Crowdfunding Meaning, Types

Crowdfunding is a method of raising capital through the collective efforts of a large number of individual investors. Crowdfunding is done primarily online via social media and websites.

Although similar concepts can also be executed through mail-order subscriptions, benefit events, and other methods, the term crowdfunding refers to Internet-mediated registries. This modern crowdfunding model is generally based on three types of actors: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organization (the “platform”) that brings the parties together to launch the idea.

So Crowdfunding is the practice of funding a project or venture by raising small amounts of money from many people, basically via the Internet or such dedicated websites.

Types of Crowdfunding

Basically, there are three types of crowdfunding. Namely;

1. Equity-Based Crowdfunding
2. Reward-Based Crowdfunding
3. Donation-based crowdfunding

1. Equity-Based Crowdfunding: Equity crowdfunding allows contributors to become part-owners of the company by trading capital for equity shares. The equity owners receive a financial return (share of the profits in the form of a dividend or distribution.) in the proportion of their contribution. This is the most popular form of crowdfunding.
2. Reward-Based crowdfunding: Reward-based crowdfunding, involves individuals contributing to a business in exchange for a reward typically a form of the product or service which the company offers.

In this type of funding distance between the creator and investor does not matter. Many characteristics of rewards-based crowdfunding known as non-equity crowdfunding.

This type of funding is used in many cases like; funding for free software development, motion picture promotion, scientific research, civic projects, and new inventions etc.

3. Donation-based crowdfunding: It is a way to source money for a project by asking a large number of contributors to individually donate a small amount without any expectation of return.

This type of funding is done mainly for social causes and nothing is expected in return for such funding. Common initiatives for such funding include; natural calamities, disaster relief, charities, and medical bills.