The global crowdfunding industry grew to an estimated $34 billion in 2015 according to the Massolution report. That’s more than double the $16 billion estimated the year before and expectations are that it nearly doubled again in 2016.
We look at this massive growth and think of the crowd movement as just one group, those raising money and those supporting crowd projects.
But within the crowdfunding industry hides several different crowds, each serving a different purpose and with different goals.
Using the different crowds correctly may mean the difference between successfully funding your project or failing to meet your goals.
History of the Crowd Movement
Most people attribute the start of the crowd movement to Indiegogo and Kickstarter, launched in 2008 and 2009. The crowdfunding platforms were hugely popular and helped projects raise billions in the first several years.
The real start to the crowd movement goes back further and gets its inspiration from social networks like Facebook. As people became more comfortable sharing their social lives online, it was only natural that the trend would evolve into fundraising and other financial sharing.
As crowdfunding evolved, it split into four distinct parts to serve the needs of specific groups. Peer lending emerged in 2006 as a loans-based model with social- and rewards-based crowdfunding soon following. In 2012, the Jumpstart Our Business Startups (JOBS) Act laid the groundwork for equity crowdfunding.
Understanding the differences between these types of crowdfunding will help you successfully raise money for your project.
Social crowdfunding is the natural evolution of traditional fundraising into the online world. Individuals or organizations can create a campaign to fund social causes, medical and emergency expenses and other personal needs. Unlike rewards-based crowdfunding, supporters don’t expect anything in return for their donation.
According to the National Center for Charitable Statistics, there are more than 1.5 million non-profit organizations in the United States collecting just over $373 billion in donations in 2015 alone. These organizations have had to follow their supporters online through crowdfunding and fundraising websites.
Most social crowdfunding sites charge campaigns a percentage of the money collected, the obvious exception being YouCaring. Being successful raising money on a social crowdfunding platform means being able to share your story and reach people on a personal level. Since there are no rewards or incentives offered, crowdfunding projects have to offer intangible benefits to supporters like the feeling of community or knowing that they are making a difference.
Success in your social campaign will usually need to start with a personal approach to family, friends and social network connections. These are the people most likely to support your campaign without any incentive. Your goal here isn’t only monetary support but recruiting this first group to help share the message to their network as well.
Rewards Based Crowdfunding
Rewards-based crowdfunding differs in that an incentive is offered to supporters. Campaigns usually develop a tiered-system of rewards where supporters can get a specific reward for donating but can get other rewards for higher donations. Donations of $10 may only receive a thank you email while higher donations might receive free samples and even trips to meet the project creators.
Because of the tie-in with rewards, rewards-based crowdfunding has become a great opportunity for small businesses. Business owners can launch a new product through crowdfunding, offering the finished product as a reward, and get instant feedback from supporters. Not only does the entrepreneur get their idea funded but they get an army of supporters that feel like they helped make it happen, turning them into life-long cheerleaders for the brand.
Being successful on a rewards-based crowdfunding campaign is much more marketing-driven compared to a social campaign. Campaign owners need to demonstrate how the value of the reward or product goes well beyond its cost to supporters. Successful crowd campaigns build communities of followers and develop relationships months before the campaign is launched in order to get the online marketing to be spread to a large enough audience.
Equity crowdfunding is one of the newest forms in the crowd movement but could grow just as large as the others. In equity crowdfunding, businesses pitch a campaign to individual investors for an investment share in the company. Until 2012, this was only allowable in private between the entrepreneur and wealthy investor groups like venture capital firms and angel investors.
With the signing of the JOBS Act, companies could make their pitch publicly and in 2016 they could sell investment shares to any investor. There are several types of equity crowdfunding, each requiring a different level of government regulation and paperwork on the part of the business owner.
Being successful in equity crowdfunding depends on your ability to pitch your company’s potential to investors. The crowdfunding platforms host a campaign writeup along with financial documents, a pitch presentation and a Q&A section to connect investors with management. Successfully raising money for your business idea means being able to show investors how their investment could grow over the years to come.
Peer to Peer Lending
Peer lending is unique in many ways compared to the other types of crowdfunding. Peer lending sites create a marketplace for people that want to borrow money and investors looking for a fixed-income return. Borrowers fill out a loan application just as they would at a bank. The p2p platform checks their credit report and assigns the loan to a risk category and proposes an interest rate.
If the borrower accepts the terms of the loan, it is made available on the website for investors to fund. Monthly payments are taken directly from the borrower’s checking account and investors are paid their share of the proceeds depending on the share of the loan they funded.
Debt consolidation, taking out one large loan to pay off several higher-rate loans, accounts for the vast majority of loans made on p2p websites. Borrowers on peer lending websites generally need a FICO score above prime, about 580, and verifiable income. Investing in the loans is allowed in most states and regulated by state law.
Crowdfunding is a growing phenomenon and promises to change the world through funding of social projects, small business and personal needs. Being successful with your crowd project means understanding the different types of crowdfunding and where your project best fits. Get to know the specifics of each form of crowdfunding as well as the advantages and limitations and you’ll be on your way to funding any project.