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The 5 crowdfunding models explained


Jan 21, 2023
crowdfunding models

The definition of crowdfunding, crowdfunding, is expanding, expanding to encompass all kinds of fundraising models.

1. Donation

Of the five, the donation model is perhaps the most obvious. It works on grassroots philanthropy, whereby people donate money for a good cause. They are left with the warm glow of knowing that they have done something positive, normally with some sort of social value.

In the arts, this has traditionally been represented by the concept of the sponsor, or patron, of a certain artist or creative field of work.

2. Reward

This is the model that most comes to mind when people think of crowdfunding. The crowd pledges to the project a certain amount of money, and the project gives them something in return, such as a poster or merchandising item.

The reward model is used by services. But the competition is getting stiff with lots of in-house sites starting to emerge and an equal range of business models catering to many different industries (from archeology to zoos).

3. Fairness

This model occurs when the project management offers a share of the profits to the crowd. Once the break-even point is reached and a profit is made, or the project is sold, investors receive a share of the profits.

This model is risky because start-ups often fail, which is why platforms in this sector require you to pass a test before you can invest on their site.

For the creative industries, there’s also bad news because this model can involve giving up some of the control you have over a project. If you specialize, for example, in a profession that you are passionate about, it might be difficult for you to give up control.

On both sides of the pond, when offering equity, you will also need legal help to make sure everything is right for you and the investors. It costs money and takes time to organize. Investors generally look for growing businesses that they can expand and sell at some point. A small craft producer working out of his garage is not the kind of business these investors will normally consider.

4. Interests

This model is like getting a loan from the bank. Except here, you get the loan from the mob, and it’s on your terms, rather than the banks.

As with equity, you can find a real lack of enthusiasm in your business unless you can prove it has significant growth potential.

Another issue here is that interest rates can be a bit higher than on the high street. The big numbers may seem the same, but you need to consider the fees charged by the crowdfunding platform, any taxes you may have to pay, and the payment processor. It all adds up and can mean that the attractive initial rates you see melt away as those other costs bite.

5. Mixed

The mix is ​​exactly what it sounds like: a mix of models. But then again, all the above-mentioned issues should be considered before funding your project through them.

Plus you need to check that they are regulated. This will allow you to be covered in the event of bankruptcy or the discovery of a fraudulent campaign.

These platforms allow an individual to borrow money for personal use, such as buying a new car, which they then repay with interest. The rates on these sites are normally in line with high street banks, and to borrow or lend money you will need to be credit checked and identified to avoid fraud.

And this is only the beginning. As crowdfunding continues to grow and change, new models may emerge that give start-ups even more options.

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