What is Crowdfunding?

It’s not news that women founders are at a disadvantage when it comes to starting a business, one of the biggest reasons why are due to lack of access to capital. However, in the case of crowdfunding, research says that women are more successful than men at crowdfunding as they are better at pitching and selling stories. In another study by Berlin Cameron and Refinery29 called “This is Women’s Work: Stepping Up Startup Culture” and which was released at CES, we also found that female-led startups are two times as likely to turn to crowdfunding as a source of investment. Previously only wealthy individuals, venture capitalists and business angels, could invest in startups. Crowdfunding platforms have helped democratise the investment process by opening the door to a larger pool of potential investors dubbed “the crowd”.

Crowdfunding has been around for a little over a decade, the first ever crowdfunded project took place in 1997 when a Rockband could not fund their tour. They were able to successfully use the internet to raise $60,000 for their tour and went on to later raise more for production of their future albums.

According to the UK Crowdfunding association “Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Traditionally, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders. Typically, those seeking funds will set up a profile of their project on a website created for Crowdfunding. They can then use social media, alongside traditional networks of friends, family and work acquaintances, to raise money. “

Below are the different types of crowdfunding

Equity crowdfunding

Here people (crowd) are able to invest in a project or business and receive equity in return which means the money invested is exchanged for shares or for ownership for a small part of the business. This route is normally used for small businesses or startups that may need a large sum of money. The investor has partial ownership of the company and as with any company if the company performs well the investors will profit and the company will go up in value, they also stand a risk of the business not doing well and losing part, if not all of their investment.

Examples of equity crowdfunding platforms are Crowdcube and Seedrs.

Debt Crowdfunding

Debt crowdfunding is mostly also known as peer to peer lending or loan based lending an option of borrowing money without going through the traditional routes as you would with a bank. The main difference here is that money is borrowed from several investors and they get their money back with an interest and also benefit from having contributed to the success of someone’s venture/project. This is a good route if you want to pay lower interest rates.

Examples of debt crowdfunding platforms are Zopa and Funding Circle.

Donation/Reward crowdfunding

People invest simply because they believe in the cause and in some cases are rewarded with anything that you feel is substantial. This could be something as small as a thank you card or production of the crowdfunded product. However, some platforms allow people to donate without having to promise the donor a reward.

Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project. This is one of the best ways of crowdfunding if you do not want to give away equity or borrow money.

Examples of reward crowdfunding platforms are Kickstarter and Indiegogo.