If you’re financing growth, an idea, project, research or charitable project, crowdfunding can be a tool to help. But, let’s first get a lay of the land.
Crowdfunding is a funding method where a large number of ordinary citizens — the crowd — can fund your personal or business project with their money.
It’s typically done through an online platform that allows the fundraiser to set up a public campaign for accepting contributions. The campaign advertises the nature of the project or venture, the amount the company/person hopes to raise and the fundraising deadline. People donate specified amounts through the campaign’s website and often receive an acknowledgement or reward in return.
Crowdfunding has moved from trendy buzzword to mainstream fundraising model.
In less than five years, Kickstarter has attracted more than 5 million contributors pledging close to $1 billion, funding more than 55,000 projects. Rival fundraising platform Indiegogo can boast of a campaign that generated $12 million in pledges. Numbers like these make crowdfunding attractive for first-time entrepreneurs and established businesses alike.
There are platforms serving different purposes, so here’s a brief summary:
Rewards-based
Reward-based crowdfunding has been used for a range of purposes, including funding movies, software development (free software as a reward), inventions like the Pebble Watch, restaurants where donors receive discounts in exchange for financial support, scientific research and civic projects where T-shirts are the reward.
One of my favorite examples is the Hungry Mother restaurant in Cambridge, Massachusetts. The donors’ names are written on the wall and they receive a 10 percent discount on dining for life.
The most popular rewards-based sites are Kickstarter and Indiegogo.
Debt-based
Debt-based crowdfunding is also known as peer-to peer lending or crowd-lending. Borrowers complete an online application that is reviewed and verified by an automated system, which also determines the borrower’s credit risk and interest rate.
Investors buy securities in a fund that makes loans to individual borrowers or bundles of borrowers. Investors make money from the interest on the loans (mostly unsecured). The platform offering the service charges a loan servicing fee and captures a percentage of the interest.
Some popular sites are Lending Club, Prosper and Funding Circle.
Equity-based
Equity-based crowdfunding is the collective effort of individuals to support startups and receive stock in exchange. The Securities and Exchange Commission just released rules for this type of crowdfunding, and startups will be able to raise capital starting in May.
A few groups received a “no-action” letter (an exemption) from the SEC and have been operating as equity crowdfunding sites. They are AngelList, citizen.vc and CircleUp. I know the AngelList founders and they’re a very reputable group.
Charity-based
Charity crowdfunding is a collective effort of individuals to help philanthropy. This fundraising helps causes, nonprofits, civic neighborhood projects, families with hospital bills, etc. The most active platforms are Razoo, CrowdRise, GoFundMe and StartSomeGood.
Other types of crowdfunding are becoming available, like websites to help pay for college or help build mobile apps. The key to selecting the right crowdfunding site is to do your homework, and learn best practices for implementation success.
Catherine V. Mott is the CEO and founder of BlueTree Capital Group, BlueTree Venture Fund and BlueTree Allied Angels located in Western Pennsylvania. As one of the more than 370 professional managed private investor networks in the U.S. and Canada, BlueTree Allied Angels has invested more than $27 million in 43 regional startup companies.
