What is Crowdfunding?

What is Crowdfunding All About?

So, what is crowdfunding anyway?  Basically 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 chose to invest in you.  Thus the answer to “what is crowdfunding?” is actually multifaceted and can mean different things to different people.  On this page we aim to not only explore what this form of investing is, but also when it may be a good fit.

Let’s start be going over some possible specific answers to “what is crowdfunding?”

General answer to “What is Crowdfunding?”

Crowdfunding is a process where peers decide to financially support a project or purpose and in return they get some sort of 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 an important event or trip, business such as 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 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 that they are pursuing.  Investors weigh the benefits of the various rewards or potential value they will get in return.

All of these definitions work, and they show 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 wanted to include the advantages and disadvantages of crowdsourcing as well?  We go over all of that on this page.

Of course Wikipedia is a great resource with an overview that helps answer What is Crowdfunding?

What is Crowdfunding: Overview

When people are asking “what is crowdfunding?” it may often be because they are thinking of using this mechanism to get money or to invest money.  They may have heard of a successful crowdfunding campaign that was in the news, or they may have watched a popular TV show that involves 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, and that is the core reason why we set up this website.  We are not invested in the choice that people make regarding their crowdsourcing options – we are not directly connected to any crowdfunding website or project so we can provide completely unbiased information and advice.  Of course we cannot give you specific advice about your own unique financial circumstances and the potential of the project or purpose for which you are looking into investing or attracting money, but we can provide general information that can help you decide whether to pursue the crowdsourcing option any further.  That is the context within which this website answers the question “what is crowdfunding”.

Please also note that whether to pursue crowdfunding may actually be the easiest choice you will make.  The much harder choice becomes which crowdfunding website to choose for your loan.  More people struggle with that choice and/or make mistakes with that choice, as compared to those who make the wrong overall choice of whether to pursue crowdfunding.

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 be referring 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 sort of preferred treatment, inside information, or early preview of a new product or artistic endeavor.  Some common subtypes of rewards-based crowdfunding include:

  • Funding for a performance artist or group, such as for the production of 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 prints, recordings, or even artwork from the artist for the 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 models of the product, or insider information.
  • Funding for a start-up business.  Very similar to the above, you might get inside information that is interesting, meet and greets with the staff, preferred customer status, etc.  In the case of a non-profit or charity you may be doing this for your own 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.

There are few regulations when it comes to rewards-based crowdfunding 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 needing to spend a good amount of effort on the rewards you’ve 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 the way many people were introduced to this type of investing and funding.  Put into words, equity crowdfunding describes a process where investors buy ownership in a business or a product, hoping to cash in later on this value when the product or business 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.  Some common subtypes of equity crowdfunding include:

  • Funding for a start-up business.  In this case the money goes toward business operations and often provides the start-up capital necessary to buy equipment and start production (if the business is based around a product), or hire staff and develop marketing materials (if the business is in the service industry).
  • Funding for an individual entrepreneur who has an idea which s/he would like to develop.  In this case the funding goes toward development and commercialization of that idea.
  • Funding for a new product within an existing company.  In this case the crowd is funding just that new product but often does not get a stake in existing products that the company already has.
  • Funding for business expansion.  In this case the equity being acquired is related to a certain 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 basically funding provided in order 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 a certain amount of years.

The regulations as far as equity crowdfunding right now involve the need to be an “accredited investor” before you can invest in this manner.  An accredited investor has a certain amount of income each year or has a certain net worth.  These requirements exclude many people from this type of investing, but they do give the entrepreneur the peace of mind that the investors will come through with the capital promised.

What is Crowdfunding, Conclusion

In all, the answer to “what is crowdfunding?“, whether you are turning to the rewards-type or equity type, may help you decide whether to invest this way or to try to attract money this way 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 is one where there are so many possibilities that it is hard to accurately answer the question generally, but we hope this post helped.  As with any potential financial investment you will make or receive, doing your homework is key, and that includes checking with a variety of sources.

As a still emerging way to get funding for a project or purpose it makes sense that no one definition of crowdfunding has emerged.  In fact, 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 use our comments section to provide more information if you have gone through the crowdfunding process, to ask a question, or to suggest other ways to answer the key question “What is crowdfunding?”