Crowdfunding Vs Crowd Fund Investing: What's The Difference?

Crowdfunding is a way of raising money to finance projects and businesses, usually via online platforms. It is often used by startup companies or growing businesses as a way of accessing alternative funds. There are several types of crowdfunding, including peer-to-peer lending, equity-based crowdfunding, rewards-based crowdfunding, and donation-based crowdfunding. Crowd fund investing, on the other hand, is a type of equity crowdfunding where investors acquire a small ownership stake in the business. It is a form of angel investing that is done online.

Donation-based crowdfunding: Investors donate to a cause or business without receiving anything in return

Donation-based crowdfunding is a model where investors donate money to organisations they want to support with no strings attached. In other words, investors give to the company without expecting anything in return for their donation. This is the most common type of crowdfunding.

Donation-based crowdfunding is a collective effort by individuals to help charitable causes. Funds are raised for religious, social, environmental, or other purposes. Donors come together to create an online community around a common cause to help fund services and programs to combat a variety of issues, including healthcare and community development.

The major aspect of donor-based crowdfunding is that there is no reward for donating; rather, it is based on the donor's altruistic reasoning. Ethical concerns have been raised about the increasing popularity of donation-based crowdfunding, which can be affected by fraudulent campaigns and privacy issues.

Donation-based crowdfunding is a popular option for any type of business that people genuinely want to donate money to. This includes non-profits, mission-based organisations, and small businesses with strong ties to their communities.

Donation crowdfunding is a simple process: investors donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return.

Donation-based crowdfunding is a great option for those seeking emergency financial aid. It allows you to reach out to your community for support in a way that is easy and accessible. Whether you are facing financial difficulties or hoping to impact the world positively, online fundraising can help you achieve your goals.

GoFundMe is one of the major sites that uses donation-based crowdfunding.

Equity-based crowdfunding: Investors receive a small stake in the business in exchange for their investment

Equity-based crowdfunding is a form of investment crowdfunding, where backers receive equity shares in the company in exchange for their investment. This type of crowdfunding is particularly useful for early-stage firms, and the amount of money raised can vary, with each investment corresponding to a gradation of the percentage stake in the company. The value of these shares increases if the company performs well, similar to regular stocks. However, due to the unpredictable nature of startups, equity investment also comes with a certain level of risk.

Equity-based crowdfunding is a way for companies to source money by soliciting many backers, each investing a relatively small amount. This method lowers the barriers to entry for individual investors and is often facilitated by online platforms. It is important to note that equity-based crowdfunding is different from traditional investing, where a company might target one or two investors to secure funding. In contrast, equity-based crowdfunding allows companies to appeal to a much larger pool of potential investors, with each investor contributing a smaller amount.

One of the key advantages of equity-based crowdfunding is that it can connect entrepreneurs with legitimate investors who possess the expertise needed to help their business grow. Additionally, this type of crowdfunding allows companies to raise money for general business purposes, such as working capital, rather than being restricted to funding a specific product or project. Furthermore, equity-based crowdfunding is relatively rare compared to other forms of crowdfunding, so a successful campaign could result in valuable media exposure for the company.

There are, however, some potential drawbacks to equity-based crowdfunding. One of the main disadvantages is the time it takes to receive funding. It can take a minimum of six months to a year to secure funds through an equity crowdfunding platform. Additionally, the rules and legal paperwork associated with equity crowdfunding can be complex and costly.

Equity-based crowdfunding is a booming industry, with Statista forecasting that it will put $31.3 billion in entrepreneurs' pockets in 2022 alone, up from $11.2 billion. This type of crowdfunding provides a valuable opportunity for companies to raise capital and fund new projects, connecting them with a wide range of investors.

Rewards-based crowdfunding: Investors receive a non-financial reward, such as goods or services, in exchange for their contribution

Rewards-based crowdfunding is a type of crowdfunding where investors receive a non-financial reward in exchange for their contribution. This could be in the form of goods, services, or other incentives. This type of crowdfunding is best suited for businesses or projects that can offer incentives to backers without giving up equity or taking on debt.

In rewards-based crowdfunding, businesses offer investors rewards or perks for contributing to their product or project. These rewards can vary depending on the business and the campaign. For example, investors might receive company-branded merchandise, advance copies of a new product, a behind-the-scenes tour of the business, or exclusive access to future events or discounts. Rewards can also be tiered, with backers who contribute more receiving higher-value rewards.

There are two main types of rewards-based crowdfunding campaigns: all-or-nothing and flexible. In an all-or-nothing campaign, the business sets a specific funding goal, and if they don't reach that goal, they don't receive any of the funds pledged. In a flexible campaign, the business keeps whatever funds are raised, regardless of whether they meet their funding goal or not.

