments to lenders during that time, and to return principal at the end of the termâ (Crowdfunding Is an Increasingly Popular Source of Borrowing for Small Businesses Looking to Grow, 2022).
Invoice financing â provides businesses with funding or a revolving line of credit based on money owed to them by customers (Crowdfunding Is an Increasingly Popular Source of Borrowing for Small Businesses Looking to Grow, 2022).
3. Equity-Based Crowdfunding
Equity-Based Crowdfunding involves more work than other types of crowdfunding because businesses, instead of individuals, have to give up a portion of the businesses (shares of the company) in exchange for funding. The process includes having a legal entity set up, following governmental regulations (specifically U.S. Securities and Exchange Commission, or SEC), taking care of paperwork, and disclosing business financials and information to investors as per SECâs requirements.
There are three major categories of Equity-Based Crowdfunding based on SECâs regulations:
Regulation D Equity Crowdfunding â there is no funding amount limit but, but only accredited investors (individuals) âwho have a net worth of at least $1 million or have made at least $200,000 each of the past 3 yearsâ can invest (TRUiC, 2022).
Regulation A+ Equity Crowdfunding â âRegulation A+ (or Reg A+) crowdfunding allows companies to raise up to $20M to $50M of capital selling equity in their ventures to both accredited and unaccredited investorsâ (TRUiC, 2022).
Regulation CF Equity Crowdfunding â this allows companies to raise up to $1 million from both accredited and unaccredited investors.
Some popular Equity-Based Crowdfunding platforms include:
Wefunder
SeedInvest
AngelList
StartEngine
Republic
Crowdfunder
4. Rewards-Based Crowdfunding
As the name suggests, Rewards-Based Crowdfunding provides rewards (products/goods) in exchange for funds. It is one of the most common crowdfunding methods around being popularized by early and large players such as Kickstarter.com and Indiegogo.com.
Though rewards-based crowdfunding is a popular crowdfunding method, project creators should be careful in setting crowdfunding goals and be diligent in marketing and fulfilling their campaigns. Kickstarter.com adopts an all-or-nothing mechanism, meaning if the campaign doesnât reach its goal, the project creator wonât receive any of the funding. On the other hand, Indiegogo.com allows project creators to choose between flexible funding (receive the funds whether the goal was hit or not) and fixed funding (all-or-nothing).
Rewards-Based Crowdfunding also has âhybridâ versions that can overlap with other crowdfunding types. For example, Bonfire.com, which is more of a charitable/donation-based crowdfunding type, but it provides t-shirts as rewards, so it is being categorized as Rewards-Based Crowdfunding. Or, an equity-based crowdfunding campaign can also provide actual goods/services as rewards or incentives.
Other Rewards-Based Crowdfunding other than Kickstarter and Indiegogo:
Crowdfunder UK
Pozible (based in Australia)
Vision Bakery (based in Germany)
Thunderfund (based in South Africa)
Patreon (for artists and creators)
CustomInk (similar to Bonfire)
5. Royalty-Based Crowdfunding
Royalty-Based Crowdfunding is an alternative crowdfunding method for businesses that do not wish to give up on ownership (shares/equities). Investors invest a certain amount of money and the business repays an agreed-upon percentage of gross revenue as soon as sales are generated. For example, a mobile gaming company might require some upfront investments to develop a game, so it creates a royalty-based crowdfunding campaign to get funded. After the game is released and starts earning revenues, the backers receive a designated stream of revenue share.
There are several Royalty-Based Crowdfunding platforms:
Quirky.com
Flowcap.com (more of royalty financing)
Tubestart.com
AppsFunder.com
Reference
Crowdfunding is an increasingly popular source of borrowing for small businesses looking to grow. (2022, March 25). Business Insider. Retrieved October 22, 2022, from https://www.businessinsider.com/personal-finance/debt-crowdfunding?international=true&r=US&IR=T
TRUiC. (2022, July 19). What is Equity-Based Crowdfunding? howtostartanllc.com. Retrieved October 22, 2022, from https://howtostartanllc.com/finance/what-is-equity-based-crowdfunding
University Lab Partners. (n.d.). 5 Most Popular Types of Crowdfunding for Startups. Retrieved October 22, 2022, from https://www.universitylabpartners.org/blog/5-most-popular-types-of-crowdfunding-for-startups
Have you created any crowdfunding campaigns? How was it?
Or would you want to try it out?