3 Essentials of Crowdfunding

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Crowdfunding platforms have been arriving on the internet faster than ever before. Many of them have the same structure and offer pretty much the same opportunities. Some have different commissions and others will award all funds that are donated instead of an all or nothing philosophy, but in effect they are basically the same.

That’s why if you’re thinking about getting involved as a backer or an entrepreneur, there are three essential things you need to know about crowdfunding right now.

1. Crowdfunding is Not a Form of Microfinancing

Websites like Kiva offer business people in developing countries a small loan to help them expand their business in some way. This is a loan and there is an expected payback for that loan. Some might call Kiva “debt crowdfunding,” but it’s a secured investment. There is no guarantee that the money is coming back to the person who finances a Kiva loan. You cannot collect on a delinquent debt. That’s why it is microfinancing and not a form of debt crowdfunding.

That’s not to say that crowdfunding doesn’t provide a form of financing. Crowdfunding just has a slightly different setup. You can get a return from a crowdfunding investment, but it is an investment, not a financing offer.

2. Crowdfunding is Not a Form of Crowdsourcing

Although the ideas behind crowdsourcing are very similar to the ideas that are behind crowdfunding, there is one important difference: crowdsourcing is about ideas. Crowdfunding is about money. Think about what you can get when you reference Wikipedia online. That is information that is collected by thousands of people who are writing entries because they want to contribute to the community. In crowdsourcing, the movement can accomplish more than just one individual.

There are great ideas that come from crowdfunding and the community comes together to support these ideas. The key difference here is this: crowdsourcing solves problems through idea creation. Crowdfunding solves problems by pooling monetary resources.

3. Crowdfunding Pools Money in a Specific Way

There are four basic types of crowdfunding that occur today: donation, equity, debt, and rewards. Donation crowdfunding is basically like giving money to the Salvation Army kettle when you see someone in a Santa suit ringing a bell. You’re donating money with a crowd, so your quarter can join thousands of other quarters and make a bigger difference.

Debt fundraising is a bit like Kiva, except that you’re getting a contracted interest return on the debt. If the business doesn’t pay up, then you’ve got legal options to help you collect the past due amounts you have. Equity fundraising takes a similar approach, except that you’re getting a slice of the pie and dividends from profits. Reward-based crowdfunding simply lets people purchase something to support a cause.

By knowing these essentials, you can put your money into the space that makes the most sense for you. Get involved today with an investment that makes sense, support great ideas, and the community you join will make a difference in the world today.