Crowdfunding models explained

What are the different methods of crowdfunding your creative project? Chris Buckingham from minivation, a crowdfund research house and consultancy, takes us through the models available.

Think of the acronym D.R.E.I.M: Donation, Reward, Equity, Interest and Mixed.

The definition of crowdfunding is expanding, reaching out to encompass all sorts of fundraising models. At a debate in London’s Tech Hub, I even heard people argue that crowdfunding is too generic a term, preferring to talk about ‘online investment vehicles’.

While I agree it’s becoming ever more widely used as new business models emerge, the term crowdfunding is, in my opinion, appropriate for the sector.

But now that crowdfunding means lots of things, what are the models available for anyone wanting to crowdfund for a project?

To help you navigate your way around the different models, minivation has come up with the acronym D.R.E.I.M. This stands for:

  • Donation
  • Reward
  • Equity
  • Interest
  • Mixed.

1. Donation

Of the five, perhaps the most obvious is the donation model. This works on basic philanthropy, whereby people give money towards a good cause. They are left with the warm glow of knowing they have done something positive, normally with some kind of social value.

Within the arts, this has traditionally been represented by the concept of the sponsor, or patron, of a certain artist or field of creative work.

The equity model, in which a share of the profits goes to the crowd, is particularly risky.

There are many of these in crowdfunding, perhaps the most well-known being JustGiving. Another includes Spacehive, which is dedicated to social or community causes. For authors there is Unbound, a special model where you can ask the crowd if they would like to see your book idea turned into a reality.

2. Reward

This is the model which most comes to mind when people think about crowdfunding. The crowd makes a pledge to the project for some money, and the project offers them something in return – like a poster or piece of merchandise.

The reward model is represented well on both sides of the Atlantic by Kickstarter and Indiegogo. But there are plenty of our own home grown UK sites, like Bloom Venture Catalyst in Edinburgh and Crowdfunder in Exeter. Both of these support artists and the creative industries.

3. Equity

In this model, the project’s management offers a share of the profits to the crowd. Once money is made or the project gets sold, the investors receive a share of the profits.

This is risky as start-ups often fail, so companies like Seedrs, which specialise in this model, require you to pass a test before you can invest through their site.

There’s more bad news for creatives too. This model may involve giving away some the control you have over a project. If you are specialising in, for example, a craft that you are passionate about, it could be difficult for you to give up control.

When you offer equity, you will also need legal help to ensure everything is correct for you and the investors. This costs money and takes time to organise. Investors will generally be looking for growth businesses that they can scale up and sell at some future time. A small craft producer that works from their garage is not the kind of business these investors will normally consider.

4. Interest

This model is like getting a loan from the bank. Except here you get the loan from the crowd, and it is on your terms, rather than the bank’s.

As with equity, you may find a real lack of enthusiasm in your business unless you can prove it has the potential for major growth.

Another problem here is that the rates of interest may be a little higher than the high street. The headline numbers might look the same, but you need to consider fees charged by the crowdfunding platform and the payment processor. This all adds up.

5. Mixed

You may find a real lack of enthusiasm in your business unless you can prove it has the potential for major growth.

Mixed is just as it sounds: a mix of models. For example, the Crowdbnk platform offers you the chance of a reward or an equity campaign. But again, all the above issues need to be considered before you crowdfund your project through them.

Plus you need to check they are FSA regulated, which Crowdbnk is. This will ensure that you are covered should they go bankrupt or find out a campaign is fraudulent.

Peer-to-peer consumer lending

To squeeze a last model in, there are also peer-to-peer consumer lending platforms, like Zopa and Ratesetter. These are available for an individual to borrow money for personal use, like buying a new car, which they then pay back with interest.

Rates on these sites are normally in line with high street banks, and to borrow or lend money you will need to be credit checked and identified to prevent fraud.

This model of crowdfunding also gets a little more controversial, as there are now two payday loan companies offering this model: PiggyBank and The Lending Well. Both offer short-term loans for very high rates of interest.

These are often used by individuals who may struggle to get finance from high street banks and need a relatively small amount of cash to tie them over.

The controversy is over the rates they charge. There is definitely a clear demand for this model, but some people argue that their higher rates take advantage of people in financial difficulty.

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