Crowdfunding is a type of fundraising in which businesses ask the public for money, usually in exchange for equity in the company. The main object of crowdfunding is usually a private company that seeks small investment from many people. This is different from the more traditional practice of raising money through angel investors or venture capitalists, where a small number of participants inject more money into the business. (What Is Crowdfunding?, n.d.)
Sometimes, companies don’t know where to look for the right investors and decide to raise money through crowdfunding campaigns. In return for investing in the business, investors will receive equity, albeit with less liquidity than they would get through public shares. The rules for crowdfunding are also more relaxed than for initial public offerings.
Crowdfunding occurs primarily on crowdfunding platforms, such Indiegogo, Kickstart, and GoFundMe. Internet-based platforms that connect fundraisers with funders for the purpose of funding specific campaigns that are usually provided by many funders. Getting funding has always been a challenge, so crowdfunding offers an alternative solution to getting funding that wasn’t available before. This field is growing rapidly and will continue to grow. It represents a revolution in finance. (Assenova et al., 2016)
There are several main ways of crowdfunding:
1. Equity-based and royalty-based crowdfunding
In crowdfunding based on equity, royalties, and loans, funders act as investors or lenders. They must assess the risks of the investment and the expected effects of successful activities. From a funder’s perspective, the uncertainty is whether the project will come up with a product that will satisfy enough potential customers’ tastes.
2. Lending-based crowdfunding
In lending-based crowdfunding, if the project is successful, the funder will receive a certain interest rate payment. Unlike traditional banks, crowdfunding platforms do not screen projects. Instead, it lets funders decide for themselves whether they should fund a particular project or not.
3. Reward-based crowdfunding
Compared with the first two types of crowdfunding, reward-based Crowdfunder mainly play the role of “consumers”. Here, small-scale funders are not primarily concerned with financial returns, but it’s about the product they design. This applies especially to the arts. The crowdfunding platform allows fundraisers to attract a group of funders who essentially buy the product up front.
4. Donation-based crowdfunding
The role of the donation-based crowdfunding is to support humanitarian and artistic projects. Funders of donation-based crowdfunding can be considered philanthropists. Like incentive-based crowdfunding, the success of donation-based crowdfunding depends on the quality of the match between the “taste” of the funder and the characteristics of the campaign. Donation-based activities rely on voluntary contributions to the public good. Other than recognition within the community, fundraisers do not offer monetary returns or in-kind payments. This is like the traditional activities of charities and NGOs. (Belleflamme et al., 2015)
It is worth mentioning that the reward-based approach to crowdfunding is offered in one of two models: “keep it all,” where the entrepreneur keeps the full amount raised whether the goal is achieved, and “all Or Nothing” (AON), the entrepreneur retains nothing until the fund-raising goal is achieved. Each project is set a funding target, and if the amount raised does not reach the target, the entrepreneur will not receive any funding. We hypothesize that AON forces entrepreneurs to take greater risks and encourages Crowdfunder to commit more money, enabling entrepreneurs to set bigger goals. (Cumming et al., 2020). Comparing with the “Keep it All” AON is a credible signal to the crowd that the entrepreneur commits not to undertake the project if not enough is raised. This signal reduces the risk to the crowd, thereby enabling the AON entrepreneurial firms to set higher goals, raise more money, and be more likely to reach their stated goals.
With the advent of Internet platforms, crowdfunding has been embraced by many entrepreneurs as an alternative form of financing. While standardization of crowdfunding platforms provides clear benefits in terms of comparability and readability among projects, it also reduces the degree to which entrepreneurs can tailor their products to funders’ specific needs. The financing model enables entrepreneurs with the most promising projects to demonstrate the quality of their projects. By being involved with the crowdfunding platforms, entrepreneurs present information can be viewed by wider audience in the crowdfunding campaign, thus attracting more supporters.
In conclusion, the future of crowdfunding is set to be shaped by several key trends, including the rise of equity crowdfunding, niche platforms, and social impact investing. By staying informed about these trends and adapting to the changing landscape, businesses and individuals can position themselves to take full advantage of the opportunities presented by this rapidly evolving industry.
