June 2022. Reading Time: 10 Minutes. Author: Sidharth Sachdeva
Crowdfunding: What is it?
In 2016, Zach Brown raised more than $50,000 on Kickstarter to make a bowl of potato salad. Starting with a goal of £10 to buy his ingredients for the potato salad, Zach went on to raise a whopping $50,000 and has since gone on to release a recipe book called ‘The Peace, Love and Potato Salad Cookbook’. Well, that is the power of crowdfunding campaigns in today’s internet age. Investopedia defines crowdfunding as the use of small amounts of capital from a large number of individuals to finance a specific business, cause or a project. Crowdfunding draws inspiration from the concept of microfinance and crowdsourcing.
Crowdfunding Models
During the past few years, different forms of crowdfunding have emerged. The two key categories are the following:
- Investment
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Lending-based: This involves a company receiving money from the crowd, with the intention that it is repaid with interest. Debt crowdfunding is similar to traditional borrowing however, an advantage is that the company typically pays lower interest rates than they would ordinarily, and investors get a better return than they would with a bank savings account.
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Equity-based: It is a form of investment that allows investors to finance startups and SMEs set up as corporations through platforms and online portals. A financial contribution is made in exchange for equity stakes in the same companies with equity and administrative rights.
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- Non-Investment
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Reward-based: Rewards-based crowdfunding often uses a tier-based donation system, meaning the fundraiser will provide backers with a reward like a service or new product in exchange for a predetermined contribution amount. Rewards-based crowdfunding doesn’t require the fundraiser to pay funders back.
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Donation-based: This type of crowdfunding involves amassing large amounts of donations without needing to provide the investors with anything in return. This particular form of crowdfunding is commonly used by charities and for social causes.
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Analyzing crowdfunding by geographies shows the US dominates with a transaction value of $504m in 2021. Behind are UK, France & Germany, while Australia comes fifth on list, implying a correlation between robustness of financial markets and the crowdfunding transaction value in an economy.

