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Four Kinds of Crowdfunding

The ongoing developments in crowdfunding are easier to understand and talk about if you know the four basic kinds of crowdfunding. As the industry develops, these categories will shift, or possibly even disappear completely. But for now, according to industry group Crowdsourcing.org, the major kinds of crowdfunding are equity-based crowdfunding, lending-based crowdfunding, reward-based crowdfunding and donation-based crowdfunding.

Reward-Based Crowdfunding

In reward-based crowdfunding, contributors get a tangible item or a service in return for their support of a project. This can be something small, like having your name listed in the back of a book, or something much larger, like a weekend in St. Bart’s with the personality behind the crowdfunding project. No organization polices when and how donors get their rewards, not even the crowdfunding platforms that enable this model, but to date there has not been enough fraud for this to really matter. Rewards-based crowdfunding is the most common model for crowdfunding platforms and makes up the bulk of crowdfunding that’s happening now.

Donation-Based Crowdfunding

This is the model of crowdfunding where donors support projects, but they have no share in the company, project or cause. They get no tokens for their contributions, as in reward-based crowdfunding. But they do get to see projects that are important to them grow and thrive. Cause-based projects are the best example of donation-based crowdfunding. Because there is no guarantee of a return for donations, these crowdfunding projects do not have to conform to SEC laws.

Equity-Based Crowdfunding

This is the kind of crowdfunding that’s getting so much attention from the SEC and the venture capitalist world. Equity crowdfunding is just what it sounds like – donors get shares in the company being funded. The rules for equity crowdfunding vary between countries, sometimes by a lot, and that is shaping which countries have the most equity-based crowdfunding platforms. Right now, Europe is beating out the United States because it is friendlier to equity crowdfunding than the United States is. Hopefully the SEC will act soon to change that.

Lending-Based Crowdfunding

This flavor of crowdfunding is typically used to start up micro-businesses. Kiva.org is the poster child for this model. Lending-based crowdfunding, sometimes called microfinance, has also been shown to be very helpful in politics. Barack Obama’s 2008 campaign discovered they could go back again and again to their base and raise millions of dollars, simply by asking millions of people to donate just a dollar or two.

There seems to be much less talk about peer to peer lending as a crowdfunding model, but it has enough volume to be worth including. It is kept under the category of lending-based crowdfunding. A good example of this model is Prosper.com, where people ask the crowd to fund their debt consolidations, weddings and home renovations. With some luck, peer to peer lending could become a huge segment of overall crowdfunding. Just consider how big even a slice of the debt consolidation market alone could be. Already, Funding Launch blog reports that peer to peer “lending grew over 1200%, from $118 million to $1.555 billion, in outstanding loans between 2005 and 2008”.

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