Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet. In 2013, the crowdfunding industry grew to be over $5.1 billion worldwide.
- The project initiator who proposes the idea and/or project to be funded
- Individuals or groups who support the idea
- A moderating organization (the “platform”) that brings the parties together to launch the idea.
The main forms of crowdfunding that we know of can be broken down into 4 major groups.
- Donation/Rewards based
- Lending based (often referred to as ‘Peer to peer lending’ or ‘P2P lending’)
- Equity based
- Real estate based
There are many variations, styles and programs going on within different crowdfunding companies and it is literally changing every day. Over the past few years crowdfunding has exploded and expanded across the world into many other industries.
When we first saw the rewards based crowdfunding platforms, of which the most successful are http://www.indiegogo.com andhttp://www.kickstarter.com, I knew immediately that this was one of the best business ideas I have ever heard or seen and that it would be a game changer. What a prolific way for great ideas to get funding, and for a complete win-win situation for both sides of the transaction! Small, quirky, useful, interesting, amazing or simply entertaining ideas and concepts, now have a low cost way of finding funding where there were no other funding channels available. The entrepreneurs/inventors do not give up equity in their businesses; instead they give services or products as return for their backers’ money. (Kickstarter has reportedly received over $1 billion in pledges from 5.7 million donors to fund 135,000 projects, including films, music, stage shows, comics, journalism, video games, and food-related projects = awesome)
P2P lending takes place online through platforms using different forms of lending and credit checking tools and has eliminated the need for traditional financing intermediaries such as banks – hurray! This space is exploding and has all the great components of reward based crowdfunding except people are loaning money to each other, generally at much lower rates than credit card and banks would charge the borrower. (LendingClub from the US has issued over $5 billion and all loans are between $1,000- $35,000 – that’s a large volume of loans)
Equity based crowdfunding is simple investing into companies and owning equity in the company raising funds. Small companies issue shares over the Internet and receive small investments from registered users in return. They are basically online venture capital portals where the venture capital companies have been replaced by millions of smaller investors. It should be noted that the “crowd” is truly a crowd, people from all walks of life and back grounds, with all different appetites of risk and wildly different investment appetites and investment capabilities.
Real Estate crowdfunding
Real estate crowdfunding allows investors to access an array of different real estate investment opportunities with low minimum investments. There are many different forms coming out and the crowd is able to pick and choose which deals they like across a broad spectrum of choice, including opportunities in residential, commercial and retail, and being able to choose either debt or equity structures.
I am sure there are many more and new forms of crowdfunding developing as you read this, and more industries are adopting the crowdfunding concept that I have not mentioned or that I am currently unaware of. However, that was a quick 101 breakdown for all those who have heard of crowdfunding but are not really sure what it all means. Get involved, there are so many great projects out there being run by great entrepreneurs, inventors, CEO’s and their teams, just waiting for more crowd backing to get them off the ground or continue growing an existing successful business.
I welcome all comments and would love to hear what you think!