We were going to start this guide with a quick whistle stop tour of examples where crowdfunding has been used throughout history to get projects off the ground.
But then we realised that’s just what all of our competitors have written about in their ‘Guides to Crowdfunding.’
At Crowdstacker, we like to think we’re a bit different from all the rest, so instead let’s take a look at your history of crowdfunding.
Yes, that’s right. You probably already have a history of crowdfunding. Whether you realise it or not.
Think back, for example, to the days when you were a kid and each week your mum or dad would hand over your pocket money. More often than not the amount would fall woefully short of enabling you to buy much more than a quarter of Kola Kubes, or maybe a couple of Curly Wurlys and a Beano if you were lucky. However, by pooling your money with your siblings or friends it meant your spending power was much higher. Perhaps enough to buy a pop gun or the latest Barbie outfit. Or, as you got older, maybe a sneaky packet of B&H to share behind the bike sheds.
These are all examples of what crowdfunding is essentially about – individuals coming together and pooling their money in order to buy or do something.
Except, in the case of crowdfunding as we know it in 2015, it’s about individuals investing their money, together as one pot, with the promise of some sort of benefit, be it shares in a company or interest on a loan.
Whether as a result of the Global Economic Crash or just the natural evolution of personal investing, crowdfunding is enjoying its moment in the spotlight with businesses, charities and individuals using it as a way to side step traditional financial institutions and connect directly with each other.
Consequently there are a few different types of crowdfunding platforms (the name these crowdfunding facilitators are given). Like Zopa. And Kickstarter. And of course, us, Crowdstacker.
So what do all these different types of crowdfunding platforms do? And how do you tell the differences between them?
Crowdfunding platforms generally fall into three different categories:
1. Debt (Loan-based) Crowdfunding
Debt crowdfunding is quite simply matching people willing to lend, with a person or business willing to borrow, at an agreed rate of interest. This cuts out the middle man, aka, banks, at a potentially greater advantage for both parties.
The two most common business models in this category are:
- Peer-to-peer (p2p) describing people lending to other people, and
- Peer-to-peer for businesses - describing people lending to businesses (this form of peer to peer (p2p) lending is what Crowdstacker does)
Again, the platform showcases the borrowers’ business or project, with the goal of attracting investors (lenders).
Many platforms offer risk categories that attempt to classify risk. And some also offer a secondary marketplace for lenders to buy and sell their loans. Platforms can also charge an upfront and ongoing fee to lenders, but this varies from platform to platform.
Crowdstacker is a peer to peer or p2p lending platform that allows people to lend to businesses. We give indepth information about curated lending opportunities that enable our members to make informed decisions.
RISKS: As with every case of lending money there is always the risk that you are lending to someone who can’t or won’t repay you and so your capital is at risk if you invest. These risks are well mitigated when proper and thorough checks have been carried out, but the lender always bears the risk.
2. Rewards-based Crowdfunding
This is the most well-known method of crowdfunding. The process is essentially where individuals donate towards a cause or project. For example, financing a short film, a music album or an innovative invention, for either personal or motivational reasons. Crowdstacker is a peer to peer p2p platform, it doesn't offer rewards based crowdfunding.
With rewards based crowdfunding, each campaign is designed to raise a specific amount of money – its goal investment – for the project outlined. And it is promoted by the crowdfunding platform. When the investment goal has been reached the accrued funds are sent to the project owners, minus a promotion fee taken by the platform, and then used for the venture proposed in the online campaign.
The basis of a reward varies with every project, some promising an early taster of the product, others just a complimentary ‘pat on the back’.
RISKS – there may be no risks as such since the reward with this type of crowdfunding is often not financial, and you give the money knowing it will not be returned. Although, if the project is not successful, it is possible you will not receive the reward you have been promised either.
3. Equity Crowdfunding
This is largely focused on start-up businesses looking to raise capital or funds for a venture, but can also involve funding more established businesses. Crowdstacker also doesn't offer equity based crowdfunding.
Equity crowdfunding works by enabling people and/or businesses to buy a part of the company they are investing in. This means they then own shares in the business a lot like owning shares listed on the stockmarket, but without the ability to sell the shares easily if you want to.
Investment is made in the hope of the company doing well in the future which will be reflected in the price the investors are able to sell their shares for, or the value of the dividends paid back to shareholders.
As is the case with rewards-based crowdfunding, equity crowdfunding projects are also promoted by the platform on which they sit. Varying degrees of information is provided about the businesses, the management team and the proposed use for the invested money. They also state an investment goal and often have a time limit attached. If the investment goal is not reached within the time limit, funds are either returned to investors or the pledges are not taken.
RISKS: Equity has the greatest potential for increase, but as a wise person once said, “biggest profits mean gravest risks”. Unlike rewards-based crowdfunding, which is typically more transparent, and loan-based crowdfunding, which gives you a fixed rate of return, the success of your equity crowdfunding investment depends entirely on the success of the business. And this cannot be guaranteed. Your capital is at risk if you invest through equity crowdfunding.
For more information on Crowdstacker's unique approach to crowdfunding click here.
You can find out more about Crowdfunding here.