So, what is crowdfunding? Crowdfunding is a means of getting money for a project or purpose from your peers and having to either pay it back, give up a stake in your project, or merely give certain perks or rewards to those who choose to invest in you. Thus the answer to “What is crowdfunding?” is multifaceted and can mean different things to different people. On this page, we aim to explore what this form of investing is and when it may be a good fit.
Let’s review some possible general answers to “What is crowdfunding?”
What is Crowdfunding: General Answers
The general answer to “What is Crowdfunding?”
Crowdfunding is a process where peers decide to support a project or purpose financially, and in return, they get some rewards, favorable treatment, or potential financial return. This encapsulates things well, with little detail.
More Specific Answer to “What is Crowdfunding?”
Crowdfunding allows people to invest in the goals of another person or group, whether personal such as a significant event or trip; business, such as a product launch or expansion, arts-based such as funding a musician or play; or education, such as helping a student get through college.
“What is Crowdfunding?” from the entrepreneur’s side
Crowdfunding for the arts involves peers investing in a project, whether an artist, actor, musician, movie, or play/musical, where the investor either gets insider information and rewards or a financial payoff if the project is successful, or both.
“What is Crowdfunding?” from the investor side
Crowdfunding allows peers to invest in a person or company because they see the potential in the project or purpose they are pursuing. Investors weigh the benefits of the rewards or potential value they will get in return.
All of these definitions work, showing how the answer to the question “What is crowdfunding” often can be tailored to the person asking it. But what is the context within which this website works – how would we answer the question? And what if we also wanted to include the advantages and disadvantages of crowdsourcing? We go over all of that on this page.
Of course, Wikipedia is an excellent resource with an overview that helps answer What is Crowdfunding?
What is Crowdfunding: The Details
When people ask, “What is crowdfunding?” it may often be because they think of using this mechanism to get or invest money. They may have heard of a successful crowdfunding campaign in the news or watched a popular TV show involving crowdfunding. It is important to note that any answer to this question must be well-rounded. Crowdfunding may not be for everyone in every circumstance.
Please also note that whether to pursue crowdfunding may be the easiest choice you will make. The much harder choice becomes which crowdfunding website to choose from. More people struggle with that choice and make mistakes compared to those who make the wrong overall choice of whether to pursue crowdfunding. This is where we can help.
But first, you need to decide what type of crowdfunding to pursue.
What is Rewards-Based Crowdfunding?
rewards-based crowdfunding was the first type of crowdsourcing that was widely available and known. When people ask, “What is crowdfunding,” they may refer to the rewards-based type. The best answer is that rewards-based crowdfunding is a transaction where the crowd invests in a project or purpose, and in return, they get some preferred treatment, inside information, or an early preview of a new product or artistic endeavor.
Subtypes of Rewards Crowdfunding
- Funding for a performance artist or group, such as producing a movie, play, band, or musical. In this case, the insider advantages might be an invitation to rehearsals or a special early showing, meet and greets with the cast, or fun and interesting information as things are being created.
- Funding for an individual artist such as a painter, singer, or sculptor. The rewards might be similar to the above but might also include receiving the artist’s prints, recordings, or artwork for funding.
- Funding for a new product or an invention. In this case, the rewards might be receiving exciting news about the product’s development, prototypes, meet and greets with the inventors, early product models, or insider information.
- Funding for a start-up business. Very similar to the above, you might get interesting inside information, meet and greets with the staff, preferred customer status, etc. In the case of a non-profit or charity, you may do this for your philanthropic purposes.
- Finding a meaningful personal purpose. Opportunities in this area include funding a mission trip, an important event, a religious ritual, or a family event such as adoption.
Few regulations regarding rewards-based crowdfunding exist, so many people have dived in. Often the amounts you need to invest can be very small. For those hoping to get rewards-based crowdfunding, the challenges include having many competitors, needing many individual investments, and spending a good amount of effort on the rewards you promised.
Now when people ask, “What is rewards-based crowdfunding,” you can clearly define it, and the next section will help you distinguish it from equity-based crowdfunding.
What is Equity Crowdfunding
The easy answer to the question “What is equity crowdfunding” is to point to shows such as “Shark Tank” and say “that.” And, of course, this is how many people were introduced to this type of investing and funding. Equity crowdfunding describes a process where investors buy ownership of a business or a product, hoping to cash in later on this value when the product or company is successful. For investors, the risk/reward profile of equity crowdfunding makes it both attractive and worrisome, and where any particular potential investment lands on that continuum will determine whether the investor will make an offer and also guides how generous s/he is expecting the entrepreneur or company to be.
Subtypes of Equity Crowdfunding
- Funding for a start-up business. In this case, the money goes toward business operations. It often provides the start-up capital necessary to buy equipment and start production (if the business is based around a product), hire staff, and develop marketing materials (if the company is in the service industry).
- Funding for an individual entrepreneur with an idea s/he would like to develop. In this case, the funding goes toward developing and commercializing that idea.
- Funding for a new product within an existing company. In this case, the crowd funds just that new product but often does not get a stake in the company’s current products.
- Funding for business expansion. In this case, the equity acquired is related to a specific new geography or a new division within the company. The crowd then only owns a stake in that new territory.
- A small subset of this category is called “human capital contracts,” which are funding provided to get equity in a person’s success. For example, the crowd may pay for business school, but then a percentage of the person’s income will be paid back for several years.
Right now, the regulations regarding equity crowdfunding involve the need to be an “accredited investor” before you can invest in this manner. An accredited investor has a certain income each year or has a particular net worth. These requirements exclude many people from this type of investing, but they give the entrepreneur the peace of mind that the investors will come through with the promised capital.
Conclusion
In all, the answer to “What is crowdfunding?” whether you are turning to the rewards or equity type may help you decide whether to invest this way or to try to attract money for your project or purpose. Looking at websites to see what has been successfully funded and how the process went for that project on both sides of the equation may help you decide as well. The whole area of crowdsourcing has so many possibilities that it is hard to answer the question generally accurately, but we hope this post helped. As with any potential financial investment you will make or receive, doing your homework is critical, including checking with various sources.
Our Services
As a still-emerging way to get funding for a project or purpose, it makes sense that no one definition of crowdfunding has emerged. It is possible that given the diversity of reasons why people and groups ask for crowdsourcing, it may be that we will always need a handful of definitions to suit the multiple purposes and procedures involved. Please feel free to contact us to see if you have the answer to the question, “What is crowdfunding?” Do you think our services may be helpful?
