In the last few years, there has been several new crowdfunding platforms. With the increase in attention, more questions relating to crowdfunding and its purpose have started to rise.
Crowdfunding is the process by which a large number of people provide small amounts of funds to raise money for a project, idea or venture. There are many different types of crowdfunding that people (investors or backers) can choose to partake in. The three explored in this article are reward-based crowdfunding, equity-based crowdfunding, and donation-based crowdfunding.
Reward-based crowdfunding occurs when people who provide money for a certain project or venture are given some sort of reward or token for their contribution. This type of model is most common with popular crowdfunding websites such as Kickstarter, Indiegogo, Rockethub, Fundrazr, Pozible, Ulule, Fundable etc. On these platforms, backers of a campaign are usually rewarded based on the amount of their contribution. For example, if someone gives $5 for a handmade mug, they might be rewarded one mug in return whereas someone who were to contribute $10, might receive a mug as well as a kettle. The idea is to encourage people to contribute more by creating rewards that improve significantly as the level of contribution increases. Reward-based crowdfunding is most suitable for people who are trying to share their creativity yet want full ownership of their product or venture. Whether it is a play, novel, technology or game, reward-based crowdfunding allows creators to fund and then share their innovation with their backers as well as the general public.
When people invest in someone’s project or venture and receive a certain share of the company, it results in equity-based crowdfunding. This type of crowdfunding can usually be found on websites like Indiegogo, Rockethub, Pozible, Fundable etc. For example, a creator can ask for a certain level of funding from the backers which would qualify them to hold a share in the company. Giving $5 might mean that you receive a mug but if a backer contributes $100, it could earn them a share in the company itself. This type of crowdfunding is most suitable for creators who are looking for people to invest and hold shares in their venture for future growth and returns rather than a temporary reward-based campaign.
Lastly, donation-based crowdfunding is a type of crowdfunding in which a person contributes funds to support a campaign without the expectation of receiving anything in return. This type of crowdfunding is popular on websites such as GoFundMe, Fundrazr, Pozible etc. This model is mostly recommended for people who need contributions for personal areas, including surgery, school trips, stolen items etc. Backers in this sort of funding model have no expectation of getting anything in return whether it is equity or rewards. Their sole purpose is to donate money and help. Donation-based crowdfunding is ideal for those who need help with problems they are facing in their personal life.
Though there are many other kinds of crowdfunding methods, these tend to be the most commonly available to people. It is important before becoming a backer or a creator to know what type of model is best suitable for you.
|Reward-based Crowdfunding||Backers receive rewards or tokens depending on their level of contribution.||Suitable for creators who are trying to share their creativity and innovation with people yet want to retain full ownership of their venture.|
|Equity-based Crowdfunding||Backers receive shares of the company depending on their level of contribution.||Suitable for creators who are looking for long term investments and want to promote their future growth with the help of investors.|
|Donation-based Crowdfunding||Backers do not receive anything in return and money is given solely as a gesture of good will.||Ideal for creators with personal projects rather than creators who are trying to share their innovation.|
Many crowdfunded projects and ideas need a strong product development process. Starting from design to prototyping to actual production. And once production is complete, there is a need to send out rewards to the backers across the world. This requires a good partner who can work with the project creator to be able to produce and send out the products to backers or investors.
Kickstarter is a wonderful platform for creators and inventors and their ideas to take shape through crowd funding. Usually the reward for the funders could be the first lot of products made by the creator
Some of the challenges faced by Kickstarter creators could be
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