Crowdfunding has emerged as a disruptive platform for individuals and businesses to raise money from small funding contributions made by a large group of people, typically via online platforms. What started as an alternative funding avenue over a decade ago has completely transformed into a multi-billion dollar ecosystem today spanning diverse sectors, models and variants.
how does crowdfunding work? Which are the most popular platforms and business models enabling this?
The Rise of Crowdfunding
Crowdfunding as a concept for raising project finance from a collective pool of individuals existed for ages via avenues like donations or micro finance groups. However, technology completely transformed accessibility, ease and scale over the past decade by bringing fundraising capabilities to the internet and social media.
Instead of approaching traditional financiers, creators and entrepreneurs could now present their ideas online to a virtually unlimited pool of global contributors who could support interesting projects. The ability for anyone to start a social funding campaign or back others on digital platforms like KickStarter, Indiegogo, GoFundMe opened new horizons.
Today crowdfunding generates an estimated $25+ billion globally each year, a figure estimated to cross $90 billion by 2025. Around 55% of this current market is estimated to come from North America followed by 25% from the Asia-Pacific region including countries like China and India with emerging startup ecosystems. Clearly the global model has strong future growth runways ahead as it enters more sectors and geographies.
But how do the practical aspects work in translating that global interest into actual fundraising success for individuals or companies launching campaigns? Which business models enable this? Let's analyze various crowdfunding approaches in the sections below:
1. Donation-based Crowdfunding Model
The donation-based model is one of the most popular as it resonates easily with human generosity instincts. Platforms like GoFundMe enable individuals or non-profits to present a social cause or personal funding need to solicit small donations from contributors who sympathize with the profile and wish to help out without expecting anything tangible in return right away. Causes can range from medical needs, community projects, religious missions to supporting artists or films/albums by fans. Profiles aim to provide transparency on fund utilization assurance so donors feel satisfied their contributions count. GoFundMe alone has facilitated over $15 billion as donations since launch.
However, since donations depend purely on the viral nature of campaigns getting adequate visibility and empathy conversion for amounts to add up, tools for amplifying social media outreach are imperative in this model. Some platforms provide guidance or additional promotion support to projects they feel deserve special attention based on endorsements or page activity metrics. Overall the purely donations-based route works for causes that can garner high public emotive appeal when showcased effectively online.
2. Rewards-based Crowdfunding Model
The rewards-based crowdfunding model pioneered by platforms like KickStarter focuses on creative projects or innovative products rather than causes. The concept allows individual creators or startups to showcase ideas, get market validation and raise development funds from interested supporters in return for non-cash rewards once successful delivery timelines are met. Rewards vary based on contribution levels - from signed merchandise, limited-edition releases or exclusive experiences that only crowdfunders get access too, to advance purchases of the very product itself like a fashion accessory, gadget or table-top game.
The model allows gauging demand for proposed creations before large investments into full production capacities. It also helps build an advance market by involving supporters not just as financiers but also product advocates who get a sense of ownership in the eventual success given their early roles as patrons fueling the journey. Over 197,000 projects have received pledges exceeding $6.3 billion on KickStarter alone since 2009 - signaling the traction and impact created. However, creators need very strategic planning on setting production, shipping timelines and returns policies aligned to rewards promised to avoid major errors or dissatisfaction.
3. Equity-based Crowdfunding Model
Equity crowdfunding takes risk capital raising abilities to the next level by allowing everyday individuals to directly invest small amounts for equity ownership in startups listing funding rounds on platforms, akin to venture capital and angel investors but now democratized at the crowd level.
Allowed only in select countries so far due to regulatory constraints, equity crowdfunding works when authorized platforms like Startengine and CrowdCube enable startups to publish their business plans, raise targeted risk capital amounts in return for issuing shares, cap table entries and even dividend rights to the pool of online investors collectively funding the company based on their belief in the growth potential. Investors can begin with tickets as low as $500 to as much as $100,000+ depending on personal appetite and net worth levels.
