The definition of crowdfunding is expanding, reaching out to encompass all sorts of fundraising models. 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 and Mixed. Here is an overview of each of the models.
5 Crowdfunding Models Explained
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.
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 used by services like Kickstarter and Indiegogo. But competition is getting stiff with lots of home grown sites starting to emerge and an equal array of business models that are catering to many different sectors (from archaeology to zoos).
This model happens when the project’s management offers a share of the profits to the crowd. Once break-even is reached and a profit is turned, or the project gets sold, the investors receive a share of the profits.
This is risky as start-ups often fail, so platforms in this sector require you to pass a test before you can invest through their site.
For the creative industries there is also bad news as this model may involve giving away some of 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.
On either side of the pond, 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.
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 banks.
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, taxes you may need to pay and the payment processor. This all adds up and can mean the attractive initial rates you see melt away as these other costs bite.
Mixed is just as it sounds: a mix of models. For example, the Crowdbnk platform in the UK 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 regulated. This will ensure that you are covered should they go bankrupt or find out a campaign is fraudulent.
There are other crowdfunding models, such as peer-to-peer consumer lending platforms, like Zopa and Ratesetter in the UK or Prosper in the USA. 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 main street banks, and to borrow or lend money you will need to be credit checked and identified to prevent fraud.
And this is just the beginning. As crowdfunding continues to develop and change, there may be new models born that give start-ups even more options.
This post was originally published on the Small Business Bonfire. The Small Business Bonfire is a social, educational and collaborative community for entrepreneurs. Join their online business community and read their small business blog to get immediate access to small business help, tools, advice and resources.
About the Author:
Chris Buckingham is the founder of minivation, a crowdfund research house and consultancy in the UK.