More often you can read news about one or another crowdfunding project raised hundreds of thousands or even millions dollars. According to data crowdfunding projects collected around 3 billion US dollars in 2012 and in 2016 the number was much more than 30 billion US dollars.
But crowdfunding is not only a fundraising for some project, there are different platforms with specifically developed instruments. In other words it’s a system with its own “cogs” allowing numerous project to work. And the further the less this systems are similar to each other. We have prepared an analysis of business models involves crowdfunding as well as infographics with explanations. So it is easier to systemize information about crowdfunding and its dimensions.
What is crowdfunding
The term “crowdfunding” was born in 2006. First it appeared in articles of the American writer and journalist Jeff Hau. Thus fundraising for a common goal exists since the beginning of time.
Crowdfunding is a way of attracting money from different people to your own project. In fact, the method is reflected in its name. Crowd is a bunch of people, funding means collecting money. You can raise funds for different objects with crowdfunding. It can be a implementation of a service or a product, it can be fundraising for a treatment or even for making possible a meeting of two persons in love.
Very often you can see the word “crowdfunding” together with the term “crowdsourcing”. In general sense crowdsourcing is the seizing of crowd opportunities in own project. Crowdfunding can be considered as a part of crowdsourcing. Because if the “source” can be different, not only financial, “funding” is namely money raising.
Business models include crowdfunding can be divided in accordance with these frames of reference:
- Project goal: business, art, politics, culture, creative project
- Type of reward: financial, non-financial, free of charge.
Donations – no reward
It is worth noting donation was long time the main form of crowdfunding. What is actually donation? Backers (users decided to donate their money to one or another project) invest in one or another social, political or medical project and don’t expect to get any physical reward. That means there are no remuneration obligations. Most frequently fund are raised that way for medical treatments, restoration of monuments, event of different charity organisations.
The maximum reward you can expect by this type of crowdfunding can be reference of donor names and also gratitude expressed personally by project leaders. There are several websites focus on that type of crowdfunding: http://www.betterplace.org/de in Germany, http://respekt.net/ in Austria, Rusini and dobro.mail.ru in Russia.
Non-financial reward: products, gratitudes, souvenirs
It is one of the most convenient models for production projects of crowdfunding. It can be applied from small handmade projects to innovative technologies. Now this method is very common because it established itself among various users. By investing in the project the backer gives a credibility to the producer. In other words he places a preorder. For instance in case of musical project it could be a physical album copy, reference in the credits in case of music video or a film, concert tickets and many others.
The authors commit to deliver the product after release. So the backers purchase the exclusive product the very first. And it can be the single release of the product. This model of exclusivity significantly warms up interest of potential investors. In some way crowdfunding becomes a retail store of exclusive goods you can’t purchase right at the moment.
Financial reward: crowdinvesting
Unlike the previous model the main benchmark of crowdinvesting is a financial reward in exchange of project support. This model can be considered same as business investment with a view to prospective benefits.
Three forms of crowdinvesting
The approach actively used in music, gaming and film industry. The royalty model assumes not only presence of a non-financial reward (for instance, physical album or game copy, reference in the credits), bit also a share of sales income.
People crediting: crowdlending
This type of crowdinvesting benefits mainly through the opportunity for the sponsor to have a clear idea when and under what conditions they can expect investment return together with interests previously agreed. There are also several benefits for a borrower. He obtains credit on better conditions than banks are offering, does not spend time on paper work. Only natural persons can take a role of investors.
Crowdlending can be divided into two blocks: natural and legal person crediting. There are less platforms focused on legal person crediting, but they manage to raise impressive sums. For instance a platform called Funding Circle managed to raise USD 250 million.
If we are talking about natural persons there are both crowdlending and P2P. In P2P model lender and borrower communicate directly with each other and not with the whole crowd. The role of crowdfunding platform in this case is to be a middle-man and to guarantee the implementation of parties’ commitments during the entire process.
Lending Club is the leading crowdlending platform now. It raised over 2,7 billion dollars in the period of 2007-2013. Even Google shows interest in its feasibility and makes it more popular. In 2015 Google made a special agreement with Lending Club. It was agreed Lending Club decreases service charges for Google partners.
Social lending is a part of crowdlending. In this model interest is nominal or absence. This main goal of these projects if to help those in need in developing countries. The biggest platform of this segment is KIVA raised over 500 million dollar for different projects. And these were loans not donations and all the money was paid back to the sponsors.
Equity crowdfunding is one of the most interesting forms of business models. In this case sponsor gets equity rights as reward. It can be property share, company shares, dividends or voting right at the shareholders meeting.
Despite the fact this approach broadens possibilities of crowdfunding, this method is very questionable. It is closely linked with the company structure and it increases investors risks.
Non-accredited investors should be legally accepted in USA in 2013, but the Securities Commision did not publish guidelines allowing this type of investment. Even today there are several difficulties do not allow equity crowdfunding to reach an industry level in USA. But it does not stop the work of the platforms focused on this method of fundraising. For instance one of such platforms EquityNet is working since 2005.
In Europe equity crowdfunding has its legal base. One of the most successful examples if Seedrs platform raising millions of pounds for different business projects.
The future is new forms
There is a new trend being formed together with the growth of popularity of crowdfunding and crowdinvesting. Different forms of community participation in project development is being now re-evaluated and is being used as an integrative part in principally new business models.
An interesting example of such business model is the innovative crypto system PLATINCOIN. It includes PLC Business platform, where you can present your startup for community participation. Cryptosystem members vote for the projects they like. And the company supports projects collected the biggest number of votes.
Democratic procedure, financial support, transparent and effective mechanism of such projects attract more and more businessmen and voters allowing talented people to realise their project and set new goals.