If 2012 was the year of donation-based crowdfunding, 2013 looks to be the year of equity-based crowdfunding. In 2013 the JOBS act will go into effect, allowing individuals in the US to make small investments in companies looking for early-stage funding.

Equity-based crowd funding is a sister to donation-based crowdfunding. Whereas donation-based crowdfunding rewards benefactors’ donations with a product or promise of future service from a fledgling start-up, equity-based crowdfunding offers the possibility to reward investments with cash, or stock rewards down the road.

Donation-based crowdfunding has been a successful option in 2012 for a wide range of upstart products (hankering for a quick office nap?) and services. A great number of musicians, movie makers, clothing lines, and many more have gotten their start from this model. In response to this shifting landscape of crowd-sourced funding, a plethora of crowdfunding websites have popped up, each with their own strengths and weaknesses.

A wonderful thing about equity crowd-funding is that it makes possible for individual entrepreneurs and small companies that don’t possess much capital to still make their ideas a reality. Crowd-funding could be an alternative for companies with a clear plan for a service, product, or business who do not want to or cannot take out loans.

On the same token, the crowd likes crowd funding, because it’s friendlier on the pocketbook, allowing the investor or benefactor to make smaller contributions into the larger pool. It truly is democracy in action: a large volume of people pool together small amounts of money, allowing start-ups and entrepreneurs the chance to let their business take off, so that overall, everyone shares less financial burden and risk, and small businesses and start-ups can make products and services that people actually want.

Using equity crowdfunding to invest in start-up companies—much like anything discussed on this blog—can be a risky maneuver with a huge payout. Just to illustrate, calculations done on the initial investment of Facebook show that, had you been able to invest in Facebook during its 2004 inception, when it was still an idea in a dorm room, would have netted you huge returns this year at their IPO.

Crowd Funding: Changing the Rules

In this milder Recession climate, venture capitalists still display an increasingly risk-averse attitude, which has forced hungry entrepreneurs to turn to alternative sources of funding to get their dreams off the ground. As the popularity of websites like KickStarter and Indiegogo have shown, this shift in availability of funding has allowed crowd-funding to demonstrate its potential for ground-breaking change on a large scale.

Tim Schafer, a veteran in the videogame industry, used Kickstarter to raise over $3.3 million with the help of over 87,000 people for a new point-and-click adventure game. He initially had to turn to Kickstarter because no game company would fund this style of game, as point-and-click adventure games are a niche genre. Instead, he pitched his idea and his company to his potential market, and his potential userbase responded favorably, allowing Schafer to realize his product.

Unlimited Potential

There is virtually no end to what crowdfunding could be used to achieve. Penny Arcade, a website that hosts a popular webcomic, wanted to get enough money to remove ads from their website for a year. The creators of Penny Arcade have said they wanted to return to a reader-centric model, rather than having to answer to businesses that advertise on their website. Websites usually rely on subscription fees as an alternative revenue-generator to ad revenue. In such a platform, most content is locked behind log-in screens and paywalls. It’s exciting to speculate whether this experiment will lead to viable alternatives for keeping websites ad-free without subscription fees.

Final Thoughts

As always, you should do thorough research before starting a crowdfunding initiative, or investing in one. Learn what the rules and fees of any websites or payment systems you’re using are. At SprinkleBit, our fees for the Crowdfunding Network of the platform will be spelled out clearly in our fee structure page.

Finally, have a clear plan to reach your goals, and be able to communicate your ideas clearly to your audience. If you happen to be an investor/donor, you should make sure you know who you’re giving money to and what they’re going to use it for. As with any investment, do your homework!