Crowdfunding is probably a word you have heard thrown around more and more in the past few years, but you may still be unsure of exactly what it encompasses. That’s a reasonable response because crowdfunding has come to mean different things to different people. There are two major types of crowdfunding: donation-based crowdfunding like Kickstarter or GoFundMe, and investment, or equity crowdfunding. Most people are generally familiar with platforms like Kickstarter, but may not have as much experience with equity crowdfunding. While equity crowdfunding also raises money via an internet platform, the two are vastly different. To clear up any confusion between the two different types of crowdfunding, we have outlined the major differences between them.
Millions and millions of people give money away on crowdfunding platforms like Kickstarter every year. When money is given to a Kickstarter campaign, it is not an investment and one does not expect monetary returns. Instead, those who give may be rewarded with early access to a new product or film credits. They’ll never see their money again, however, and even if the company goes on to be majorly successful, the donor will get nothing beyond the initial reward or access to the product. Most of the projects that get funding through Kickstarter are relatively small, usually under $5,000. Additionally, Kickstarter projects are usually creative or artistic ventures. Donors are often viewed as customers, as they are people who ultimately wish to use the product that is being funded. Rewards-based crowdfunding is as much about marketing and promoting a new product as it is about raising funds.
Equity crowdfunding, on the other hand, is a true investment that investors can expect monetary returns from. While this type of investment can still provide funding for businesses looking to grow, it involves selling shares or interests of the company to investors. For investors, this means they not only have the chance to earn back their original investment but to grow it as well, while sometimes receiving regular dividends. Of course, there is risk associated with private placement crowdfunded investments, just as with any investment vehicle. And obviously, investors should perform more research and due diligence than someone donating a small sum to a project on Kickstarter. Two of the most important considerations for investors evaluating an opportunity on an equity crowdfunding platform include profitability and the sponsor’s track record. An interest in the actual product takes a back seat to the deal particulars. Though the range of equity crowdfunding platforms is broad, with opportunities ranging from racehorses to lawsuit outcomes, tangible assets, such as real estate, are more commonly offered investments. Additionally, equity crowdfunding is usually used to raise much larger sums than a platform like Kickstarter, with deals frequently reaching into the millions of dollars.
While both are considered crowdfunding, reward-based crowdfunding and equity crowdfunding target largely different markets. If you are only looking to give a relatively small amount of money and are satisfied with a one-time reward, then a platform like Kickstarter or GoFundMe is probably for you. However, serious investors wanting strong returns and manageable risks who are willing to put in the time to find and evaluate investment opportunities, should consider equity crowdfunding.