Crowdfunding is a process for raising money from the general public. It involves collecting small amounts of money from a large group of people to fund a product or business or charity. The crowdfunding process also has its own terminology that you should become familiar with.
There are different types of crowdfunding processes, such as:
- raising money for your business or product line, often described as reward-based crowdfunding;
- offering equity in a business to investors, often described as equity-based crowdfunding or investment-based crowdfunding;
- offering debt to small and medium businesses, often described as peer-to-peer lending or loan-based crowdfunding;
- generating donations for a charitable cause, often described as donation-based crowdfunding.
Only the investment-based and loan-based crowdfunding is regulated. In the UK, the regulator is the Financial Conduct Authority, and in the US, the JOBS Act govern crowdfunding.
Crowdfunding is, overall, not a new way to raise money. Throughout history, many cultures globally have used various forms of crowdfunding to raise money and engage in a business venture. Crowdfunding is currently enjoying a resurgence because internet.
Crowdfunding tends to eliminate the middle man, and it usually completed via a crowdfunding platform, such as:
- Kickstarter for businesses or products;
- Seedrs for equity or stock;
- Funding Circle for peer-to-peer lending (debt);
- JustGiving for donations.
This website focuses on rewards-based crowdfunding. This process and associated timeline can be represented as follows:
Crowdfunding is different compared to the usual sale in that the timeline is longer for the entire transaction to complete. It has its own nuances that can make this type of transaction very risky for a backer, especially in getting the product or service paid for. But, on the flip side, there are multiple reasons why backers would choose to engage in a crowdfunding transaction.
Before you crowdfund, use this quick questionnaire to understand if the process is for you.