Comparison of crowdfunding services

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Crowdfunding is a process in which individuals or groups pool money and other resources to fund projects initiated by other people or organizations "without standard financial intermediaries." [1] Crowdfunded projects may include creative works, products, nonprofit organizations, supporting entrepreneurship, businesses, or donations for a specific purpose (e.g., to pay for a medical procedure). Crowdfunding usually takes place via an online portal that handles the financial transactions involved and may also provide services such as media hosting, social networking, and facilitating contact with contributors. It has increased since the passage of the Jumpstart Our Business Startups (JOBS) Act.

Contents

Crowdfunding use

Crowdfunding has a wide reach and may be utilized by businesses, nonprofit organizations, an individual, group, or an organization. Crowdfunding is used in a variety of platforms from social media to face-to-face environments. The use of crowdfunding has increased; however, success is not guaranteed.

Funds may be sought out to start a business, to support a cause, or to reach a fundraising goal. Most crowdfunding projects are small and "seek to raise small amounts of capital, often under $1000." [1] An individual or organization may not qualify for a traditional bank loan, and crowdfunding provides another opportunity to gain financial support from others. The use of crowdfunding has gained an increased presence since the JOBS Act and has a significant social media presence. "Approximately 25 percent of real-world relationships start online, with people of all ages migrating online to find a partner. Crowdfunding is doing for small businesses and entrepreneurs what dating sites have done for singles." [2] Those unable to procure funding from traditional methods may be interested in pursuing crowdfunding as an option; however, the success rate may be a deterrent. E. Mollick examined Kickstarter projects from 2009 through 2012 and found many projects were not successful as only "3% raise 50% of their goal," and he stated that successful projects succeed "by relatively small margins." [1]

Crowdfunding models

Crowdfunding is donation-based fundraising for businesses or creative projects, typically via an online funding portal. [3] Some but not all crowdfunding projects offer contributors rewards, which may differ based on the amount of money donated. Rewards can include copies of a creative work, products generated with the funding, special or personalized incentives (such as autographed works or promotional merchandise), or public recognition. One can classify crowdfunding as using one of the following models:

  1. Equity-based crowdfunding
  2. Reward-based crowdfunding
  3. Debt-based crowdfunding
  4. Litigation crowdfunding
  5. Donation-based crowdfunding

Equity-based crowdfunding

In equity crowdfunding, a crowdfunding approach is used to raise investment capital, and contributors receive equity in the resulting business. It is a joint effort made between individuals to support the causes of other people or organizations in the form of equity. Contributors may act as investors and receive shares directly, or the crowdfunding service may act as a nominated agent. [4] Equity crowdfunding helps "the 90 percent of businesses that were left out in the cold" by traditional funding methods, which is why it has become such a viable option for business startups. [2]

Equity-based funding is illegal in many countries, such as India. In the United States the JOBS Act of 2012 regulated the trend. This "legislation was intended to increase access to capital for the innovative companies" in need of investment capital and allows a pool of small investors to come together. [2] The Regulation was updated in 2021 by the SEC allowing companies to up to $5 million per year from unaccredited investors and allowing investors to invest more. [5]

Reward-based crowdfunding

This mode, also known as "non-equity" funding, has become increasingly popular, with a 230 percent increase in 2012. [2] Reward-based crowdfunding may fund campaigns supporting the free development of software, the promotion of motion pictures, scientific research, development of inventions, etc. Reward-based funders expect a return from the project.

Debt-based crowdfunding

This is known as "Peer to Peer", "P2P", "marketplace lending", or "crowdlending". Borrowers set up campaigns to fulfill their financial needs, and lenders contribute toward the goal for an interest. This method of online funding may prove to be "a threat to the traditional banking system in the areas of consumer and business loans, as has already been demonstrated by the rapid success of [these] online lending marketplaces." [2]

Litigation crowdfunding

A plaintiff requests a monetary donation to fund a court case. If the claimant wins, investors may get more than their initial investment. [3]

Donation-based crowdfunding

This type of crowdfunding "is part of a trend in which people are relying less on charities to help them fulfill their philanthropic aims". [6] The best example might be raising funds from individuals to support personal or social causes.

