Crowdfunding began in 1997 and is now ever so popular given the wide reach and instant access to the internet. Forbes reported that in 2015, over US$34 billion was raised worldwide through crowdfunding. So given its huge impact, what is crowdfunding? It is the simple idea of raising money by asking a large number of people each for a small amount of money. Crowdfunding generally involves three parties: the project starter who proposes the project to be funded, the people funding the project, and the crowdfunding platform that connects both parties.
In this article, we share with you the different types of crowdfunding and why you need to know them.
1. Rewards-based crowdfunding
Think Kickstarter and Indiegogo – two very popular rewards-based crowdfunding platforms today. On these platforms, project initiators launch their campaigns and backers are offered a range of incentives.
These incentives are often goods that can be used or consumed by the buyers, such as a wallet or a softcopy of a movie. The value of these incentives generally increase as the funding amount increases.
If you are interested in a creative project that is looking for funding, you can back it and get your rewards later.
2. Equity-based crowdfunding
People that fund equity-based campaigns are given a share (equities) of the company. This type of crowdfunding is used to raise money for the launch of a company or to fund its growth.
Each investor/backer owns a small piece of the company. This process often involves securities and financial regulation.
You might be interested in funding a company’s equity-based crowdfunding campaign if you think the company has good long term growth and its shares’ value might rise in the future.
3. Debt-based (lending) crowdfunding
It is important to note the difference between equity-based and debt-based crowdfunding. As both equity- and debt-based crowdfunding fall under the term security, both are regulated the same way. This often gives rise to confusion among people who are unable to distinguish between the two terms.
Debt-based crowdfunding is different from equity-based crowdfunding in that in debt-based crowdfunding, the funders are lenders. They lend with the expectation that they will get back their principal plus interest.
It is similar to getting a loan from a bank, but instead of an SME borrowing one large amount of money from a bank, the SME now borrows smaller amounts of money from many people.
Debt-based crowdfunding is also known as P2P (Peer-to-Peer) lending or crowd lending.
4. Donation-based crowdfunding
One way of thinking about donation-based crowdfunding is that these funding campaigns generally try to raise money for causes which are non-profit in nature. This can be raising money for building a school for orphans or for funding someone’s medical fees.
Another way of thinking about donation-based crowdfunding is how it differs from rewards-based crowdfunding. In donation-based crowdfunding, the backers of the campaign pledge donations, and there is no monetary reward – although sometimes donors receive a special mention, or even a simple “thank you” postcard. This is unlike rewards-based crowdfunding where backers exchange their pledge for items with clear monetary value.
5. Murabaha-based (‘cost-plus’-based crowdfunding)
Murabaha-based crowdfunding is like debt-based crowdfunding in that both connects businesses who are looking for funding, with investors who are looking to get returns on their investments.
However, unlike debt-based crowdfunding, Murabaha-based crowdfunding is Shariah-compliant and does not involve loans; it uses a different ‘cost-plus’ approach.
It works like this. A small business requires funding to purchase assets such as production machines. Investors agree to pool thier money to purchase the said asset, with the business acting as the Agent to buy on Investors' behalf. Once purchased, the Investors will sell the asset to the business at a mark-up or profit. The payment of the cost plus profit to Investors represent the principal and returns to Investors.
With its increasing popularity, crowdfunding is a great alternative to traditional lending and borrowing avenues. It has the potential to help individuals and companies to transform the way they proceed with capital acquisition. In a nutshell, this allows anyone with the right idea and vision for a project to fund their ambitions when other alternatives are not suitable.
Kapital Boost aims to tackle the lack of financing available to small businesses in Southeast Asia. We help level the playing field by offering these businesses a crowdfunding platform to access temporary liquidity for goods and capital purchases.
We also address the shortage of attractive Islamic-based investments. By funding small businesses through Murabaha-based crowdfunding, Kapital Boost members (funders) have the opportunity to earn attractive returns on short-term, Shariah-structured deals. In other words, our members get rewarded for doing good.