Crowdfunding: Definition, models, and markets

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Crowdfunding is a method of externally financing business ventures. This is a relatively new concept that allows you to describe the financing of a product or project online to a large number of users, or what’s known as the "crowd." The English word “Crowdfunding” has been directly translated into many different languages, and there are four distinguishably different Crowdfunding models.

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What type of Crowdfunding is best for you? – The four models for Crowdfunding

Donation-Based Crowdfunding: This involves small donations typically ranging from one to two dollars. With these donations, the community finances a company without reaping any benefits from it. This model is usually used for non-profit and/or self-serving projects by organizations or individuals.

Reward-Based Crowdfunding: The focus of this type of financing is usually new processes or technologies, and implementation is only possible with the financial support of the community. Most of the time, prototypes or models are presented on the front end. Donations are usually made on a quid-pro-quo basis in that every constituent receives something like a license for new software or a copy of a certain physical product in return. The quality of this exchange can directly influence the donation amount.

In this type of Crowdfunding, there are multiple “soft goals” which are set in addition to the base financing goal, which, if achieved, the corresponding company uses to finance further endeavors. This is currently the most common form of Crowdfunding. In this way, businesses are capable of short-selling to some extent without taking on too much risk. If the goal is not met, in most cases, there is almost never compensation for lost investments.

Credit-Based Crowdfunding: Essentially, credit or lending-based Crowdfunding has to do with micro-loans. The business model is planned out exactly, stating expected earnings and repayment plans in a plausible manner. Then, the Crowdfunding platform brings the company and potential investors together.

Equity-Based Crowdfunding: Also known as Crowdinvesting, equity-based Crowdfunding has to do with financially supporting a business venture that has already been started with the entrepreneur’s own capital. By investing, the investor purchases a share of the business with the hopes of capital gains, if successful. After the reward-based variant, this is the most successful form of Crowdfunding, especially in the United States.

Market development and growth

In recent years, a variety of Crowdfunding platforms have emerged with enormous growth momentum. While the donation-based model was the most popular at first, the reward and equity-based models have become increasingly successful. The reward model mostly finances software and product development, while the equity method frequently benefits the real estate market.


Mariana Mellor
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