Variables in online crowdfunding

People make donations for different reasons and give to different entities. Donors may give to feel good about themselves or because they believe in a cause. Some donations are made to individuals while others are made to organizations. The same is true in online crowdfunding. However, some differences exist in their method of giving, geography, and demographics.

Online crowdfunding donors differ from traditional fundraising donors in that donors give anonymously, do not have a connection to the recipient, and donors may seek out a cause or recipient to give to. [7] Another important factor is that online donors are not limited by their geographic location and can give to individuals or organizations anywhere in the world. Once a fundraiser is created, individuals can share the details anywhere to attract donors and gather funds for their cause.When it comes to motives, donations are made to individuals to help them reach a goal and typically drop off once that is met; however, donations to organizations are made for a greater societal good. [7] The demographics of online donors vary from traditional donors as "online donors tend to be younger and give larger gifts than traditional donors." [8] This is important for online campaign organizers to note as they determine their target audience; however, those over 50 have increased their social media usage and have a presence on Facebook. [8]

Crowdfunding as a replacement method

More research is needed in regard to the topic of crowdfunding in general. There are benefits to online crowdfunding as it has the ability to tap into audiences that are not close in geographic proximity to an individual or organization and to increase awareness about a campaign. However, with relatively low funding success rates reported, "social networking and traditional approaches to fundraising may be complements" to help individuals and organizations raise funds but not a replacement." [8]

See also

Related Research Articles

Seed money, also known as seed funding or seed capital, is a form of securities offering in which an investor puts capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include friends and family funding, seed venture capital funds, angel funding, and crowdfunding.

Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources.

<span class="mw-page-title-main">Fundraising</span> Process of gathering donations

Fundraising or fund-raising is the process of seeking and gathering voluntary financial contributions by engaging individuals, businesses, charitable foundations, or governmental agencies. Although fundraising typically refers to efforts to gather money for non-profit organizations, it is sometimes used to refer to the identification and solicitation of investors or other sources of capital for for-profit enterprises.

Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve an outsized gain in financial return while delivering social impact to the world. There are various organizations, such as Venture Philanthropy (VP) companies and nonprofit organizations, that deploy a simple venture capital strategy model to fund nonprofit events, social enterprises, or activities that deliver a high social impact or a strong social causes for their existence. There are also regionally focused organizations that target a specific region of the world, to help build and support the local community in a social cause.

Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an alignment of an investor's beliefs and values with the allocation of capital to address social and/or environmental issues.

<span class="mw-page-title-main">Crowdrise</span>

CrowdRise is a for-profit crowdfunding platform that raises charitable donations. CrowdRise was founded by Edward Norton, Shauna Robertson, and the founders of Moosejaw, Robert and Jeffrey Wolfe. CrowdRise was acquired in 2017 by GoFundMe.

<span class="mw-page-title-main">Indiegogo</span> American crowdfunding website

Indiegogo is an American crowdfunding website founded in 2008 by Danae Ringelmann, Slava Rubin, and Eric Schell. Its headquarters are in San Francisco, California. The site is one of the first sites to offer crowd funding. Indiegogo allows people to solicit funds for an idea, charity, or start-up business. Indiegogo charges a 5% fee on contributions. This charge is in addition to Stripe credit card processing charges of 2,9% + $0.30 per transaction. Fifteen million people visit the site each month.

GlobalGiving is a 501(c)(3) non-profit organization based in the United States that provides a global crowdfunding platform for grassroots charitable projects. Since 2002, more than 1.6 million donors on GlobalGiving have donated more than $750 million to support more than 33,000 projects in 175 countries.

InvestedIn is a crowd funding website for fund raising projects and charity events such as walkathons and celebrity cause-based campaigns. InvestedIn is also a technology provider offering a white label crowdfunding platform for commercial and non-profit use.

<span class="mw-page-title-main">FundRazr</span> Canadian crowdfunding site

FundRazr is a free crowdfunding and online fundraising platform released in 2009. FundRazr operates internationally in 35+ countries with the largest markets being United States, Canada, United Kingdom and Australia. It allows users to run a wide-range of crowdfunding campaigns by creating fundraising pages and sharing it via social media, messaging apps, email and more to raise money for over 100 types of causes such as nonprofit, medical care, education, community help, poverty alleviation, arts, memorials, and animal rescue causes. FundRazr also works with more than 4000 nonprofits, charities and social enterprises with an advanced fundraising toolset for free. The digital fundraising platform provides 8 different campaign types. They include microproject fundraising, peer-to-peer campaigns, wishlist campaigns, recurring donations, branded sponsorship campaigns, DIY projects, sweepstake campaigns, and storefront campaigns.

