A Quick Look at Five Types of Crowdfunding

Crowdfunding became part of the pop culture lexicon in 2013 after a few projects gained fame, thanks to platforms like Kickstarter and Indiegogo. Five basic types of crowdfunding have emerged: equity, reward, gift, debt and revenue. First a look at two crowdfunding success stories.

Crowdfunding Success Story

Pebble Watch exceeded its $100,000 goal by a mere $10.1 million on Kickstarter.com in 2013. The customizable watch syncs with Android and iPhone smartphones and allows the wearer to see incoming text, email and instant messages; control music on smart device; and track speed, distance and pace for cyclist and runners. It’s the success story that every startup wants to tell. More than 190,000 backers are sporting the watches, according to getpebble.com, and developers are creating new apps for the device.

Successful Failure

U.K.-based Canonical broke Pebble Watch’s record for funds raised but failed to reach its $32 million goal to fund the Ubuntu Edge, a combination PC/smartphone. It raised more than $12 million from nearly 20,000 supporters through Indiegogo.com (all backers received refunds). The company could hardly call the record-setting $12 million a failure, and said on its Indiegogo page that it is encouraged by the support for Ubuntu phones. Look for them in 2014.

Equity-Based Crowdfunding

Equity-based crowdfunding is highly regulated by the U.S. Securities and Exchange Commission (SEC). SEC has proposed changes to relax its rules, which would allow non-accredited investors to back startup projects and growth companies for small amounts of money in exchange for ownership. Title III of the JOBS Act is in public comment until February. Until then, all equity-based crowdfunding must comply with existing SEC rules and regulations which do not generally make crowdfunding easy or affordable, particularly for “nonaccredited” investors.

These are equity-based crowdfunding sites:

  •  fundersclub.com
  • seedinvest.com
  • crowdfunder.com
  • angellist.com
  • growvc.com (allows micro investment)
  • microventures.com
  • circleup.com (focuses on consumer products)
  • earlyshares.com
  • fundable.com (also allows offers reward-based)

Gift- and Reward-Based Crowdfunding

People who give money to startups in exchange for a small reward or a simple thank you do it because they want to be part of something new. Indiegogo started in 2008 as a crowdfunding site for the independent film industry, and because it was so successful, it expanded a year later to all industries. Backers typically choose a contribution level in exchange for rewards, such as T-shirts or the actual goods or services. Platforms that are exclusively gift-based typically facilitate fundraising for nonprofit organizations and people in need.

Gift-based platforms

  • gofundme.com
  • razoo.com
  • sprigster.com (exclusively for military veterans)
  • microryza.com (science-sector only)
  • fundourpark.com (for sustainable community projects)

Reward-based

  • indiegogo.com
  • fundable.com (also offers equity-based)
  • appbackr.com (wholesale marketplace for app developers)

Reward- and gift-based

  • kickstarter.com
  • appsfunder.com
  • peerbackers.com

Debt-Based Crowdfunding

These sites offer small business loans from institutional and individual lenders, and they are small and uncommon platforms. Somolend includes a friend and family borrowing option and plans to launch crowdfunding services in 2014 when Title III of the JOBS Act goes into effect. FundingCircle also offers crowdsourced lending up to $500,000 to businesses.

Revenue-Based Crowdfunding

Two notable firms offer unique platforms for individuals and inventors. Upstart allows backers to invest in talent, and the talent repays the backers based on earnings over five to 10 years. For example, one individual might seek backing for an MBA program; when she graduates, she promises her backers a percentage of her six-figure income for a limited time. Upstarters can also back startup businesses in exchange for a percentage of revenue, but they have no ownership stake.

Quirky is a New York City-based manufacturer that takes inventors’ ideas and turns them into real products. Candidates submit ideas to Quirky, which then go through a vetting and voting process and are either rejected or made. Winners get a cut of the gross revenue.

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