What is crowdfunding?

Crowdfunding is a form of financing where individuals and businesses can raise money from a group of people - a crowd - to fund a project or idea. 

The word crowdfunding itself is a compound of the English words 'crowd' and 'funding'. Crowdfunding can therefore be translated as "funded by the people", as opposed to funded by the bank, private equity fund or other type of institutional investor. 

The funding can be used for anything from creating a new app or product, to starting a business or supporting a charitable project. Crowdfunding allows entrepreneurs and others to raise capital from a wide range of investors and supporters and can be an effective way to raise funding, especially for those who have difficulty accessing traditional loans or investors. 

Crowdfunding platforms can be online, where investors can invest money via a digital platform, or offline, such as at a funding event.

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There are 4 different types of crowdfunding, which we will discuss in this post. 

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What types of crowdfunding are there?

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There are 4 types of crowdfunding:

1. Donation-based crowdfunding

2. Reward-based crowdfunding

3. Dividend-based crowdfunding

4. Loan-based crowdfunding 

What is donation-based crowdfunding?

Donation-based crowdfunding is the oldest form of crowdfunding and involves an individual or organization looking to raise money for a specific cause or project. This can be anything from charitable causes to individuals' personal projects. 

In donation-based crowdfunding, investors donate money to the project but receive nothing in return - except the feeling of having supported a good cause.

In other words, it's a donation.

A typical donation-based crowdfunding campaign will have a clear purpose and a description of what the money will be used for. Investors can see how much has been raised and how much is left to reach the goal. 

Some donation-based crowdfunding platforms allow investors to make an anonymous donation, while others require investors to make their names public.

Donation-based crowdfunding can be an effective way to raise money for a project, as even small donations can help reach the goal. 

Example of a donation-based crowdfunding campaign

An example of a donation-based crowdfunding campaign is the 2019-2020 campaign to benefit fire victims in Australia. 

Here, Australian comedian Celeste Barber created a crowdfunding campaign to raise funds to help people affected by the devastating wildfires in Australia. The campaign received a huge amount of support and raised over 27 million Australian dollars.

What is reward-based crowdfunding?

With reward-based crowdfunding, some form of reward is typically offered to the investors who donate to the campaign. The reward can range from small gifts like a thank you card or a keychain, to larger gifts like a prize or a product from the campaign.

Reward-based crowdfunding is a popular way for entrepreneurs to fund their projects and products as it allows them to connect with their target audience and get feedback on their ideas. It also allows investors to back an idea they believe in and receive a reward for their support.

Example of a rewards-based crowdfunding campaign

A well-known example of a successful rewards-based crowdfunding campaign is the Pebble Smartwatch. Pebble launched their campaign on Kickstarter in 2012 with a goal of raising $100,000 to fund their smartwatch. They ended up raising over $10 million, making it one of the most successful Kickstarter campaigns of all time. As a reward for their investment, investors received a Pebble Smartwatch.

See the Kickstarter campaign here.

What is dividend crowdfunding?

Dividend-based crowdfunding, also known as equity-based crowdfunding, allows investors to buy a stake in a project or company. In exchange for the investment, investors receive a share of future profits or an increase in the value of their shares as a result of the company's own appreciation. 

This means that the better the company performs, the greater the investor's return will be.

Dividend-based crowdfunding is typically used by companies and startups that have a strong business foundation and the potential to grow. It can be an advantageous way for companies to raise capital, as they can avoid the strict requirements that traditional investors might otherwise impose.

However, investors in dividend crowdfunding should be aware that they are investing in a risky business. There is no guarantee that the business will be successful and investors may lose their entire investment. Therefore, it is important to thoroughly research the company's background and business plan before investing.

Example of a dividend-based crowdfunding campaign

An example of a dividend-based crowdfunding campaign is the well-known Oculus VR campaign launched on the crowdfunding platform Kickstarter in 2012. The campaign attracted more than 9,500 investors who invested a total of 2.5 million dollars in exchange for a stake in the company. Less than 2 years later, the company was sold to Facebook for more than 2 billion dollars.

Read the story of Oculus VR here.

What is loan-based crowdfunding?

Loan-based crowdfunding, also known as crowdlending or peer-to-peer lending, involves investors lending money to companies or individuals who want to finance their projects or ideas. 

With this type of crowdfunding, interest is typically charged on the amount borrowed and the loan has a fixed term after which it must be repaid. This is a win-win situation as it allows entrepreneurs to raise funding that they might not otherwise have access to, while investors can earn interest on their loans.

Loan-based crowdfunding - crowdlending - is one of the more established crowdfunding models, and it is this type that we at Fundbricks specialize in. 

Fundbricks gives you the opportunity to invest in construction projects by providing loans to real estate developers who need capital to realize their projects. When you finance a construction project through Fundbricks, the real estate developer agrees to repay the loan at an agreed interest rate. 

As a crowdlending investor, you get a high interest rate and a short term - typically 8-12% p.a. for up to 6-18 months.

See our ongoing construction projects here that you can help finance and receive interest returns from.

Pros and cons of crowdfunding

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Benefits of crowdfunding

Crowdfunding is a popular way to finance ideas and projects. Here are some of the benefits of using crowdfunding:

1. Ability to raise capital without relinquishing control: One of the biggest advantages of crowdfunding is that you can raise capital without relinquishing control of your business or project. If you have an idea that you believe in but don't want to relinquish ownership, crowdfunding is a great way to raise money to fund it.
2. Market research: Crowdfunding campaigns can also provide a good indication of whether there is interest in your product or project. If the campaign goes well, it can indicate that there is a broader interest in the product or project than expected. It can also help identify potential target groups and customers.
3. Lower costs: Crowdfunding is also a relatively inexpensive way to finance a project compared to traditional financing methods such as bank loans or venture capital. Crowdfunding platforms typically take a smaller percentage of the total amount than venture capitalists or banks take in interest and fees.
4. Build awareness of the project: Crowdfunding campaigns can also help raise awareness of your project or product. By sharing the campaign on social media and other channels, you can reach a large audience and potentially create hype around the project.

Disadvantages of crowdfunding

While crowdfunding can have many advantages, there are also some disadvantages:

1. Not all campaigns are successful: While it may be tempting to use crowdfunding as a funding method, it's not a guaranteed success. Not all campaigns reach their funding goals and some campaigns don't receive any funding at all. It takes a lot of effort to promote and market your campaign to generate awareness and support.
2. Requires a detailed plan and preparation: Crowdfunding requires a detailed plan and preparation to be successful. This typically involves understanding who your target audience is, creating a good campaign video and/or images, and writing a compelling and clearly worded description of the project. It also requires building a network and engaging with potential contributors.
3. Requires follow-up: Another disadvantage of crowdfunding is that it requires follow-up. Once the campaign has ended, you need to follow up on your pledges. If you are unable to deliver what you promised, it can damage your reputation and have a negative effect on your future fundraising. 
4. Lack of control: Although crowdfunding offers the opportunity to avoid controlling investors in the form of venture capitalists and the like, crowdfunding investors can still make demands and requests for the direction of the project. This is especially true in the case of dividend-based crowdfunding, where shares of the project/company are effectively owned by the investors.

Read more about the risks of crowdlending here.

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