Crowdfunding

Definition

Crowdfunding is a method of raising capital where a large number of individuals each contribute a relatively small amount of money to support a specific project or idea and is an alternative to traditional methods of financing.

What is crowdfunding?

Crowdfunding can be used to fund a wide array of projects and operates through specialised online platforms that connect project creators with potential backers.

There are several crowdfunding models, including:

1. Reward-based: Individuals receive non-equity rewards.
2. Equity-based: Individuals receive a share of ownership or equity in the project or business.
3. Donation-based: Individuals contribute without expecting any financial return.
4. Debt-based (peer-to-peer lending): Individuals provide loans to the project creator, expecting to be repaid with interest.

Project creators set a specific funding goal and determine a campaign duration. If the funding goal is not met within the set duration, the project may not receive any funds. Crowdfunding campaigns can operate on an “all-or-nothing” or “keep-what-you-raise” basis. In an all-or-nothing model, the project must meet or exceed its funding goal to receive any funds. In a keep-what-you-raise model, the project creator retains all funds raised, regardless of whether the goal is met.

While crowdfunding offers opportunities for individuals to support innovative projects, there are risks involved. Projects may face delays, encounter unexpected challenges, or even fail to deliver on promised rewards.

Example of crowdfunding

Jane has a brilliant idea for a new eco-friendly product, but she lacks the funds to bring it to market. She decides to explore crowdfunding and creates a campaign on a popular crowdfunding platform.

She sets a crowdfunding target of £20,000 and offers backers different reward tiers based on their contribution levels. For instance:

• A £10 contribution might get a thank-you note.
• A £50 contribution could earn a pre-order of the eco-friendly product.
• A £100 contribution might include a personalised thank-you video and two pre-orders.

Over the course of the campaign, she successfully raises £25,000 from a combination of small contributions from numerous backers. With the funds, Jane is able to manufacture and launch her eco-friendly product, fulfilling the promises made to her backers.