There are three main reasons why a project creator would opt to crowdfund instead of going to a bank or Wall Street for money for their business, namely that the project creator:
- is too small in size to access main-stream funding sources;
- doesn’t have to complete a credit assessment as required by banks or sophisticated investors, including venture capital or private equity;
- can reach out directly to customers or investors via an online platform, and by cutting out most of the middlemen, can generate more profit.
The funding raised from crowdfunding is typically considered as income/revenue or donation revenue, except in the instances that the content creator or business is specifically seeking equity/stocks or debt financing.
The funding sources available to each content creators or businesses, depending on the size and maturity, can be represented as follows:
Note that crowdfunding can be used by every type of business; reasons why this is the case is explored in the post unpacking the motives of the various types of project creators using crowdfunding.