MicroVentures is an equity crowdfunding website that offers investments in early stage companies. It connects accredited investors with startups, businesses and services looking to raise funds or participate in select secondary market opportunities.

Crowdcube is a British investment crowdfunding platform, established by Darren Westlake and Luke Lang in 2011.

<span class="mw-page-title-main">Fundly</span> Website

Fundly is a crowdfunding site for online fundraising. It allows non-profits, charities, politics, clubs, schools, teams, churches, and other causes to raise money online from friends, family, colleagues, donors, and other supporters via email, Facebook, Twitter, LinkedIn, Google, and social media networks. It is also an app for social networks like Facebook and LinkedIn. It uses WePay to process donations. Donors are charged when they make a donation. Other sites like Fundly include GoGetFunding, Indiegogo and Kickstarter.

<span class="mw-page-title-main">Tilt.com</span> American crowdfunding company

Tilt.com, Inc. was a crowdfunding company founded in 2012 that allowed for groups and communities to collect, fundraise, or pool money online. James Beshara and Khaled Hussein launched the platform under the name Crowdtilt out of Y Combinator.

Garnering funds in the form of donations has always been a major focus for university leaders. These donations are usually found in the form of large annual gifts by alumni and friends of universities, along with funding from government entities for public universities. More recently, universities have been taking steps to modernize their giving structure through the use of crowdfunding. Crowdfunding is an online tool utilizing peer-to-peer relationships to help gain funds for different aspects of university culture.

Aplos Software is a privately held company that specializes in software as a service for nonprofit organizations. Their primary focus is simple software to manage the essential nonprofit tasks of fund accounting, nonprofit tax preparation and donor management for small, mid-sized, and large non-profit organizations.

Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it is often subject to securities and financial regulation. Equity crowdfunding is also referred to as crowdinvesting, investment crowdfunding, or crowd equity.

Alternative finance refers to financial channels, processes, and instruments that have emerged outside of the traditional finance system, such as regulated banks and capital markets. Examples of alternative financing activities through 'online marketplaces' are reward-based crowdfunding, equity crowdfunding, revenue-based financing, online lenders, peer-to-peer consumer and business lending, and invoice trading third party payment platforms.

Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over US$34 billion was raised worldwide by crowdfunding.

Crowdfunding in Estonia is a rapidly growing sector that allows individuals and organisations to raise funds for various projects through online platforms. While crowdfunding in Estonia holds significant potential and is appealing to both investors and entrepreneurs, it requires a careful approach to project selection and a thorough understanding of the associated risks.

References

  1. 1 2 3 Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing. Vol. 29, pp. 1–16.
  2. 1 2 3 4 5 Hollas, J. (2013). Is crowdfunding now a threat to traditional finance? Corporate Finance Review. Vol 18, issue 1, pp. 27–31.
  3. 1 2 "The Beginners Guide To Crowdfunding". milaap.org. Retrieved April 16, 2018.
  4. ↑ "Der Treasurer". cfo-insight.com. Archived from the original on April 26, 2013.
  5. ↑ "SEC.gov | Regulation Crowdfunding". www.sec.gov. Retrieved October 24, 2021.
  6. ↑ The future of fundraising: Is crowdfunding the wave of the future? (2016). Third Sector. October 1, 2016. 29.
  7. 1 2 Gleasure, Rob; Feller, Joseph (2016). "Does Heart or Head Rule Donor Behaviors in Charitable Crowdfunding Markets?". International Journal of Electronic Commerce. 20 (4): 499. doi:10.1080/10864415.2016.1171975.
  8. 1 2 3 Saxton, Gregory D; Wang, Lili (2013). "The Social Network Effect". Nonprofit and Voluntary Sector Quarterly. 43 (5): 850. doi:10.1177/0899764013485159.


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