4 types of crowdfunding and what this means for the future of investments

written by Clare Ryan on May 10, 2012 in Opinions with 4 comments
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Piggy bank
There are some amazing numbers coming out around crowdfunding.  The first ever Crowdfunding Industry Report, from Massolution, revealed that $1.5 billion was raised in 2011 from sites like Kickstarter, Indigogo, etc.  That’s a lot of investment!

Perhaps the most talked about crowdfunded project lately has bee the Pebble Smartwatch.  Just this week, the company had had so much success, they were forced to cut off funding offers at $1 and stop taking orders. This is not only a success story for Pebble, this is a success story for startups and entrepreneurs everywhere who can potentially use crowdfunding investment to kick their projects into high gear.

Helping to fuel this revolution towards crowdfunding even more, has been the shift in the legal climate. “Crowdfunding from unaccredited investors was highly restricted prior to President Obama signing the JOBS Act in April, 2012. Under the new law, friends, family, and strangers can more easily use a crowdfunding platform to invest in a startup” or project they believe in.

“Driven by equity-based and reward-based crowdfunding, our forecasts indicate total funds raised will nearly double this year. Additionally, the passing of the JOBS ACT will have a profound effect on the growth of crowdfunding in the U.S. In 2013, we expect securities-based crowdfunding to bring new sources of funding to many startups and early stage businesses,” said Carl Esposti, chief executive of Massolution in a statement. (Souce: VentureBeat).

Below are four types of crowdfunding we’re seeing gain traction:

1. Equity Based Crowdfunding: Investors receive a stake in the company. (If Pebble goes big, you get a percentage of the prize).

2. Donation Based Crowdfunding
: Contributions go towards a charitable cause. (You paid for 50 children in Africa to receive watches).

3. Lending Based Crowdfunding:
Investors are repaid for their investment over a period of time. (You invest in Pebble, and get your money paid back over time).

4. Reward Based Crowfunding:
Investors receive a tangible item or service in return for their funds. (You invest in Pebble, and get a first edition watch.)

So, now that we see where this is going, how do you feel about this?  Is this a win for entrepreneurs?  Is it a passing fad?  Is it legally doomed?