5 Types of Crowdfunding Models and Their Advantages

Instead of a few major investors pouring money into a business, startup crowdfunding democratizes the entire process by letting the ‘crowd’ fund a project. 

Crowdfunding campaigns are carried out online, and ask people to donate funds for a specific business, project, cause, or idea. 

What is a key advantage of crowdfunding? It allows entrepreneurs to collect capital even if large institutional players are not ready to invest In 2021, the worldwide crowdfunding market was valued at $13.64 billion – and is estimated to double by 2028. 

When thinking of crowdfunding, many think of popular platforms like Kickstarter or GoFundMe as viable crowdfunding models. However, few know that companies and businesses can rely on a wide range of crowdfunding strategies to raise capital. 

Here’s a breakdown of some of the most common types of crowdfunding and their advantages.

Donation-Based Crowdfunding 

This model remains one of the most popular and well-known crowdfunding strategies.

Crowdfunders often work hard to share their projects on various social media platforms to solicit funding for personal and community-related projects. 

GoFundMe is a prominent example of a donation-based crowdfunding platform. The company’s 2021 Giving Report revealed the community has raised at least $15 billion since 2010. 

Reward-Based Crowdfunding

Reward-based crowdfunding is primarily used by companies and organizations offering a product or service. With this model, donors stand to collect rewards based on how much they give. 

Kickstarter is a prominent example of a platform where crowdfunders can offer tangible rewards, like the early release of a product, unique perks, and special experiences in exchange for a donation. 

As of mid-September 2022, research shows more than 336,000 successfully funded Kickstarter projects, with about $6.72 billion pledged overall on the platform. 

Equity Crowdfunding

Equity crowdfunding is a business strategy where investors receive equity ownership in a company in exchange for their contribution. 

In the United States, private companies can harness the power of equity crowdfunding to raise up to $5 million in a 12-month period from either accredited or unaccredited investors. RedCrow will offer investments in companies with a RegD or RegCF 506c offering that are seeking equity crowdfunding from investors. 

Those pursuing the equity crowdfunding model in the United States must be properly registered with the Securities and Exchange Commission, FINRA, and adhere to strict rules and regulations governing the process. 

Debt Crowdfunding

Businesses often rely on debt crowdfunding when they’re looking to grow. With this crowdfunding model, investors loan capital in exchange for repayment plus interest. 

Business owners often prefer the debt crowdfunding model as it can provide more favorable terms, a lower interest rate, and faster approval times than a traditional bank loan or other types of debt financing. 

The RedCrow platform empowers companies to raise funds via the security type that is the most appropriate for the company, whether it be equity or debt. 

Real Estate Crowdfunding

Real estate remains a popular investment vehicle, and real estate crowdfunding empowers smaller investors to pool funds with others online to purchase property. 

Crowdfunded real estate providers sometimes are able to offer investment opportunities into properties that might be unavailable to traditional consumers. 

Investment dollars are usually paid into Real Estate Investment Trusts (REITs), which function as a ‘holding company’ to own and operate various property-related investments. Crowdfunded REITs are often private and usually pay out regular dividends to investors. 

Crowdfunding advantages and disadvantages

All of the various crowdfunding models have their advantages and disadvantages

No matter the strategy, crowdfunding represents a tool where an entrepreneur, individual, or business can quickly raise capital while simultaneously attracting attention and boosting marketing prospects. 

Another advantage of crowdfunding is that this model allows prospective investors with less funds to participate, feel connected to a brand/idea, and potentially become loyal customers and followers. Platforms like RedCrow help investors make sound decisions by ‘vetting’ and curating specific companies that launch campaigns. 

However, crowdfunders should remember that a large amount of resources and time might be needed to build interest in an idea, brand, or company to raise dollars later. Therefore, leaders need to be careful to offer the right rewards (if it’s applicable) to entice people to contribute. 

Overall – crowdfunding remains an effective way to raise capital. There are various crowdfunding models to choose from for individuals, entrepreneurs, and companies looking to raise money. 

1 comment
  1. Aishlin Harrison
    Aishlin Harrison • Post Author •
    October 5, 2022 at 9:34 pm

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