Crowdfunding is the term used to describe the process of funding a business project or new venture by way of raising money from a large number of people rather than one individual investor.
The popularity of crowdfunding has grown at a phenomenal rate in the last few years and is now an industry that is worth in excess of $5 billion worldwide. The global financial crisis helped fuel the growth as traditional lending sources dried up due to a tightening in lending criteria and this method of investing your money is now an established method of raising money.
The basic principle of crowdfunding is “safety in numbers”. Although the money you invest is at risk if the venture fails or the business go bust, but because you are sharing the risk with hundreds of other investors, your losses should be restricted and in theory, the good loans should cover the ones that go bad, but nothing is guaranteed.
Types of crowdfunding
There are actually two distinct types of crowdfunding. The main version is equity crowdfunding but there is also the option to participate in rewards crowdfunding.
Rewards crowdfunding is where the business owners pre-sell their product or service at the concept stage of their business launch instead of incurring debt or giving up equity in their business.
Equity crowdfunding is where you receive equity shares in the company in exchange for the money that you invest.
Each crowdfunding platform has varying models and you can choose a site that has focuses on the type of business venture or industry that you are interested in investing in.
Lending club claims to be the biggest online marketplace for connecting borrowers and investors.
When you invest your money in a platform like lending club you can spread your investment across 100’s of different loans to borrowers rather than one single loan, which helps to diversify your portfolio and minimize the impact felt when you suffer a loss.
This is one of the larger platforms for raising investment and does not get involved in rewards. Crowdfunder only offers equity crowdfunding from individuals, angels and VCs and is known as a leading participant in the JOBS act legislation.
This particular platform approves donation-based fundraising campaigns for almost any conceivable project and they have enjoyed popularity and expansion due to their flexible and broad approach to lending.
This site concentrates on donation-based funding for creative projects and is not for business or personal financing needs,so it is a site to go to if you want to get involved in something like an art project or a music album.
You can also visit sites like CrowdingIn, which offers you the chance to browse the various different platforms available and filter your choice by your chosen sector or area of interest such as business finance or social projects.
There are at least 400 crowdfunding sites around the world as an alternative investment opportunity, you should be able to find a platform that meets your requirements in terms of lending options and returns relevant to your risk profile.