Financing a startup or small business has always provided a challenge to entrepreneurs, but never before has there been an opportunity to reach potential funders at such a large scale. Enter crowdfunding.
“Crowdfunding is a method of funding that allows individuals to utilize their personal networks to raise capital and support their cause or business. Campaign organisers create an online profile to explain their fundraising goals and share their project with friends, family, social networks, etc.”
But, let’s back up a little bit.
Although crowdfunding may seem fairly self-explanatory, in practice it can be somewhat confusing to navigate this new arena. Basically, crowdfunding can be broken down to three types: donation, debt and equity.
Donation, or reward, crowdfunding is just that – a donation. People invest because they want to, without expecting a return on their investment (although rewards may be offered to donors).
Debt crowdfunding is also referred to as peer-to-peer lending, and allows for the lending of money without traditional banks. Investors receive their money back with interest, except in cases of microfinance where crowdsourced money is given to projects in developing countries and no interest in paid on the loan.
People invest in an opportunity in exchange for equity (a share in the business, project or venture). The value of the share is based on the level of success. If you’re just getting started, we’ve put together an infographic about some of the best-known crowdfunding sites.