Crowdfunding is an initiative where finances are collected from different people commonly known as the “crowd” to aid in the sustenance of a particular project.

The history of crowdfunding can be traced back to the 19th century when the French decided to give the US a gift, this gift was the Statue of liberty. The French would be responsible for the building and shipping of the statue while the US would be required to cater for the base upon which the Statue would be erected. The US, short of the $300,000 required to build the base and erect the statue, decided to mobilize the public to donate funds so as to achieve this goal. In less than 5 months, the amount raised was a staggering $1,000,000 and the project was ready for kickoff. This initiative served to signify the financing power that a crowd has when finances are sourced from it. This project marked a milestone in crowdfunding.

Over the years, crowdfunding has experienced a paradigm shift in the way it is carried out. There have been numerous platforms created to enhance it and majority of which are online based (e.g. kickstarter, indiegogo). The most common platform is the creation of websites where those seeking the finances use these websites to outline how much money they need, why they need it and most probably, what an individual will get in return after they contribute. It is on this platform that the potential funders get to interact with the finance seekers and get clarification on various issues (e.g. project description, goals, funding need, team, timeline).

Crowdfunding can take the shape of different models. These include the donation, reward, lending and the investment model.

  • The donation model raises or sources for funds to be used for charity and charitable projects, the “crowd” in this case therefore donates to fund such projects.
  • Under the reward model, the people who fund the project usually receive rewards that are non-financial. This model usually funds projects that are creative or social and the contributors receive recognition or experience as their rewards.
  • The lending model ensures that businesses aiming for debt use the model as a platform. The crowd members then apply for small proportions of the loan and then later repay the loan at an interest rate decided by them.
  • The investment model seeks for crowdfunding so as to invest in projects that bring back monetary returns. Revenue sharing is the most common reward under this model.

For projects that call for huge financial base to kickoff, crowdfunding has been embraced as the way to ensure that such kind of projects see the light of day. This mode of funding continues to take shape each day as more and more projects are rolled out.

Related topics: financing a company, business angel, venture capital, bootstrapping