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What is crowdfunding?
“Crowdfunding” is the act of online fundraising which encompasses the power of the crowd and social media. The idea is for a large number of individuals to support a project or business venture by contributing relatively small amounts of money.
Campaigns are typically conducted via online platforms and the message is spread across social media outlets.
Crowdfunding has emerged as an alternative method to the traditional ways of raising money, such as bank loans or offline fundraising and is gaining popularity and success, year-on-year. In fact, the UK Alternative Finance market more than tripled in size from £309 million in 2011 to £939 million in 2013 and is predicted to reach £1.74 billion by the end of 2014.
What is crowdfunding - the 4 types:
Philanthropic individuals donate money to charitable causes for no physical reward. Rather, they do it to help make a difference or for the good feeling it gives them. Click here to learn more about one of the biggest donation-based crowdfunding stories from 2014, Stephen Sutton
Perhaps the most widely-recognised of the four types. Fans can support projects in exchange for tangible, non-monetary rewards such as t-shirts, CDs, graphic novels, tech innovations. Performer Amanda Palmer is a strong advocate of raising money from the crowd and has used it to fund a few of her projects. Click here to watch Amanda's TED talk on “The Art of Asking”.
Usually chosen by businesses (as oppose to projects) who plan to repay contributors on a fixed repayment term plus a specified rate of interest, also to be paid during the terms of the loan. There are a number of secured and unsecured “debt instruments” available to investors, including some which allow for conversion into common shares.
This is where start up, early stage, and more established businesses sell shares in their company. With some platforms, the crowd can co-invest in deals alongside more experienced angels and institutional investors (Venture Capital funds). For more information, please download our Entrepreneur’s Guide.
The first two in the above list are considered “unregulated” activities and the latter two are “regulated”. This means that anyone raising finance either through debt or equity, has to adhere to strict guidelines. Such rules include not soliciting investment by promising specific returns.
It’s important that you choose the most appropriate type of crowdfunding to suit your venture. For example, if you want to print a one-off zine, rewards would be best suited. If you’re running a marathon and want to raise money through sponsorship, publishing a donation campaign would be best suited. If you have a start up business with high growth potential, consider either debt or equity funding.