Crowdfunding: what is it and which different types exist

It is undeniable: crowdfunding is fashionable and, if done right, it works.

Two data that confirms this. In 2012, Kickstarter, one of the most popular crowdfunding platforms, brought together 230 million for more than 23,000 projects. In Spain, more than 50% of crowdsourcing platforms are crowdfunding.

But what exactly is crowdfunding? For what can it be used? Which are the ways you can use it, which models exist?

Crowdfunding definition

Crowdfunding is just a particular type of crowdsourcing. Based on the eight elements that define any crowdsourcing initiative, the crowdfunding differ only in two: the task the crowd must perform and the reward, what is offered in return.

1. The task that the crowd should perform. In crowdsourcing initiatives the crowd can be asked to perform tasks as diverse as designing a logo, searching stardust in Mars photos taken by a space probe or giving the opinion about a product. In the case of crowdfunding, what claims from the crowd is not their intellectual effort or creative ability: is a financial contribution. Additionally, this financial contribution is usually preset: the crowdsourcer contribution gives different options (5 €, 10 €, 20 €, 50 € or 100 € for example).
2. The offered reward. In principle, all crowdsourcing initiatives offer a reward for the work done, which is usually economic. In the case of crowdfunding, the opposite happens. In most projects, in return for a financial contribution, the crowdsourcer offers a range of rewards, each of which will be linked to a specific amount. Depending on the crowdfunding model being used, the rewards will be of one kind or another. In Goteo.org, for example, there is an initiative about equestrian therapies that offer the project monitoring files for €10, a shirt for €20, to spend an afternoon in their facilities for €35 and a child tour spending an afternoon on horseback for €50 (including a mention on their website, etc).

Then, we can strictly define crowdfunding as:

“an online activity by which a person or organization of any kind, asks the Internet crowd to give money for the completion of a project; contribution that will receive in return some sort of compensation, be it economic, material, of recognition or of social self-esteem. “

The utility of crowdfunding is clear: to raise funds to carry out a project. And when I say a project I mean any project. If the project interests to some part of the crowd and the crowdfunding initiative is well planned, it will succeed. Could a project to commercialize sandals with grass in its plants get ahead and be funded? The answer is “YES”.

Crowdfunding models

About crowdsourcing there is still confusion in some aspects … and crowdfunding,  as a crowdsourcing particular type, is no an exception. Depending on who you ask, there are now 3 or 4 different models of crowdfunding. The three in which everyone agrees are:

1. Equity based crowdfunding. In this case, the crowd, in return for their investment, received shares of a company. If the company works well, the investor will get their benefits.
2. Lending based crowdfunding. In this case, a person gives money to a project and his reward is to recover the given quantity. Besides recovering the money lent, crowdsourcers using crowdfunding include such an interest, for the crowdworker get something more than what he paid. Also included in this type of crowdfunding, the pre-sale lending model can be found. In this case, the crowd “pays” a sum of money to buy a product that has not yet begun to produce.
3. Reward based crowdfunding. All the rewards mentioned before are of only one kind: shares or recover the money. In this particular type of crowdfunding, the rewards can be of any type: film merchandising, the use of a particular service (such as the example of equestrian therapies), publicly acknowledgment of the participation, etc.. The most known crowdfunding platforms use this crowdfunding model: Lánzanos, Goteo, etc.

So far, all agree.

The problem comes when talking about the donation based crowdfunding. This crowdfunding model consists on donating money to a particular cause, usually a worthy cause, without expecting any reward in return. Examples are Sport2Help, Mi grano de arena or Smile Mundo.

In this case, we can find those who claim that, because there is no reward, it can’t be considered crowdfunding. For this people, this kind of crowdfunding is just charity. They do not underestimate these initiatives, they just don’t think that it isn’t crowdfunding.

On the other side are those who say that the reward is not necessary in crowdfunding initiatives, and therefore this is crowdfunding. As such, any project funded by people over the Internet is crowdfunding.

How about you? What do you think? Is this donation based crowdfunding real crowdfunding?

Update [20-3-2014]

Currently the donations-based crowdfunding model is recognized as a valid crowdfunding model. The problems associated with the lack of a physical reward is outweighed by the subjective reward of the person involved: the feeling of helping someone, the fact of helping other with a problem that he or she also suffers, etc.