Crowdfunding: An Introduction

By Stefanie Neyland with research by Oscar Jofre

You may have heard a lot about crowdfunding recently, and you may be wondering what it’s all about. If you’re not quite sure exactly what it is, have no fear—you’re not alone. The truth is that crowdfunding is a relatively new concept, and many entrepreneurs are only just beginning to learn about it and how it can be leveraged to start or grow their business venture.

So what is crowdfunding? On its most basic level, it’s the aggregation of small amounts of capital from a large group of people, usually via the Internet, in order to fund a business, project or organization. There are four main types of crowdfunding:

Equity-based crowdfunding

Equity crowdfunding is considered by most to be the holy grail of the crowdfunding phenomenon that’s sweeping the globe. For the past 24 months there has been a frenzy of tweets, blogs, articles, and news reports about how entrepreneurs and small businesses can access capital via equity crowdfunding. Investors receive a stake (usually common or preferred shares or units) in the company (the issuer), with the idea being that the investor is either looking to make a return from dividends or capital gains on the growth in value of their stake in the company. In a nutshell, it’s a method of seeking financing that allows companies of all sizes (including startups) to raise funds through secured online platforms, giving them access to large numbers of qualified investors.

Donation-based crowdfunding

With donation-based crowdfunding, contributions go towards a charitable cause. For example, you may pay for a charity in a poverty stricken area to receive much-needed medication for its inhabitants. In donation-based crowdfunding, funds are collected from a community for a publicly disclosed initiative but there is no financial return to the people putting money in. The return for contributors is usually the satisfaction that comes with helping others in need.

Lending-based crowdfunding

With this type of crowdfunding, investors are repaid for their investment in a business over a period of time and receives a stipulated return (interest) for the use of their money.

Reward-based crowdfunding

With reward-based crowdfunding, contributors receive a predefined product or service in return for their funds provided to the company or individual. A contributor advances funds with the promise of receiving a prescribed reward at a later date (i.e., paying now for the development of a new smartphone and receiving the phone after it is developed, manufactured, tested and shipped).

Whether it’s in Canada, Brazil, Chile, China, Italy, Japan, Ireland, Israel, Russia, Sweden the United Kingdom, Australia, the Netherlands or the United States, Equity Crowdfunding is changing the global landscape to give everyone—the ‘crowd’—an opportunity to invest and contribute in a variety of initiatives.

To learn more about how crowdfunding—and more specifically, equity crowdfunding—could help you start or grow your business, download our free eBook, ‘Equity Crowdfunding 101’ via the Free Tools section of the BizLaunch website.

 

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