Help! I’m confused by all the terms being thrown around in the crowdfunding sector!
Do not fear, you are not alone!
From the single term Crowdfunding, we now have Crowd Investing (also know as Equity Crowdfunding) plus Donation Crowdfunding and Crowd Selling.
So what do these terms all mean?
Here’s our view on what these terms mean…
‘Crowdfunding’ is the original term coined by the likes of Kickstarter in the US to raise funds (ie donations) for good works, social projects, artistic projects and increasing developing gadgets.
The money provided was provided on a donation basis – rather like donating to a charity. Hence, nothing was expected in return other than a report that the project was completed etc…
However, the largest and most prominent successes from this sector of the crowdfunding world have been where a prototype product is offered ‘free’ in return for a donation. In effect, this is pre-selling the product, and hence, has been described as Crowd Selling to distinguish it from a pure donation.
Examples of successful crowd selling campaigns include Pebble Watch (which took $99 donations in return for a free watch) and was funding over 100 times its original goal, or an affordable 3-d printer (donors of $2,299 got a free 3-d printer).
Hence, as the number of ‘free products for funding’ projects are launched, the remaining – social, art, photography or theatre projects are increasingly described as ‘crowd donation’ or if you prefer ‘donation crowdfunding’. Albeit, that many will include a free book, ticket to an event or report.
This then leaves the new boy on the crowdfunding block
Crowd Investing or Equity Crowdfunding
This category is clearly distinct from those above. For the first time, there is no notion of a donation. Instead this is a business angel / investment transaction in which cash is swapped for equity in the new or growth business.
Equally, the amounts that are typically invested – based on reports from the UK’s first Crowd Investing website – Crowdcube – are around £1,800 (or roughly US$2,700). This is much greater than $100 for a cool watch or device.
In addition, the reasons for investing are different and require a much deeper study of the business proposal and idea. Hence, we have put together 21 tests that you use to assess whether your startup is ready for equity crowdfunding.