Is Crowdfunding donation, investment, or eCommerce?
Updated: Jul 25, 2021
Crowdfunding is now a big umbrella encompassing many types. Generally speaking, crowdfunding is a way for funds to be raised by individuals, corporations, and charities. In exchange for a possible profit or reward, it operates through individuals or organizations that participate in or contribute to crowdfunding projects. It can be risky to invest this way, so you need to be conscious of potential risks. The return is not always assured, and the business can fail, leaving you without your income or compensation. The risks and risk management techniques are different on each platform.
There are a number of crowdfunding forms, the three main styles being: Donation-based, rewards-based, and equity crowdfunding.
Rewards-based crowdfunding can be similar to eCommerce. It relates to people who contribute to a business in return for a "reward," usually in a form of the product or service provided by the company. Backers donate money in order to get a certain physical item in exchange. In contrast with eCommerce, the rewards are sent only after the end of the campaign, often months later. The most successful crowdfunding sites such as Kickstarter and Indiegogo use this crowdfunding form because it helps business owners to promote their project to the contributors without incurring much additional cost or selling ownership stakes.
Even though this approach provides a physical payout to backers, as there is no financial or equity return, it is also commonly considered a subset of donation-based crowdfunding. This means that the fulfillment of the reward is not guaranteed. Some campaigns don’t fulfill their reward because they didn’t calculate the production cost properly, because the company encountered issues and failed, or simply because the whole campaign was a scam. Companies that have done their research and are certain that they will be able to send out the rewards can use a ‘guaranteed delivery or get your money back’ badge. This badge holds the campaign creators accountable for their part of the deal and creates further trust with the backers.
The donation-based crowdfunding model is similar to classic charity donation. Broadly speaking, as donation-based crowdfunding, you can think of any crowdfunding initiative in which there is no financial or physical return to the donors or contributors. Popular crowdfunding programs focused on donations include disaster relief fundraising, charities, nonprofits, and medical bills.
This crowdfunding model does not represent much risk for the backers since they do not expect anything in return. The only thing the backer can expect is that the money they donated goes to the cause they chose. The risk, in this case, is that the funds don't get used as advertised on the campaign. When this happens, the backer will most likely never know about it, unless someone investigates as it sometimes happens.
Equity-based crowdfunding enables contributors to become part-owners of the business by swapping money for equity shares. Contributors receive a financial return on their investment as stock shareholders and finally receive a share of the earnings in the form of a dividend or payout. Threats such as the risk of loss, fraud, and doubtful returns are involved in investing through equity crowdfunding.
No matter the type, crowdfunding is a wonderful concept that helped millions of people and companies raise funds, start companies, pay their bills, and other life-changing projects. No wonder why it’s gaining more support as time goes; backers now have opportunities they had never access to before. They can access the newest product before they hit the commercial shelves, they can choose specific small charities to give to, or they can become an investor in a business and potentially have financial gain out of it. The different subsets of crowdfunding can be similar to known concepts such as investment, donation, and traditional eCommerce, but at the end of the day, crowdfunding is much more than that.