Changing the Fund-Raising Sector
Essentially, crowdfunding is the gathering of a large group of people to make small investments. Supporters take a stake in the project and convince their friends – or followers on social media platforms – to make an investment, too. Attracted by a community and by different kind of rewards, a number of small investments
accumulate to collectively fund a project. Crowdfunding is a modification of the term “crowdsourcing”, originally coined by Jeff Howe, author of Wired magazine, in 2006:
“Simply defined, crowdsourcing represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call.”
Howe goes on to describe how crowdfunding has the potential to entirely change the fundraising sector and undermine the role of traditional donors:
“...It radically shifts the organisation of an existing field. (...) it flattens hierarchies, by directly connecting people with money to the people who need it. And crowdfunding shares crowdsourcing’s generally democratic impulse”.
According to Massolution’s Crowdfunding Industry Report, crowdfunding (platforms) can be classified into four types, depending on the type of reward people get for supporting a certain project or idea:
- equity-based crowdfunding
- lending-based crowdfunding
- reward-based crowdfunding
- donation-based crowdfunding
Equity-based crowdfunding is often referred to as “crowdinvesting” and describes a model in which funders take an equity stake in a venture or sign a revenue or profit-sharing contract.
Under the lending-based approach, funders receive fixed periodic payments until the principal investment is repaid after an agreed period, similar to a bond. This model is sometimes also termed Peer-to-peer lending (P2P lending) or social
lending. It allows to directly link projects with funders without banks acting in between the two.
The reward- and donation-based models are quite different from the first two in that they are based on non-financial motivations. But under these models funders usually still receive a non-financial benefit such as a token of appreciation.
For example, Paul Kalinauckas, Regional Secretary of the United Kingdom’s The Co-operative Party and a member of the National Executive Committee, promised backers of his project Develop a Village (in the Sekyere District of the Ashanti Region in Ghana) benefits starting from £10, such as the supporters’ names inscribed in a book housed in the village, regular project updates through a newsletter or a carving from a Ghanaian village.
About the Authors
Wolfgang Gumpelmaier is an independent digital media consultant and one of the leading crowdfunding experts in Austria. He runs several blogs, e.g. on gumpelmaier.net he writes about Social Media in general.
Karsten Wenzlaff is co-founder and CEO of ikosom, the leading research institute on Crowdfunding and Crowdsourcing. He is also the co-author of the first
Crowdsourcing-Report in Germany.
Jörg Eisfeld-Reschke has conducted the first crowdfunding study in Germany in 2011 and written many articles since. He runs www.sozialmarketing.de – a blog about fundraising and digital communication for Non-Governmental-Organisations.