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How Many Different Crowdfunding “Models” Are There ?

differentcrowdfundingmodels

Crowdfunding has exploded onto the scene over the past few months; it’s impossible to go a single day without seeing a new crowdfunding article on a major news site.  There are now over 50 crowdfunding platforms from all over the world listed in the CrowdfundingBlog.com database.  We distinguish between 5 types of models or characteristics:

  1. donation
  2. reward / perks
  3. equity
  4. debt/lending
  5. revenue

We’ve classified most as donation or reward/perks; that is, platforms which accept contributions for nothing in return, and those that require project creators to give backers some kind of reward or benefit.  However, there are still a fair amount of equity platforms, as well as a few debt/lending and revenue sites.  But are there really five “models” ?  Some other websites have simply distinguished between the major three, combining donation and reward/perks as a single category.  And a few more have even classified “pre-sale”- something we haven’t been mentioning- as its own separate model.  So what’s the deal?  In the following paragraphs we justify our classifications.

First, it appears that many websites are combining donation and reward.  This seems reasonable for simplicity, but rewards and perks are an integral part of the crowdfunding process and can make or break a campaign.  Without them, many backers simply wouldn’t contribute at all.  Pure donation platforms are more focused on charity and projects that advance a good cause.  Perhaps there is a small reward, such as a t-shirt or something similar.  But by and large, “donation” platforms, as we see them, are those that focus on contributions for nothing in return.

Second, some websites don’t distinguish between “revenue” under the debt/lending umbrella.  This isn’t surprising, since revenue bonds and instruments are literally a type of debt instrument.  But the potential to earn a percentage of revenue, as opposed to a simple loan that returns a fixed amount of interest or merely principle, is a major selling point.  For a profitable and successful company, even a small share of revenue can be quite large.  Furthermore, it aligns the interests of the business owner and the lender in seeing the company succeed.  It’s a lot more exciting and interactive than a simple loan.  Thus, for the crowdfundingblog.com database, we’ve made “revenue” it’s own classification that lies in between “equity” and “debt/lending.”  (Plus, it’s quite unique in the crowdfunding world right now, with only a few platforms offering this option)

Third is “pre-sale,” which we haven’t been distinguishing in our database.  Kickstarter is best-known for hosting these types of projects.  Some of the most successful crowdfunding campaigns to date that have earned millions of dollars have used the pre-sale model.  But to us, receiving the actual item being crowdfunded is just another form of a reward or perk.  And since there aren’t many platforms 100% dedicated to pre-sale projects, we’re going to continue to group them under reward/perks for now.

Finally, there’s equity: the big model that we are all waiting for.  Investors will be able to become actual owners in companies that were previously reserved for large investors.  There doesn’t seem to be much confusion here since having ownership and equity is straightforward.  But we’ll see what happens when the SEC and FINRA finalize everything; some of these classifications may change in the future as crowdfunding evolves.  This is simply what we’ve been rolling with so far on CrowdfundingBlog.com to create an easy-to-understand database for potential backers and investors.

Originally published October 16, 2012