Types and functioning of Crowdfunding

Types of Crowdfunding

Crowdfunding offers various models for raising funds, each with distinct characteristics and purposes. Here's a breakdown of the different types:

1. Donation-Based Crowdfunding

• Description:
  • Contributors donate money to support a project or cause without expecting any tangible return.
  • The primary motivation is altruistic, driven by a desire to support a cause they believe in.
• Use Cases:
  • Charitable causes
  • Disaster relief efforts
  • Community initiatives
  • Medical expenses
• Key Features:
  • Focus on social impact and support.
  • No financial return for contributors.
  • Builds community and raises awareness.
• Examples:
  • GoFundMe
  • Ketto (India)
  • ImpactGuru (India)

2. Reward-Based Crowdfunding

• Description:
  • Contributors receive non-financial rewards or incentives in exchange for their financial support.
  • Rewards can vary widely, depending on the project.
• Use Cases:
  • Funding creative projects (e.g., films, music, games)
  • Launching new products
  • Supporting artistic endeavors
• Key Features:
  • Tangible rewards for contributors.
  • Pre-orders, exclusive merchandise, or personalized acknowledgments.
  • Creates a sense of community and early adopters.
• Examples:
  • Kickstarter
  • Indiegogo

3. Equity-Based Crowdfunding

• Description:
  • Contributors become investors and receive a share of the project's ownership or potential profits.
  • This model is regulated in many jurisdictions.
• Use Cases:
  • Startups and small businesses seeking capital
  • Real estate projects
• Key Features:
  • Potential financial return for contributors.
  • Investment in the project's success.
  • Higher risk and potential reward.
• Examples:
  • LetsVenture (India)
  • Various online platforms that adhere to local security regulations.

4. Debt-Based Crowdfunding (Peer-to-Peer Lending)

• Description:
  • Individuals lend money to others or organizations, expecting to receive the principal amount plus interest over a specified period.
  • Functions as a loan from the crowd.
• Use Cases:
  • Personal loans
  • Small business loans
  • Real estate loans
• Key Features:
  • Financial return in the form of interest.
  • Loan agreements and repayment schedules.
  • Risk of default.
• Key Concepts
  • P2P Lending.
  • Crowdlending.
• Considerations:
  • Regulations vary between countries.
  • Creditworthiness of the borrower is a key factor.

Functioning of Crowdfunding Markets

Crowdfunding markets operate as online ecosystems connecting project creators with potential backers. Here's a step-by-step breakdown of how these markets function:

1. Platform Selection

• Process: Project creators choose a suitable crowdfunding platform based on their project type, funding goals, and target audience.
• Considerations:
  • Platform's target audience (e.g., creative projects, charities, startups).
  • Platform's fee structure.
  • Platform's reputation and user base.
  • Specific platform features, such as analytics, and marketing tools.
• Examples: Kickstarter, Indiegogo, GoFundMe, Patreon.

2. Campaign Setup

• Process: The project creator creates a campaign page on the chosen platform.
• Key Elements:
  • Project description (purpose, goals, timeline, funding target).
  • Engaging content (video, images, detailed descriptions).
  • Clearly defined rewards or equity offers (if applicable).
• Goal: To capture the attention of potential backers and clearly explain the project's value.

3. Funding Model Selection

• Process: The project creator selects a funding model.
• Options:
  • Donation-based.
  • Reward-based.
  • Equity-based.
  • Debt-based.
• Impact: The chosen model determines the incentives or returns backers can expect.

4. Fundraising Period

• Process: The campaign runs for a specified period.
• Promotion: The project creator actively promotes the campaign through:
  • Social media.
  • Email marketing.
  • Personal networks.
  • Other marketing strategies.
• Goal: To maximize visibility and attract backers.

5. Backer Contributions

• Process: Interested individuals visit the campaign page and contribute funds.
• Payment: The platform provides secure payment options (credit/debit cards, PayPal, etc.).
• Security: Platforms handle the financial transactions securely.

6. Funding Goal and Thresholds

• Funding Goal: The target amount the project creator aims to raise.
• Thresholds:
  • All-or-nothing: Funds are only released if the goal is met.
  • Flexible funding: The creator retains the funds raised, even if the goal is unmet.
• Importance: Establishes clear expectations for both creators and backers.

7. Backer Engagement

• Process: Project creators engage with backers throughout the campaign.
• Activities:
  • Providing updates.
  • Answering questions.
  • Expressing gratitude.
  • Creating community through comments, forums, etc.
• Goal: To build trust and maintain momentum.

8. Project Completion and Rewards

• Process: After the campaign ends, the creator uses the funds to complete the project.
• Reward Fulfillment:
  • Reward-based: Delivering promised rewards.
  • Equity-based: Distributing shares or profit-sharing agreements.
  • Debt-based: Repayment of loaned funds with interest.
• Importance: Fulfilling promises builds trust and ensures positive experiences.

9. Platform Fees

• Process: Crowdfunding platforms charge fees.
• Types:
  • Percentage of funds raised.
  • Fixed amount.
• Purpose: To cover platform maintenance, payment processing, customer support, and other services.