Finance 9 September 2015

What are the different methods of crowdfunding your project?

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Deciding early which method of crowdfunding will best suit the product is essential
Having worked on crowdfunding campaigns ranging from the arts to zoos and contributed to over 2m worth of crowdfunding activity, Chris Buckingham has learnt a lot about the process and what works. Here, he shares some advice as well as a guide to the various different models you can opt for.

The definition of crowdfunding is expanding, reaching out to encompass all sorts of fundraising models. At a debate in London’s Tech Hub, I even heard people argue that crowdfunding is too generic a term, preferring to talk about “online investment vehicles”. While I agree the term is becoming more widely used as new applications of the process emerge, crowdfunding for a project has, at its core, the same component across all models that is the granting of consent by the crowd for a vision to be created. I call this “crowdconsent”.

There are five options (or models) available for anyone wanting to crowdfund their project. To help navigate your way around the different models I introduced the acronym DREIM back in 2012. DREIM stands for:

Donation

Reward

Equity

Interest

Mixed

(1) Donation

Of the five models, perhaps the easiest to understand is the donation model. This works on basic philanthropy, where people give money towards a good cause. Their motivation is the warm glow of knowing they have done something positive, normally with some kind of social value.

(2) Reward

This is the model that, by default, most people think of when they think of crowdfunding. The crowd makes a monetary pledge to a project and the project offers them something in return like a t-shirt. This is the motivational factor for the crowd and I like to think of this model of crowdfunding like shopping. The reward model is represented well on both sides of the Atlantic by Indiegogo and Kickstarter. But there are plenty of home grown sites across Europe.

(3) Equity

In this model, the project’s management offers a share of the company to the crowd. This is a higher risk model but the motivation for the crowd is to gamble on the project becoming a big player in their field. The investor will then get dividends and/or they will be able to sell their shares at some future point.

This is risky as start-ups often fail. Companies like Crowdcube, which specialise in this model, require the crowd (investors) to pass a test before they can invest through their site.

When you offer equity, you will need legal help to ensure everything is structured correctly. This costs money and takes time to organise but the good news is most of the platforms offer this as part of their service.

(4) Interest

In this model you get a loan from the crowd which then gets paid back with interest. The interest levels depend on credit ratings and sometimes the past history of the organisation and the management team. As with the equity model, the crowd like to see a strong potential for growth. This is related to their motivations – to help the economy while making a little money in the transaction.

(5) Mixed


 
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