The 4 Types of Crowdfunding

Since 1997 that crowdfunding took a place as a way for raising money, four different types have emerged:

1)      Rewards

2)      Equity

3)      Donation

4)      Loans

Every type is quite different from the other. They differ in terms and requirements, so it is necessary to examine carefully all types and choose the path most relevant to your goals and needs.

 

1)      Rewards Crowdfunding:

Rewards based crowdfunding is the most common type. It is also called ‘perks based’. The reward based crowdfunding, involves setting varying levels of rewards that correspond to pledge amounts. Most often the reward is the product that the project owner is trying to launch.  A standard rewards campaign offers at least three levels of pledges/ rewards. One of its biggest benefits is that you don’t have to repay the money, so you are not starting your venture in dept, nor do you have to give away shares of your venture.

This type works well for tangible products who requires less than €100,000 and the campaign last between 1 to 3 months.

 

2)   Equity crowdfunding :

Has come to light in 2012 after the signing of JOBS ( Jumpstart Our Business Startups) Act . Equity crowdfunding is the exchange of shares in a private company for capital. In this case, entrepreneurs who launch an equity crowdfunding campaign can set investor caps,  minimum pledge amounts, etc. They can also approve or deny investors who wish to view their business documents.

This type of crowdfunding can last several months and fits well with startups that seek more than €100,000

 

3)   Donation crowdfunding:

Donation crowdfunding campaigns raise money without being required to provide anything of value in return. This type serves best  social causes, charities, political campaigns, rather than for entrepreneurial endeavours. Donation campaigns usually last for 1 to 3 months and they work well for less than €50,000 amounts.

 

4)   Lending Crowdfunding:

Lending based crowdfunding allows entrepreneurs to raise funds in the form of loans. Startups or business have to pay back lenders over a pre-determined timeline with an   interest. This type, serves best entrepreneurs that do not want to give up equity.

So, choose which model suits best your project.  Also, you need to look into the fee structures that crowdfunding platforms charge for every type of raising money. All platforms clearly state their fees in their FAQs, so review carefully  this  section before you make up your decision.

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Crowdfunding is not just a way of raising money

Nowadays, successful crowdfunders declare that they also used crowdfunding as a means to validate demand and build online communities to support them. The more enthusiastic a community becomes  the more successful the your idea will be. Apart from raising seed funding  over a platform, a direct connection between the ‘crowd’ and the creator is built so the support is of great value.  Most of the times backers take very personally this support and work together with the creator of the campaign.  On the other hand, the psychological pressure from the community that supports a project, creates an obligation to the team which leads at the end  to successful campaigns.

Moreover, projects that have the support of backers rarely fail. To be more precise, the failure percentage is 9% and even in that case, a founder that failed due to factors outside his control can still receive VC funding. The main substance in the relation between backers and the team of a project is not only the feeling of obligation that is generated to founders,   but a dynamic relationship that follows many stages of the project after the campaign. Let’s take a look at the backers’ profiles.
Certain stereotypes combine those profiles, which have a great impact on fundraising.  According to surveys, backers favor certain individuals, such as white males instead of women.

However, women surpass men in crowfunding procedures (Gender, Homophily and Activism in Crowdfunding)   shows that the 13% of women are more likely to succeed in raising money on Kickstarter than men.  In addition,
the survey indicated that this success comes from the support of other women, especially when the female founder is operating in a male-dominate space. So, backers can join communities to support campaigns for many different reasons or
even social causes.

Despite the diversity of backers, researches  also indicate that they are good at making decisions and adopting innovation. People that deal with technology, love to experiment new ideas and spread the information.

Undeniably, crowdfunding is changing how entrepreneurs bring new products in market. Thousands of innovators build brand awareness all while still in the product development process.

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