Crowdfunding Series – Part 2: The Four Types

Once again, welcome back to our series! We spoke about crowdfunding and how it’s grown in popularity over the past few years last week, including how investors with tight budgets may participate. Which you can check HERE

The beginning, though, was only that! The numerous sorts of crowdfunding that are available will be covered in greater detail this week, so stay tuned to find out which one would be best for you.

In order for you to decide which approach best meets your needs, let’s briefly go through each of the four types of crowdfunding that are available.

  1. Donation-based Crowdfunding: Donation crowdfunding is the practice of securing financial support based only on altruistic or civic motives without any hope of receiving tangible benefits. Supporters are another name for backers in contribution crowdfunding. They often donate money to a particular initiative out of altruism, peer recognition, respect, or regard; they are not motivated by material benefits or money in general.

Donation crowdfunding has streamlined and standardized the process of raising money for charitable causes by fusing information gathering, contribution transactions, and interactive communication. In comparison to conventional philanthropic giving, this is supposed to dramatically lower the coordination and transaction expenses. Also, crowdsourcing makes it possible to reach a larger geographic audience. With standardized web-based platforms, non-local contributors with no prior relationships to the fundraisers can now make contributions.

  1. Reward-based crowdfunding: With this kind of crowdsourcing, backers are sometimes referred to as contributors. They look for incentives in the form of material goods or immaterial advantages. Four categories of donors can be made: heavenly backers, reward hunters, ardent supporters, and tasteful hermits. 

Angelic supporters resemble altruistic contributors. They give money because they believe in doing so and are less driven by incentives. 

  • Reward seekers resemble conventional investors. They are motivated differently than the heavenly backers. 
  • The most passionate contributors are die-hard admirers. They like the co-creation possibility that certain platforms provide. 
  • Tasteful hermits are less focused on the interpersonal components of the activity. They essentially make up less of the lively audience.

Crowdfunding for rewards is unique since it is a powerful tool for marketing. Pre-ordering allows business owners to increase their sales. This makes it possible for innovative items to enter the market at an early stage. This suggests that the feedback culture of the audience will aid business owners in early product evaluation and modification. This can stop significant losses during the pre-production stage.

  1. Debt-based Crowdfunding: Individual or institutional backers give loans to borrowers through lending crowdsourcing. Investors anticipate in return the timely repayment of the principal and a fixed interest rate. One of the investment-type modes is this one.

Due to decreased operating expenses, lending through crowdsourcing is significantly less expensive than using institutional investors. Physical branches are not required because services are provided online. The majority of the legislative framework that governs banks does not apply to crowdfunding sites. Because platforms may not be subject to certain licensing regimes, prices are also reduced.

  1. Equity-Based Crowdfunding: Crowdfunding for equity is when investors buy unlisted shares or debt-based instruments that have been issued by a company. These investments often go to small and medium-sized businesses (SMEs).

With the launch of the first online equity crowdfunding platform in 2008, this type of financing has seen rapid global expansion. A variety of people make up the investors. Their levels of professional and academic preparation differ. Equity crowdfunding platforms draw venture capitalists and angel investors who want to diversify their holdings and enjoy the ease of standardized online investing procedures.

It is significant that equity crowdfunding participants, like those who participate in other types of investing, have a local bias. Investors in equity crowdfunding are advised to choose projects local to them as they are more accessible to information and allow for better monitoring of the project. 

For investors who are more financially savvy, the impact of this local bias is less significant. Maybe it’s because they’re more inclined to try to diversify their portfolios to reduce risk. It’s interesting to note that this is only true for domestic investments; for cross-border ones, distance has shown to be unimportant. 

This could be the case because local knowledge levels in cross-border investments are unaffected by distance.

In short, there are multiple ways to invest for those interested who do not have enough capital for the amount of entry into a venture, and crowdfunding is one of the best ways to think outside the box and get involved with an investment model. that was conceived out of it: Equity & Help.

Setting up a discovery call now will allow you to learn more.


Till next week!

More articles