As an example of traction, SeedInvest alone has funded over 300 startups through $500 million raised online in equity capital from over 340,000 members since launch in 2011. Startups get access to growth funds from a diverse group aligned to their vision while investors get fractionalized equity ownership in innovative private companies at relatively early stages compared to public stocks - that provide higher risk-adjusted return potential if successful than traditional options.
However, many countries still limit equity crowdfunding to accredited or qualified high networth individuals only. Globally adoption also remains niche so far given investor education levels required on evaluating risky startups holistically by the wider public. But progressive frameworks and success stories are expected to drive adoption going ahead.
4. Peer-to-Peer Lending Crowdfunding
Peer-to-peer lending is another rising model where individuals can directly invest in lending out money while earning fixed interest income in what has traditionally been the stronghold of banks or NBFCs so far. Digital platforms like Lending Club use the wisdom of crowds, predictive algorithms and credit scoring automation to enable disaggregated investors to finance creditworthy loan-seeking individuals or businesses looking to access capital for needs like education, health expenses, business expansion etc.
Investors analyze borrower profiles, risk metrics and past repayment histories on the platforms to create diversified auto lending portfolios aiming to maximize earned interest yield from such Notes while accounting for acceptable default rates. Sophisticated investors deploy statistical models and optimization strategies across grade levels and loan durations to generate target returns. Retail investors on the other end may start more simply. Returns vary across geographies but often range in the 5% to 15%+ per annum mark which enhances fixed income yields over conventional options. On the borrowing side, platforms promise quicker access, lower rates and flexible options. Over $56 billion worth of loans have been originated in the US alone by the P2P lending sector till date.
The model however carries underlying risks of economic fluctuations causing individually financed loans to default - impacting portfolio returns. Also recent rising rate cycles strain refinancing capabilities that then expose retail investors to extended low liquidity on their committed capital in underperforming loans. Regulatory oversight is hence essential to success of this industry.
5. Cryptocurrency Based Crowdfunding
A new paradigm in crowdfunding utilizes decentralized blockchain architectures, smart contracts and crypto tokens/NFTs to facilitate peer-to-peer fundraising on Web 3.0 for new age causes. Platforms like BitFund, CryptoFund promote projects to the cryptocurrency community where backers vote via tokens and get rights to access rewards, or fractionalized ownership/utility representations depending on implementation architectures. All transactions occur transparently over secure distributed ledgers.
For example, music NFT marketplace Royal recently raised $55M by selling rights to future album revenue shares with the Fan Tokens crypto community, implemented algorithmically via smart contracts executed once funding closed. Such crypto-native crowdfunding models remove intermediaries while aligning incentives tightly across creators/contributors given outcomes directly influence token value. However, adoption still remains relatively niche due to technology education barriers in onboarding mainstream audiences unfamiliar with blockchain ecosystems.
As evidenced, various flavors of crowdfunding innovation continue to emerge - tapping into special interests and behaviors of diverse funder communities while financing equally diverse needs of individuals or business benefiting from decentralized access to risk capital unconstrained by traditional institutional gatekeepers or geographic boundaries. It promises to power creative projects, causes and ideas that likely would have never seen light in earlier eras - thereby boosting global innovation, entrepreneurship and digital transformation.
Conclusion
In conclusion, modern crowdfunding leverages the power of digital community action, disruptive business models and passionate champions supporting causes or ideas they believe in - to raise finance or risk capital for projects that align with their views. Harnessing this collaboratively can unlock immense potential for solving problems at scale while allocating capital to where the maximum crowdwisdom identifies value.
Several variants across donations, rewards, equity, lending or cryptocurrencies cater to a spectrum of social and commercial endeavors at early idea or growth stages in a decentralized manner - thereby boosting their chances of success through access to resources. And continual evolution of models indicates crowdfunding still remains at the early stages of its impact journey.