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The 4 Types of Crowdfunding

Crowdfunding is not only a way to finance your company, but it is also a method to raise money for humanitarian purposes, give a discounts for a particular product or ask for liquid money in exchange for interest.

Let’s dive in to the purposes, the pros and the cons of each type.

1. Donation Based Crowdfunding

The typical example of this type of crowdfunding is the fundraising for humanitarian purposes.

People donate their money for a cause, an idea or simply in order to help the organisation making the campaign.

In fact, the people who donate don’t expect any type of reward from their actions, they simply hope that the amount they have invested can really help make a difference.

2. Rewards Based Crowdfunding

We can consider the Rewards Based Crowdfunding as the “upgrade” to donation crowdfunding.

In fact, very early stage companies make these kind of crowdfunding campaigns in order to finance the production of their future product.

By financing the project, the investor will get the product or a discount when the product will be ready for the market. In order to make people invest more money, there are different discount levels that are offered, usually increasing with the amount invested.

However, the perception of this kind of crowdfunding is similar to the donation type because you don’t even know if the campaign will reach the target and the production will effectively start.

One of the most famous platforms for rewards-based crowdfunding is Indiegogo, in which you can find innovative and high-tech products that are going to be produced with the funds of their campaigns.

Photo by Alice Pasqual

3. Debt Based Crowdfunding

Think of a bond. A state offers these types of financial instruments in exchange for liquidity. Of course there will be an interest rate that defines the earnings that the investor will get at the end of a fixed period.

It works similarly for debt based Crowdfunding.

In fact, these campaigns are particularly popular among entrepreneurs who don’t want to give up equity in their start-up companies immediately and/or do not have access to more traditional types of loan facilities.

These are also growing in popularity as a way for real estate developer to fund a particular real estate project or projects.

4. Equity Based Crowdfunding

In an equity-based crowdfunding campaign, a person contributing money can expect to receive some ownership of the company that is raising the funds.

From another perspective, the company which is running the campaign is selling off a piece of its ownership (e.g. shares, membership interest, etc.) to each of the crowd members who contributed with money.

Usually the crowd is interested in participating in this kind of crowdfunding because the equity, that they are buying can address them dividend or can be sold in the future at a higher value.

Equity based crowdfunding campaigns are being used more and more by entrepreneurs and start-ups seeking an alternative to traditional venture capital and angel investors when looking for a capital infusion to take their business to the next level.

The Introduction of Blockchain Equity Crowdfunding

Equity crowdfunding is the most interesting type of crowdfunding for investors who are seeking for great profits; however, it has many problems and limitations.

We introduce the blockchain based equity crowdfunding.

The equities are recorded on a blockchain in order to make use of the advantages that blockchain technology brings. It is immutable to hacks such as DDoSS attacks, which is a problem that even big companies like VISA and Playstation still struggle with. It also allows for a more liquid tradeoff which makes it more accessible.

By combining the blockchain technology and the equity crowdfunding, each project will have more visibility and engagement from the investor side, because he or she is interested in the growing of the company.

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