Crowdfunding is a collective effort of many individuals who network and pool their resources to support efforts initiated by other people or organizations. This is usually done via or with the help of the Internet. Individual projects and businesses are financed with small contributions from a large number of individuals, allowing innovators, entrepreneurs and business owners to utilise their social networks to raise capital.
The rise of the crowdfunding industry over the past years comes from the advancement and availability in web and mobile-based applications and services. Entrepreneurs and businesses can now utilise the crowd to obtain ideas, collect money, and solicit input on the product, overall fostering an environment of collective decision-making and allowing businesses to connect with potential customers. The main advantage of crowdfunding is that the funders are also potential customers and ambassadors of the project or business they support and that they will help to promote it through their own networks.
The funder usually identifies with the project, has a mind for change, and is happy to help provide the social proof of concept. Profit maximisation as a goal is rare in crowdfunding, for now. The risk of failure does not necessarily translate into risk of loss of capital, because success is for the funder usually not defined through financial return. Of course, the different crowdfunding models also correspond to slightly different motivations in funders, though they all are to some degree intrinsic motivations. There are basically four types of crowdfunding:
➜ Donation: a donor contract without existential reward
➜ Reward: purchase contract for some type of product or service
➜ Lending: credit contract, credit is being repaid plus interest
➜ Equity: shareholding contract, shares, equity-like instruments or revenue sharing in the project/business, potential up-side at exit