Donation-Based CrowdfundingI'll start with the most well-known of the crowdfunding models: donation-based crowdfunding. In the donation/pledging category there are multiple different incentives for the individual who pledges capital to a company. The most common are gifts, prizes, rewards, and product pre-orders. This is great for B2C companies or art projects, especially for those with low fixed expenses, fairly low marginal costs, and easily manufactured products. It’s no coincidence that the top three segments with highest success rates on Kickstarter are Dance (75%), Theater (71%), and Music (68%). They have low fixed expenses with no big upfront costs to get started, once you produce an album or show the marginal cost is very low, and it does not take hundreds of individuals to produce it. However, there are examples of successful projects where the individual backer had no personal interaction or engagement with the end product other than the bragging rights. A good example of this is the Washington Monument, the construction of which was crowdfunded after being halted between 1854 and 1877.
Benefits Of Donation-Based CrowdfundingDespite Kickstarter's much publicized 41% fail rate, there are plenty of great projects that reach their funding goals and attest to the benefits of this model. Aside from the obvious ability to seek funds from a broad base, you can build up a client base even before you start production. Good examples of this are art projects and product pre orders. Additionally, you don’t have to pay any interest rates in the future and you don’t have to give up any equity
Downsides Of Donation-Based CrowdfundingIf you set you’re expectations too high and budget too low you will encounter problems with delivery and customer management. You have pressure to deliver what you promised on time. Lack of preparation can bury you.
PlayersKickstarter, Indigogo, rockethub,
Investment-Based CrowdfundingInvestment-based crowdfunding is very different from the well-known donation-based crowdfunding just discussed. It's important that we distinguish the two. Investment-based crowdfunding is divided into two sections; debt and equity. The individuals who take part in this type crowdfunding have a slightly different incentive -- here they can actually earn a return on investment (ROI) in the form of interest payments. This opens the door for any company to crowdfund, including B2B companies.
Debt-Based CrowdfundingDebt is already a plausible way to crowdfund your startup in the US. Lending Club generates about $50 Million in new loans each month and it’s growing at about 100% a year.
Benefits Of Debt-Based Crowdfunding
- You can raise capital without giving away part of your company.
- You know what the cost basis for the crowdfunding is as you have your set interest rate and the amount of money you want to raise.