Different Types of Crowdfunding
There are many types of crowdfunding available, not only covering many types of funding need, but also many types of repayment terms and rate structures. It is vital that you become aware of the available crowdfunding types in order to make the perfect choice for your specific need. This section of our website covers the basics of types of crowdfunding, the ways that the repayment terms can be a favorable match to your project, and how you might be able to structure the interest rates as well as possible.
Basic Types of Crowdfunding
There are two basic types of crowdfunding available, equity crowdfunding and rewards-based crowdfunding. There is also a basic type of crowdfunding that is more like a loan. Here are those three types:
- We have a separate website on what is simply called “Peer to Peer Lending“, and there we go over the crowdfunding types that individuals typically apply for for personal reasons, basically turning to the crowd for an investment that they could otherwise not get or for a project that they think will be popular with this kind of funding. Examples of peer-to-peer lending include funds for adoption and job retraining, but even things like home remodeling and relocating, debt consolidation, and small business start-up can be accomplished with peer-to-peer lending. On our pages you’ll find information about repayment terms that you might look for in per to peer lending no matter what type of need you are funding, and also what rate structures are possible in this type of peer to peer lending.
- Another major type of crowdfunding is the well-known “Equity Crowdfunding” which involves promising a portion of future revenue or profit to the investors in return for up-front cash. While most popular for start-ups or businesses that are fairly new, equity crowdfunding is also done when an existing business is either launching a new product or service, or when they are in a challenging financial situation. Equity crowdfunding carries significant risk in both directions – the investor takes the chance that their equity could be worthless or at least worth less than their investment, while the business takes a risk that they will have given away value far beyond what they should have.
- Rewards-based crowdfunding involves giving some sort of perk or insider information to the investor in return for the capital. Often there is no payback at all, but instead the investor gets to be a part of the exciting roll-out of a product, or the production of an artistic work, or the backing of a telaenyted person or group. There are few regulations when it comes to who can invest in rewards-based crowdfunding, and often people invest a comparably small amount in order to get rewards that may range from meet-and-greets, to early prototypes of new products to exciting insider information.
Specific Crowdfunding Types
Aside from those major categories there are also specific different types of crowdfunding that you might be interested in, as follows:
- “Crowdfunding Student Loans” is exactly what it sounds like. People turn to the crowd for help with their education instead of taking out traditional school loans. In these cases investors seek out promising students who they feel will be able to pay back the loans, and the terms can be favorable to the student. In some cases crowdfunding student loans can even be used if the student does not qualify for some reason for traditional school loans.
- One subset of crowdfunding for education is called “Human Capital Contracts” where a prospective student agrees to pay a percent of their future income for a predetermined length of time in order to get funding for their education. The investors look for students with particular potential, including sometimes only funding students in graduate school in certain fields who are likely to earn significant money when they graduate.
- Crowdfunding games involves providing start-up or working capital to a company making a video game or even a board game. This is one of the crowdfunding types that can be quite fun for those who enjoy games, since you get early versions before others and inside information and tricks about the games themselves
- Crowdfunding for music is a subtype of rewards-based crowdfunding that involves providing money to allow for the production of a CD, the purchase of important equipment, or the production of a performance. This is also an exciting form of crowdsourcing for those who want to see or hear the artistic creation first.
There are many different types of crowdfunding available, and these are just a few examples. Our aim with these sections that cover the types of crowdfunding is to help you narrow your search and know the possibilities. Never have their been so many choices as far as types of crowdfunding, and thus never has there been a need to be educated.
Our pages and blog entries will be updated as the market changes and perhaps different types of crowdfunding emerge or the choices as far as types of crowdfunding broaden. We also, as always, welcome those who have received or invested in any of these types of crowdfunding to share your experience through the comments section.
Applying for the Different Types of Crowdfunding
So what do the above types of crowdfunding mean for the application process? It’s actually much more complicated when it comes to equity crowdfunding than rewards-based crowdfunding types, as follows:
Applying for equity types of crowdfunding
Equity crowdfunding carries a fairly intensive application process. Your company or if you are an individual entrepreneur you yourself, has to prove that you will be good stewards of the investment and that the payoff will be worthwhile. Thus you have to prove two things:
1. You need to show that you have a history of making good on financial promises and commitments. You may be asked for information about past defaults on loans and other financial commitments, your debt to income level, bankruptcies, late payments, etc. The website will likely pull and then factor in your credit score if you are applying as an individual. It may feel funny that your financial background is such a factor when the success of your project may not have that much to do with it, but most investors feel they are not only investing in a product but also a whole business – a great idea might only be successful in the hands of someone who knows how to build a business around it.
2. You need to show that the project or goal for which you are applying is worthy of the outlay from the crowd. Why will it become successful – what is the market for it and how many units could sell? Why is it better than other solutions? Does this product or service look like it can be successful? Is there space in the market for it? Can it disrupt the market and be a brand new product or solution that many people want? The answers to all of these questions may determine whether an investment will be made.
These steps are quite important, with investors often paying much more attention to the second item than the first.
Applying for rewards-based crowdfunding types
Applying for rewards-based types of crowdfunding is much more straightforward. You need to attract members of the crowd that are interesting in your area and give them the type of rewards they are looking for. If you are a musician you want people interested in your genre of music to like your potential and you might want to offer them early demos of your music. If you are a business making a cool product that some people may enjoy being the first to get, you may want to promise prototypes to the crowd who invests in your business. And if you are a asking for money to create a movie or other production, people may want behind the scenes information and/or meet and greets with the stars.
Remember that people who are investing in rewards-based crowdfunding types are looking for some type of return for their money, and even though this return will not usually be as valuable as the money invested itself, the value needs to be found in the reward. There are some cases where people will find reward in just giving – such as crowdfunding for charities or to help a certain group of people meet goals or to pay for a special event or trip. But in many cases the crowd needs to feel like the amount you are asking for from each individual is a match for what they will get out of it in rewards.
Investing in different types of Crowdfunding
Once you have narrowed the crowdfunding field at least a little, you can start to vet individual proposals. It is not easy in one page to help you with the process of vetting proposals because with crowdfunding there can be as much art as science, but we will try on our next page.
Much more information about investing in the specific types of crowdfunding is available in our specific sections:
We also the different types of crowdfunding sites:
Entrepreneur Magazine breaks down your Crowdfunding choices in a different way.
We hope this page and the other pages in this section help you understand the different crowdfunding types. If you have experience with one of the different types of crowdfunding we hope you will share it!