Crowdfunding is a relatively new idea compared to other methods of securing capital (bank loans, personal savings, line of credit, venture capitalist, charitable donations). However, it’s actually been around for several years. Many of us have heard stories of people funding various initiatives online.
So what do you need to know about crowdfunding? Here’s a quick tutorial:
What is crowdfunding?
Individuals contribute their money, from as little as one dollar to thousands of dollars, to collectively fund various initiatives introduced by other individuals, organizations, or businesses. Sometimes the donor gets a reward or sample product for contributing.
Who can crowdfund?
Anyone. Crowdfunding can be used to fund startup businesses, social enterprises, nonprofits, causes, charities, and even personal financing. Below are just a few examples of crowdfunding initiatives:
- A crowdfunding campaign for the victims of Typhoon Haiyan in the Philippines has been created on Indiegogo on behalf of the International Rescue Committee. Read about it here.
- Stockbox Grocers and LuminAID Lab are two social enterprises mentioned by Doug Rand, Senior Policy Advisor, White House Office of Science and Technology Policy, in his article who have successfully used crowdfunding. Read more about how the Whitehouse thinks that crowdfunding for social entrepreneurs can contribute to economic growth in this article.
- Boston University student, Alexis-Brianna Felix, used crowdfunding to pay for her tuition and fees. Read about more about it here.
How to crowdfund?
Crowdfunding is usually done through an online site, such as Kickstarter, Crowdfunder, Indiegogo, etc. Each site offers different features and specializes in certain types of initiatives. Some site are better for businesses while other sites are more useful for causes while others cater to the arts. Check out this article in Forbes which gives an overview of the top 10 crowdfunding sites and their focus area. It’s important to note that the sites charge a fee, usually between 4-8% to host your project.
What’s new with crowdfunding?
Traditionally, crowdfunding has been based on donations. However, in 2012, Congress and President Obama passed the JOBS Act, which allows for investment or equity crowdfunding. Instead of individuals donating, they can invest and become shareholders of a business with the possibility of a financial return. The SEC is in the process of reviewing the JOBS Act and creating rules and regulations around investment crowdfunding. So look out for investment crowdfunding in the near future!