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3 models of Crowdfunding

3 models of Crowdfunding

The crowfunding model seems to be easy: a group a people, often large, accepts to finance a project by investing relatively small amount of money via web platform and virtual money transfer tools. The power of union at its paroxysm!

But in reality it exists different crowdfunding models, mainly divergent according to the way money is promised. Actually 3 models can be highlighted

 

#1 Donation Model

This is the first identified model.

Indeed we can say than a charity aiming at raising money is a basic case of crowdfunding. Whatever it is a one shot or monthly-based donation, people giving money to charities relatively provide small amounts.

In this model, several factors seems to drive donors, and get back financial returns isn’t one of them:

-       Satisfaction of helping a good cause (most of charities)

-       Receiving news, tangible proofs that the money was efficiently used

Up to know most of the crowdfunding platform are based on the Donation Model. By the way lots of additional strategies can be implemented to turn this “forgivable donation” model into something else, more appealing for potential donors.

This is the case of KickStarter or IndieGogo for instance. The famous platform set up the “reward” section in order to enhance commitment of backers. Rewards can be tangible (goodies, t-shirts, …) or intangible (name in credit lines, invitation for a show, …).

Another famous strategy was also born on those donation-based crowdfunding platform. It is the “pre-order” model. The method consists of promising a pre-selling version of a product, at a cheaper price, in exchange of a pledge. The most successful crowdfunding campaign at this date, realized by PEBBLE followed this strategy.

 

#2 Lending Model

We all know how a bank lends money. Well this model is based on the same method, including interest rate (depending on the quality of borrower) and period of reimbursement. But the point is that lenders are no more banks but individuals like you and me.

The Lending-based crowdfunding is also called P2P Lending or Personal Loans.

Heavily influenced by micro-credit model first implement in developing nations, lending-based crowdfunding platforms eventually appeared and attracted people in Western countries. Some website like Prosper or The Lending Club are leader in the US for personal loans. On this website people seek money for debt consolidation or purchase a car and for investor a system of “grade” allow them to evaluate risk.

Closer to the initial micro-credit model, Kiva is a place where you can invest on project in the developing world. A mix between philanthropy and investment!

 

#3 Equity Model

Last but not least the Equity Model!

This model is still the less common model in term of volume invested but is one of the most promising one. If it has not emerged as its potential require it is mainly because of regulation. Actually the equity-based crowdfunding model doesn’t match with present laws in many countries and is hard to regulate.

For example, the US have just decided to modify the law in favor of crowdfunding thanks to the JOBS Act signed by Obama in April 2012. However the government institution that rules the financial industry (SEC) recently disappointed the community when they released guidelines around this new law.

However in Europe the model is more developed because regulations are more accommodating. Indeed pioneering platforms such as CrowdCube in the UK or Wiseed in France have proved that the model works.

And according to a recent report (The Crowdfunding Industry Report, Massolution) equity-based crowdfunded project are much more attractive to investor if we compare amount invested per project:

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