Updated: Nov 14
Author: Enrico Baralis
Date of Publication: 11/07/2022
Looking for an innovative investment opportunity requiring small capital? Want to raise funds for your start-up online? Crowdfunding is made for you! You’ll find a specific type for every objective and necessity.
The technological innovation in the financial sector created more investment opportunities than ever before. For example, crowdfunding is surely one of them. In fact, entrepreneurs have been dreaming of sharing their revolutionary ideas with a large audience for decades. What’s more, nowadays, is that they can make their supporters become investors.
A new way to raise funds
Crowdfunding involves gathering small amounts of capital from numerous online users. This investment approach enables broad outreach at minimal costs. Virtual platforms enable innovative startup entrepreneurs to showcase themselves to potential investors, facilitating capital raising. Social media promotion significantly contributes to the success of crowdfunding. This financing option provides an alternative to traditional banking solutions, like seeking loans.
Moreover, it allows a broad audience to support a company with small amounts of capital. This reduces the impact of intermediaries in the capital-raising process. Many crowdfunding platforms focus on matching supply and demand without mandating additional advisory services to investors, significantly lowering associated costs. Crowdfunding, a rapidly growing phenomenon, is subject to specific boundaries in various jurisdictions, although the regulatory process is still evolving.
Different forms of crowdfunding
To date, there are mainly four types of crowdfunding (Quesada 2018, pp. 103-134):
- Equity-based crowdfunding (or crowdinvesting): raising capital by selling a portion of ownership in the company. This type of campaign normally requires reaching a specific minimum in order to confirm the fundraising validity. It is also possible to buy different types of shares having a specific price and specific features.
- Lending-based crowdfunding: it means raising debt capital through the contribution of many users rather than a single lender. Also, guaranteeing the payment of interest (exceptions to this are some cases of social lending in which interest may be reduced or absent altogether).
- Reward-based crowdfunding: it means raising capital by providing the investor with products and services developed by the company itself. This alternative form of remuneration does not consider any financial compensation. Normally, such rewards are commensurate with the amount paid to fund the business.
- Donation-based crowdfunding: it means raising capital through acts of liberality by users without any form of financial remuneration. This tool is mainly suited to raise funds for charitable and solidarity purposes.
Finally, there is also a new kind of fundraising that is becoming more and more popular: real estate crowdfunding. This new form of financing gives a chance to raise capital by selling small portions of a large property to a vast number of investors. On the other hand, the possibility to make a real estate investment without having to buy an entire property opens new ways for portfolio management.
Bruton, G., Khavul, S., Siegel, D., & Wright, M. (2014). New Financial Alternatives in Seeding Entrepreneurship: Microfinance, Crowdfunding, and Peer-to-Peer Innovations. Entrepreneurship: Theory and Practice, 39(1), 9-26.