The 3 Crowdfunding Types Explained! Which one suits you?

How many kinds of crowdfunding exists? Well, it’s not a foregone conclusion. The answer is… many. But hold on, we’re going to analyze the three most used kinds: donation-based, equity crowdfunding, and reward-based. 

They’re different from each other, and the main difference relies on their purposes, they could be useful in certain situations or business stages. But one of the most distinctive things is the reward, which means what you’re going to give to your backers after they support your project. 

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DONATION BASED CROWDFUNDING

The first one we’re going to deal with today is the donation based crowdfunding. 

Usually, donation crowdfunding is used to support social, personal causes or non-profit organizations, it doesn’t involve a reward just because the mere purpose of this crowdfunding is supporting the subject and participating in the project. 

Also the amount of the donation is not demanding, that’s because it is up to you and how much you believe in the project.

So definitely we’re not talking about business oriented projects, and that’s why when you’re creating a donation crowdfunding there are a few important things to keep an eye on. 

1) Storytelling

It is well known that good stories sell more than anything, and what’s better than your real story? Motivations behind donation crowdfunding are very important, and they need to drive the attention of backers and supporters in order to be convinced and moved by your story.

Supporting a donation crowdfunding is a step further for them to become part of the story of the project.

2) Social Proof

The biggest campaigns are the ones where big influencers or prominent personalities decide to back the project and make it publicly. In this way the project will gain attention and credibility, and more donors will land on the campaign page. 

Speaking of donation crowdfunding, the most known platform is Gofundme. That’s where the majority of non-profit organizations decide to run their campaigns. 

EQUITY CROWDFUNDING

Now let’s see the equity crowdfunding campaigns. 

So if we’re talking about crowdfunding campaigns, what’s equity’s got to do with it? 

Equity crowdfunding owners are going to give their backers some actual shares of their company, so you will hold a piece of that specific company. Why? The main reason is because you find the product offered pretty interesting and you trust into a big company's growth. This could be considered an interesting strategy for investors that want to differentiate their portfolio.

Time for some questions:

Why run an equity crowdfunding?

When using this kind of crowdfunding you’ll be showcased to professional investors and individuals, who could be interested in participating in your company as a partner, that simply leads to a higher valuation for your startup or your business. With this modality you will be able to raise capital for your new projects or expansion of your company. 

When is it time to start doing equity crowdfunding? 

Typically the kind of businesses that run equity crowdfunding have at least a couple of years of activities and a good track record of revenues to show to their investors. This is important because you will need to convince your investors that you’re a reliable partner and a good investment for their savings. And that’s because we’re talking about a good amount of money that they would back, starting from $250-$500 as the minimum amount. 

So definitely if you’re an early-stage startup or business i would not recommend to run equity crowdfunding for your project. Instead, I would suggest you a reward-based campaign, but we’ll see it in a bit. 

The most known platforms for equity crowdfunding are StartEngine, Wefunder and Seedrs.

REWARD CROWDFUNDING

Now it’s finally time to talk about the most common type of crowdfunding: the reward crowdfunding. 

In this type of crowdfunding basically the backers are going to get a reward back, in exchange for their economic support to your campaign. The rewards usually are related to the main subject of the campaign, for example, if you back a campaign for a video-game you’ll most probably get the latest release of the game, when it will be ready. 

But why reward based crowdfunding is an attractive fundraising option for small businesses? 

It is easy.

Reward crowdfunding it’s more efficient, both to prepare and to manage, compared to traditional business finance, also there’s the emotional side: people will get attached to your story and the motivation behind the project and that creates a boost in popularity. 

WHEN IT IS RECOMMENDED TO RUN A REWARD CROWDFUNDING? 

First, you want to run a reward based campaign most of all because you’re looking for funds for your new project and you don’t have enough economic disposal to do that. And the simplest way to make your project come true is to ask the crowd. 

If you’ll be able to find people who believe in your project enough to put money in it and in exchange you’ll give them your product or service once you reach your goal. 

Second, it will be a good way to test the market and pre-sell your products to avoid annoying stock costs! In this way you’ll be able to get a response directly from your reference market about you new product, plus you’ll only get to produce only a specific amount of products (only what your backers ask for) 

In other words, it’s a great way to launch a startup or a new business in the market. 

WHAT MORE DO YOU NEED TO KNOW?

As you’ll probably know, the most known reward-based crowdfunding platforms are Kickstarter and Indiegogo.

(But usually every country has its own crowdfunding platforms)

 I know, everything fits now, ain’t it?

 But when you decide to run a reward based crowdfunding campaign you need to take care of some essential things, and as that’s my specialization i’ll be ready to help you! 

For example:

1. Target definition (I've created an article about it here) 

2. Funding goal strategy

3. Community building - which is actually the most important thing in terms of priority. 

If you want to know more about how to execute a proper pre-launch strategy for a successful reward based crowdfunding campaign for your project, I’ve got you covered with my free e-book: 3 simple steps to success on Kickstarter and Indiegogo you’ll find the whole step by step strategy that allowed me and my clients to raise 6 figures in crowdfunding. 

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