Introduction: What is crowdfunding
In very simple terms, crowdfunding is the process by which a large number of people (the “crowd”) decides to support an idea, project or business with funding. Sometimes that support is offered for purely charitable reasons, and sometimes it is given with the expectation of receiving a return on the investment.
Although crowdfunding has existed for decades and even centuries, its contemporary popularity has been driven by the growth of the Internet, which makes it feasible to tap a big enough “crowd” to rise sufficient funding to launch a project, and even start or grow a business.
There are several variants of the term, based on the source and purpose of the funding.
For instance, crowdlending refers to the process by which many individuals lend small amounts of money to a borrower. That practice, also known as “peer-to-peer lending,” has been developed quite successfully by platforms such as LendingClub.com and Prosper.com.
If your intent is to seek investors instead of lenders, then the accepted qualifier for the term is equity-based crowdfunding. In this case, a number of individuals who see the potential of a business idea, product or service, are willing to invest money in said venture in exchange for a fractional ownership of the company. That is, they become shareholders (even if it is of only a tiny percentage) of the startup.
Equity-based crowdfunding platforms, such as CircleUp.com and Bolster.com are particularly well-suited for early stage companies that might have an idea, service or product that would be appealing to a large audience of potential investors. Note though, that as of the printing of this book, the only investors allowed to participate in equity-based crowdfunding in the United States are so called “accredited investors”. That is so, because the sale of securities, such as shares in a company, is regulated by the US Securities and Exchange Commission (the “SEC”), which up to this point has limited access to such investment opportunities only to those the SEC deems sophisticated investors. As we will discuss in more detail below, that limitation will likely change soon, given the approval of the JOBS Act, which opens equity-based crowdfunding to a much broader universe of potential investors.
Finally, if you are interested in raising funds for your business, idea or project, but do not want to “sell” a piece of your company, i.e. you do not want shareholders, or you do not want to owe a repayment to a lender, then non-equity-based crowdfunding is the way to go. Note that for an ever-greater segment of the population who comes across the crowdfunding term, what they think of is this type of non-equity-based crowdfunding, given the success of several platforms that have received wide publicity in the last few years, most notably Kickstarter.com and Indiegogo.com.
Still, even this form of non-equity-based crowdfunding has variants, as we will explore later in the book. For instance, there are crowdfunding platforms that are solely based on funding charitable causes or non-profits, such as donorschoose.org, while there are others that focus on a specific industry, such as musicians, graphic designers, film makers and artists.
I now it may sound confusing, given so many terms and variants, but rest assured that in this book we will clarify, identify, and discuss in detail each of the crowdfunding variants, so that you can make an informed decision as to whether crowdfunding is for you, and if so, which are the particular niches that might be more suitable to your business.
As we will also discuss, an additional benefit of crowdfunding is the possibility of turning it into an extremely powerful marketing and validation tool. When combined with savvy use of social media, a crowdfunding campaign could prove a powerful ingredient in the success of your new venture or startup.