What is Crowdfunding?

by Pit / Dec 30, 2022

What is Crowdfunding?
by  Shrina Kurani 

In the past, when someone wanted to fund something — be it a project, a company, or anything that required capital to start — there were a few ways to raise money. They could take on debt from a loan. They could raise money from friends, family members, and angel or VC investors. They could even take the "bootstrapping" route and scrounge up as much money as possible to fund the project themselves.
In the late 2000s, a fourth option became viable for those trying to get something off the ground: crowdfunding.
Crowdfunding is a way to raise money from a large number of people. Large groups of people pool together small individual investments to provide the capital needed to get a company or project off the ground. Individuals, charities, or companies can create a campaign for specific causes and anyone can contribute. 

Types of crowdfunding

Securities-based crowdfunding
 provides opportunities for people to invest in private companies (aka, startups). In this type of campaign, investors receive the promise of stock, future shares, or another security issued by the company in exchange for capital. We’ll primarily discuss equity-based crowdfunding, but there are many different types of crowdfunding, including:

Donation-based crowdfunding is when someone donates to a specific cause or charity.
Reward-based crowdfunding is exactly what it sounds like. People donate to unlock a specific reward linked to the project they support.  For example, you might help fund a new product line and later receive that product in return.
Peer-to-peer lending allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman. Think of this as debt crowdfunding.
Real estate crowdfunding offers individuals opportunities to invest in real estate projects. This is especially useful for people who are interested in real estate investing but don’t want to deal with mortgage brokers, real estate agents, or contractors. This is a specialized type of securities crowdfunding.
Human capital crowdfunding is a way for people to raise money to back their personal growth or projects. Investors are given the opportunity to fund a project in exchange for a share of the winnings. For instance, many poker players crowdfund money to play and then distribute a share of their winnings back to investors.