16 Jun Want to Crowdfund? Here are Four Types of Crowdfunding Models to Check Out.
Planning to crowdfund your next venture? Before you sign up on a crowdfunding platform, you need to know which model suits you best.
This article is a brief guide on four of the most popular crowdfunding models and who they are best suited for.
1). Rewards-based model:
A simple model, rewards-based is the most popular with entrepreneurs. As the term suggests, contributors are given a special reward for their contributions to the project.
For example, the highest contributor to a smart-watch maker will receive the developed product as a reward for their contribution. The project owner decides the kind of reward contributors will receive when stating their goals and deliverables.
Kickstarter and Indiegogo are popular rewards-based crowdfunding models. Project owners sign up, submit their project and launch their campaign for the public to begin contributing.
If your project falls into categories like tech, music, film, and video, publishing and art then rewards-based funding is the way to go.
Small scale startups, entrepreneurs or individuals with exciting and innovative projects can benefit from crowdfunding.
Crowdfunding hardly ever goes beyond $10,000 unless it is for items like the Oculus Rift, the Formlabs 3D printer which raised $2,945,885 and backers who pledged $2,299 or more received a Formlabs printer in spring of 2013.
Rewards-based funding works exceptionally well only when you have an exciting and interesting project to offer.
2). Donation-based model:
Similar to rewards-based model, donation-based is more altruistic in nature.
Contributors donate without the expectation of receiving anything in return, for charity or personal causes. Over the years, hundreds of non-profit organizations and individuals have used this platform to fundraise for their cause.
Popular sites like Crowdrise and GoFundMe has thousands of people generously donating to social causes.
If your project has a social or personal cause to it, donation-based funding is your best option.
Although you are not obliged to give any reward for contribution, it is always recommended that you provide them with a token of recognition for their support. It’s also important to be transparent with your objectives, progress and utilization of donor’s money.
3). Lending-based model:
Also known as peer-to-peer lending, or P2PL, this model is complex and requires financial knowledge. It also requires you to display your financial profile for the public to see and decide whether you should be given a loan.
Entrepreneurs join a P2P lending platform hoping to meet an investor who is willing to lend a low-interest loan.
Platforms like Upstart or Lending Club are some of the oldest and most popular when it comes to P2P lending.
Entrepreneurs looking for capital funding can try lending-based model, however, it is advised that you carry adequate research on P2P lending (legal requirements, interest rates etc) before you opt for this model.
4). Equity-based model:
The equity-based model is jokingly called the ‘mature’ form of crowdfunding.
You have a crowd of high-value investors who choose a company they like based on current or future potential and invest money in return for becoming a shareholder.
AngelList is a popular platform that runs on the equity-based model and is a good choice for startups or companies that are established with good market potential.
For those who are comfortable with equity shares, this is a good model to follow, though, you open yourself to public share-holding, so do your research or speak to an expert before you opt for this.
Crowdfunding models are designed to cater to various business structures. Before you take the plunge, know your financial goals and which crowdfunding model may be best for your business.
To speak to our crowdfunding expert, feel free to drop us a line here!