Google defines crowdfunding as, “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” In simpler words, it is just a lot of people financially backing an idea of yours. However, this is a very broad overview of crowdfunding. Thus, it cannot help us understand much about the thing. Crowdfunding is a much broader concept. In fact, there are some 4 different crowdfunding types. And all of them are very different from each other. Let us try and understand them in detail.
Crowdfunding Types
- Equity-Based Crowdfunding
- Donation-Based Crowdfunding
- Reward-Based Crowdfunding
- Debt Crowdfunding
Equity-Based Crowdfunding
Equity-Based Crowdfunding is the most popular of all the crowdfunding types.
In equity crowdfunding, the investors have to invest comparatively large sums of money. For investing this amount, the are given some equity or stake in the company. This stake helps them ensure some good future profits.
Since equity crowdfunding requires larger investments, startups usually don’t use it. Also, the company has to make the people believe in them. Thus, it can be difficult for startups to use it. Therefore, it is used by established companies to fund some new growth ventures.
Donation-Based Crowdfunding
Donation-Based Crowdfunding or Non-Profit Crowdfunding are both the same crowdfunding types.
In these crowdfunding types, we have donors instead of investors. Usually, an organization or a group of people launch a project meant for social good. It can be anything – building a school, treating the sick, etc. Some people even use it for personal good. For example, a person needing money for some medical treatment.
Usually, the donors don’t receive any kinds of rewards or other profits. Since it is meant to be a “non-profit” thing. However, sometimes the organization gives them some mementos.
Reward-Based Crowdfunding
Reward-Based Crowdfunding is also very popular amongst the crowdfunding types. Startups usually prefer this over other crowdfunding types.
In reward-based crowdfunding, usually, the term backers is used. In this type of crowdfunding, the backers give some money to small projects. While, the creators give some small rewards to the backers.
Though these rewards are usually the product being produced. But sometimes, it may be something else too.
Debt-Based Crowdfunding
Debt-Based Crowdfunding is principally different from all the other crowdfunding types. Here, there are no investors or backers. But instead, lenders. Additionally, they don’t expect some equity or rewards. But, they expect to get the principal amount back along with a fixed interest.
Although, Debt-Based Crowdfunding is more like taking a loan from a bank. But in this case, you take smaller loans from a large number of people.
Debt Crowdfunding is mostly used for personal reasons. For example, buying a new house, debt consolidation, etc. Although debt crowdfunding is quite a good idea. But in practical terms, it isn’t as popular as the other crowdfunding types.
Concludingly, all the crowdfunding types are meant for very different purposes. Also, one cannot say which of the crowdfunding types is the best. It completely depends on what you need money for.