Rewards-based crowdfunding is a popular option for businesses as it offers several benefits. It can generate positive buzz and media exposure for the company, be used as a form of market research and feedback, raise the company's profile, and build relationships with fans and supporters. However, there are also some drawbacks. Running a successful campaign requires a built-in audience or a strategy for reaching potential backers, and there are substantial upfront costs associated with creating marketing materials. Additionally, campaigns can take a significant amount of time to prepare and run, so it may not be suitable for businesses that need funding quickly.

Overall, rewards-based crowdfunding can be a powerful tool for businesses to raise funds and connect with their audience, but it's important to carefully consider the pros and cons before launching a campaign.

Debt-based crowdfunding: Investors loan money to a business and expect to be repaid with interest

Debt-based crowdfunding is a form of investment crowdfunding, where investors loan money to a business and expect to be repaid with interest. It is a way to source money for a company by asking backers to invest a relatively small amount each.

Debt-based crowdfunding can include several types of crowdlending or peer-to-peer lending, such as mini-bonds, peer-to-peer lending, and invoice financing. Mini-bonds, for example, typically have a term of three to five years and offer interest rates of around 7-8%. Peer-to-peer lending matches savers or investors with businesses seeking finance, allowing investors to get a better return than they would with a regular savings account.

Through an online platform, investors can review the purpose of the loan, the terms, the interest rate, the loan's length, and the borrower's estimated credit rating. Investment crowdfunding allows startups to seek small investments from many backers when other options are unavailable or too costly.

As an investor, you can expect to receive an interest rate that is typically higher than other debt instruments because of the credit risk involved in lending this way. However, it is important to note that debt-based crowdfunding is considered a high-risk investment by the Financial Conduct Authority (FCA). There is a possibility of losing all the money invested if the business fails, and it may take several years to get your money back, even if the business is successful.

To mitigate the risk, investors can spread their microloans across a range of entrepreneurs, projects, and companies. It is generally recommended not to invest more than 10% of your money in high-risk investments.

Debt-based crowdfunding has gained popularity since the 2008 financial crisis, when stricter lending policies made it difficult for small businesses to secure credit. It has become a valuable way for entrepreneurs to raise capital and connect with a wide pool of investors.

Royalty-based crowdfunding: Investors receive a percentage of revenue once the business or project generates income

Royalty-based Crowdfunding

This type of crowdfunding offers backers a percentage of the revenue accrued from the project or venture once it starts generating income. This means that once a product, such as a mobile app, is developed, launched, and starts selling, the backers will receive a share of the revenue from sales.

It's important to note that backers are not shareholders in the venture and are only entitled to royalties from sales, not equity or voting rights.

• No Shareholder Rights: Royalty-based crowdfunding does not give backers shareholder rights in the business. They are only entitled to receive royalties from sales, not equity or voting rights.
• Revenue Generation: For backers to receive royalties, the project or venture must generate revenue. This means that there is a risk that backers may not receive any returns if the venture is unsuccessful.
• Gratitude and Incentive: Offering a percentage of revenue can be a way to show gratitude to backers and incentivize their support. It also provides them with a potential financial return on their investment.
• Flexibility: This type of crowdfunding allows entrepreneurs to raise funds without giving up ownership or control of their business. It can be a good option for those who want to maintain full ownership while still rewarding their backers.
• Risk and Reward: As with any investment, there is a level of risk involved in royalty-based crowdfunding. Backers are investing in the hope that the venture will generate revenue and provide them with a return. The level of risk and potential reward will depend on the specific venture and its success.
• Due Diligence: As with any investment, it is important for backers to conduct thorough due diligence before investing in a royalty-based crowdfunding campaign. This includes researching the business, understanding the risks involved, and assessing the potential for revenue generation.
• Long-Term Commitment: Royalty-based crowdfunding typically involves a long-term commitment, as backers will only receive returns once the venture generates revenue, which may take time. Backers should be aware of the potential time frame for returns and the ongoing commitment required.
• Diversification: To mitigate risk, backers may consider diversifying their investments across multiple royalty-based crowdfunding campaigns or other types of investments. This can help spread the risk and increase the potential for returns.
• Regulation: It is important to note that crowdfunding, including royalty-based crowdfunding, is subject to regulations and laws that vary by country. These regulations aim to protect investors and ensure transparency. Entrepreneurs and backers should be aware of the relevant laws and regulations in their jurisdiction.

Frequently asked questions