What is the first thing that comes to your mind when you hear the term Crowdfunding? In this case, judging the book by its cover might just be appropriate. But before digging deeper in explaining “What It Is,” let’s talk about who might be interested in understanding crowdfunding and its different types.
Individuals or startup companies that are looking to fund their idea/business.
At the early stage of a startup, the cost of maintaining and growing the business is greater than its capital and revenue.
In other words, you will be burning through a lot of funds to maintain your business when it is still not ready to generate revenue.
Therefore, you would need to raise money using one of the pre-seed funding methods available to be able to keep your company afloat until it can be self-sustaining.
Pre-seed funding is the earliest stage of funding for a new company.
There are several types of pre-seed funding that we have covered in a different video: “Types of Pre-seed Funding”.
Bootstrapping, Grants, “Friends, Family & Fools” or the 3 Fs, Pre-Seed Accelerator Programs, and Crowdfunding.
In this video, we will be focusing on Crowdfunding…which is the least traditional form of pre-seed funding!
Crowdfunding is an innovative method for raising money from a large number of people.
And by large, we mean hundreds and possibly thousands of individuals pitching in with small pledges.
Mainly done via the internet, it is also a popular and accessible source of Proof of Concept funding, which allows entrepreneurs to gain the resources needed to establish the viability of their business idea. Ultimately, these two features will widen the spectrum from which you can secure financing.
Now let’s talk about the four different types of crowdfunding:
- Reward Crowdfunding
- Debt Crowdfunding
- Equity Crowdfunding
- Donation Crowdfunding
Reward Crowdfunding allows investors to contribute to your venture in return for non-financial benefits.
However, investors might expect a reward in form of goods or services at a later stage. The more the investors donate, the bigger the reward they will expect. This type of crowdfunding is usually used for creative projects.
Debt crowdfunding provides investors with the chance to fund the project in exchange for financial interest.
This interest might range from high, low, to no interest at all.
This type of crowdfunding is usually used when people or companies are expecting a certain cash flow that will allow them to repay the financiers.
Equity crowdfunding, also known as Crowd Investing, Investment Crowdfunding, and Crowd Equity…
…allows investors to offer money in return for shares, or a small stake in the business, project, or venture.
This method is ideal for entrepreneurs who are looking for a large amount of capital to launch or grow their business, especially in areas where there is a potential for return.
Usually, these are companies that already have viable operations with a solid consumer base.
Finally, we have Donation crowdfunding, which is self-explanatory for the most part.
Donation crowdfunding is a way to source money for a project by asking a large number of contributors to individually donate a small amount to it.
These contributors/funders do not obtain any ownership or rights to the project, nor do they become creditors to it. They are - simply - donating. It is usually designed by charities, or entities raising money for social or charitable projects.
Thank you for watching. Check our videos on the hub to learn more about pre-seed funding and the available types businesses can leverage, the different methods for building a winning crowdfunding strategy, and more.
- European Commission. “Internal Market, Industry, Entrepreneurship, and SMEs: Reward-Based Crowdfunding”
- European Commission. “Internal Market, Industry, Entrepreneurship, and SMEs: Equity- Crowdfunding”
- Reason Street. “Debt-Crowdfunding”
- Investopedia. “Series A, B, C Funding: How It Works: Pre-Seed Funding"