It seems that everyone who has been online in 2013 knows something about crowdfunding, mostly drawn from the massive media coverage which has been attracted by the major sites such as Kickstarter and Indiegogo. However, many people are not aware that those two huge sites are only a part of the spectrum of crowdfunding platforms overall as they are essentially reward-based sites only. There are five primary types of crowdfunding sites and the reward-based platform is only one of them. Review all the types and discover which one is the best for your business’ crowdfunding requirements.
- Reward. The provision of a reward or a perk is the way most people understand crowdfunding and it is the most popular type of all. In this category of crowdfunding platform, the contributors obtain no financial return for their donations at all. They get no equity, no chance to recoup their investment, and essentially are only “purchasing” a particular product or service. However, reward based crowdfunding is not just a fancy internet version of a store, as the actual perks are usually personalized (such as a signed CD cover or T-shirt) or may even involve a direct phone conversation with a key personality. The “intangible” value of this personalization is often ten or more times greater than the cost of the unpersonalized product, therefore it is not unusual to see a personalized CD or T-shirt be made available for a contribution of $100 or more.
- Donation. In the cases of social causes, political campaigns, and non-profit fundraising, donation crowdfunding allows for a contribution to be made directly to the organization sponsoring the project and the contributor usually receives a tax write-off in return. In some ways these types of sites are little more than central clearing houses for non-profit fundraising which would have occurred on the association’s website anyway.
- Lending. While in the first two types of crowdfunding platforms there is no mechanism for the return of any of the contributed funds, there are many sites which operate on the debt, or peer to peer lending paradigm. Contributors can fund a particular project through the platform and expect to be repaid over a fixed period of time with an amount of predetermined interest added onto the principal. Generally these types of lending sites have very stringent requirements for project approval, with at least one year of business operations and a demonstrable amount of pre-existing cashflow necessary to appear on the site.
- Royalty. A variance on the Lending business model, this type of platform offers contributors a fixed percentage of any revenue which will be generated by the project once it is activated and earning money. This type of platform is widely used by app programmers who attract funding through the development process and then share in the revenue generated by the app sales when it hits the market.
- Equity. This is the newest form of crowdfunding for the specific reason that it was contrary to long-established United States Securities & Exchange Commission (SEC) legislation up until just a few weeks ago when the JOBS Act came into force. Prior to this time, any contributors to a project were legally prohibited from receiving any form of ownership interest or even a portion of any profits generated. These benefits were counted as a financial return on an investment and thus subject to extremely stringent SEC rules. Even under the JOBS Act equity crowdfunding entrepreneurs will still have to extensively pre-qualify investors as if there is no pre-existing personal relationship, there are going to be various litmus tests which the investors will have to satisfy, including a certain demonstrable level of yearly income and total net worth.
The crowdfunding platform spectrum encompasses a wide variety of different types of fundraising opportunities for your business but since they vary so profoundly among each other, there is never a substitute for researching each type very carefully to ensure that it’s the best fit for your particular requirements. When you pick the right category you are then well on the way to locating the perfect platform to fit all of your business’ crowdfunding needs!