A Brief Primer on Crowdfunding for the Entrepreneur
As demonstrated by the growth of both the amount of projects that have found funding through the crowd and the phenomenon of funded project goals that now can reach tens of millions, acquiring funding socially and collectively from individuals online is now a viable, and engaging, means to bringing ideas to reality. Over the past few years, crowdfunding has democratized access to capital, and in the process driven innovation and social progress. Many worthwhile projects that would otherwise have not happened from the lack of resources now have a fair shot at getting off the ground. Crowdfunding is, undeniably, here to stay.
Entrepreneurs and initiators of grassroot projects alike now have different crowdfunding options at their disposal as platforms of varying funding flavors and niches contend for a piece of the pie. Most crowdfunding sites fall into one of following forms of funding:
Reward-based: Probably the most well-known form through the enormous amount of press that a few popular sites and high profile projects have received over the past couple years, reward-based crowdfunding allows project creators to offer non-monetary rewards in exchange for monetary contributions. Reward offerings can range from thank you notes to the final product that the project is aiming to produce, and are typically structured according to the level of contribution. For example, contributors will receive something of greater value for a $100 contribution versus a $50 contribution.
Donation-based: As the name suggests, contributions for projects come as funds donated by individuals and may not involve perks as a condition for contribution. This form of crowdfunding is usually more suited for projects that are of a social or charitable nature.
Debt-based: Projects may receive loans from contributors through online platforms, but borrowers will need to meet certain credit worthiness criteria and may be vetted by the funding platform. As expected of loans, repayments usually involve principal plus interest.
Equity-based: Equity-based crowdfunding allows projects that are typically small businesses or startups to acquire funding in exchange for equity. While a number of countries already have online equity crowdfunding sites in operation, platforms in the United States are still placed in a holding pattern while they wait for the green light from the SEC to finalize regulations related to the JOBS Act passed last year that will allow non-accredited investors to participate.
Traditional asset-based loans, venture capital, and other forms of financing still have their place in an entrepreneur’s toolbox for fundraising. However, crowdfunding has rightfully earned its place in that toolbox, and should be an option that is given consideration when starting a business or project. Each category of crowdfunding has its own purpose and application, and as an entrepreneur, it would be up to you to determine which type would be most suitable for your project or business.
Rallyoop is a Babson-based startup that is creating a next-generation, “Crowdfunding 2.0” platform to take crowdfunding to the next level where its full potential can be realized. Find out how Rallyoop can be the platform for your fundraising needs and join our beta campaign program at http://rallyoop.com.