Crowd•fun•ding (n.): Investors are only a click away

Everyone has a dream project: the perfect artistic or business idea that would be so successful, if only you could find the money to get started. In the past, to start a big project you would need to attract some private investors or get approval for a serious loan to reach your goal. With crowdfunding, this is no longer the case. Crowdfunding gives creators access to potentially thousands of Internet strangers who are ready to invest in a dream.

What Is Crowdfunding?

The concept of crowdfunding has been with us for a long time and describes the act of financing a project using many small donations. Things such as community fundraisers, and even buying war bonds, can all be thought of as forms of crowdfunding. But thanks to the online world, the idea has taken on a whole new life.

In modern crowdfunding “creators,” as they’re commonly known, take to Internet platforms such as Kickstarter or GoFundMe to pitch projects to the online masses. Anyone with a credit card and a shared interest in the project can become a “backer” and donate money to the cause. If the creator reaches their funding goal, they receive the money and can start their project. If the financial goal isn’t met, all money is returned to the backers.

Creators benefit from this process by being able to reach out to like-minded investors that they otherwise wouldn’t have access to. What do backers get out of the process? There are a few different models of backer benefits.

Reward Models

The reward model is usually what people think of when they hear the term crowdfunding. In exchange for a backer’s financial contribution, creators will give them an agreed-upon prize. These rewards typically come in tiers based on how much you’re willing to give and can be something like your name in the credits of the project, a free copy of the finished product or even exclusive behind-the-scenes privileges.

Donation Models

Donations models are exactly what they sound like: a donation. Backers typically receive nothing in exchange for their support, other than the satisfaction gained from performing a kind deed. This model tends to work best for ventures that don’t produce an actual product, such as charity initiatives or community-works projects.

Equity Models

The equity model serves to fund whole businesses rather than specific projects and turns backers into investors. Instead of getting a one-time token of appreciation, backers get shares in the company, potentially leading to a continuous share of profits.

In Canada, equity crowdfunding is regulated. Unaccredited backers can only invest up to $2,500 into a company. This might seem unfair, but it is designed to protect public interest. Equity crowdfunding projects have a failure rate between 70% and 90%, and the purchased shares can’t be bought or sold on the stock market. Additionally, these companies are not obligated to be transparent to their investors, so be careful about funding projects like these. The potential reward might be greater, but so too is the risk.

Debt Models

With debt or loan models, backers give their money to projects of their choice with the expectation that they will be repaid (with interest) after the project has made a profit. Whereas banks would perform a detailed risk assessment before giving you a loan, individuals are usually not quite as strict. This model is ideal for risky or niche ventures that banks wouldn’t approve.

Unfortunately for creators looking to use this model, Canadian law dictates that loans of this nature can only be given by accredited institutions, meaning that Canadian creators must seek international backers for their debt-based projects.

Risks

Before you start investing in crowdfunding projects, you should know the risks. Many creators are not professionals in their chosen field, and if projects fail or turn out differently than promised, refunds are not guaranteed. Always do background research on the creator and the project before you invest your money in their cause. t8n

Did You Know?

New York’s Statue of Liberty and many of Wolfgang Amadeus Mozart’s concertos were crowdfunded projects complete with backer rewards.

Fun Fact

What can be crowdfunded?
Anything you can imagine. Movies, books, games, businesses, festivals, legal fees, tech and more. One
infamous 2014 Kickstarter campaign even raised over $55,000 to make a simple potato salad.