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Jul 9, 2015 2:59 PM ET

Archived: Types of crowdfunding

iCrowdNewswire - Jul 9, 2015

Crowdfunding industry is becoming a major financing source that you should consider for your project

Crowdfunding industry is really big. In 2015 alone, around $65 billion are estimated to be raised through this financing method, rivaling venture capital as the main source of money for startups. But, in fact, crowdfunding is spreading to other, more traditional, areas. And we can expect it to grow much bigger.

As such, no matter what type of project, or how big it is, you should pay close attention to crowdfunding as a way to get financing. Crowdfunding, however, is not a one-size-fits-all type of business, so you should consider your goals, products and services and discover what type and platform works best for you.

There are, basically, three different types of crowdfunding: one category does not necessarily exclude another and, in fact, you can take advantage of two or three of them within a single project. But bear in mind that the main goal of your campaign will be key for choosing your platform and how you’ll promote your initiative.

Product or service crowdfunding

This is the most popular crowdfunding type. Platforms like Indiegogo, Kickstarter and GoFundMe are some of the largest in this category.

In this type of campaign, you finance your venture by a pre-sales offer of your product or service to your backers. While you can give “thank you messages”, benefits or appeal to backers’ altruistic causes, the main objective of your project is well defined in the form of something tangible.

If you decide to start your project this way, you should make sure that your price is not so high, making your offer look expensive nor so low, making it difficult to execute your project. Your project should also feature some kind of innovation, so it can grab attention from backers and the press, making it easier to reach your goals.

Traditional pre-sales are normally done for a completely developed product, or, at least, one in advanced stage of completion. That is usually not the case, however, for most crowdfunding initiatives. In fact, 75% of projects deliver their products or services later than promised. Some don’t even reach completion stage and put the entrepreneur on the shameful position of having to negotiate with backers the return of their money.

Charity/cause crowdfunding

Crowdfunding for charity or a cause is a traditional way of raising funds for families or individuals who are going through difficult times in their lives or projects that promote a better world. It is one of the original means of raising money via these platforms.

In spite of its popularity, the values involved are often not so big. After all, there is usually not a sizeable reward involved in most cases. However, this type of project tends to attract lots of shares in social networks and attention from the media.

Environmental initiatives fall within this category as well. But if you are the one running the project, you can have the best of both worlds if you offer a product or service related to your campaign. It may even be some type of souvenir (something that usually works well on this kind of initiative). Some of the largest and most successful crowdfunding campaigns to date were, indeed, a mix of product/service with a cause.

There are a number of different platforms available for this type of crowdfunding, depending on your cause or charity. Razoo is a generosity platform, for charity. Causes.com is for NGOs and individuals defending a cause. Crowdjustice is for people who want to raise money for legal battles.

Equity crowdfunding

Crowdfunding for equity is the latest type to enter the scene, but the one that’s driving most growth. The platforms for this type of crowdfunding sell securities that promise a share of business revenues or even participation after the project is successful.

There are two subtypes of equity crowdfunding: startup investment and real estate investment.

Startup investment

Regulations have been passed all over the world to allow platforms to sell securities for investment in startups. The values involved may be limited per individual and project, so investors don’t run many risks (like in Canada, for example). In the United States, the JOBS Act, when fully enabled, will allow startups to get financing this way.

In this kind of investment, the investor holds an equity on the company being formed and can then receive dividends on the profit or turn their participation in shares that can later be negotiated in stock markets, in the case of a successful project.

Startup investment is the type that represents the most risk.

Examples of platforms for this type of investment are Crowdcube and Seedrs, in UK, and Fundable and StartupValley, in the US.

Real estate investment

Real estate investment: this is the latest trend and the one that drives the biggest sums. Actually, it’s the sector behind the bigger boom in the crowdfunding industry so far. In real estate crowdfunding, investors participate in a project and share profits in the following manners:

• Rental: if the investment is for rental, like a multifamily residential building, an office building or any other tangible property, investors receive a payment based on the rental fee of the space. This modality is very low risk, but, even so, some projects may be open only to accredited investors due to the individual sums involved.
• Revenue-based: when the investment is in a local company, like a bar, a bakery, a grocery, a gas station or any other venue like that, investors receive a dividend on profit. This is very similar to startup investment but limited to a local venue and generally much less risky, though riskier than rental equity crowdfunding.
• Property sale: this type of equity crowdfunding can be turned into (or from) rental. This is a time-specific project when venues are built with the intention of selling them to third parties, splitting the profits among investors. Though not very common, it’s possible to do this via crowdfunding.

There are a number of portals for real estate crowdfunding appearing all over the world. Dalian Wanda Group in China is doing it and, in the US, Fundrise.com and EquityEats are two platforms worth mentioning.

Via iCrowdNewswire
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