What is crowdfunding?

There are various sources like debt, public offering of shares or own capital to fund a project or a new venture. From last one decade we have been seeing a new concept of funding projects called crowdfunding. Crowdfunding can be defined as raising funds for a project or a new venture from large number of public in the form of monetary contributions. The majors/active players to fuel crowdfunding concept are:

1. The initiator of the project who proposes the new idea which is to be funded
2. The individuals who support the project and are ready to fund
3. A platform which helps both the parties meet

There are basically three types of crowdfunding. They are:

1. Rewards crowdfunding ( Donations)
2. Debt crowdfunding
3. Equity crowdfunding

Rewards crowdfunding: This is something where people contribute money for projects without expecting any returns. They invest just because they trust the project. They will be generally offered some rewards such as acknowledgements for the success of the project, free gifts etc. Generally, the returns are not tangible.  People perhaps donate with personal or social motives and feel happy for making the project a success.

Debt crowdfunding: This is also called as peer-to-peer lending. In this, people invest in projects with pre-defined expected returns. They get their investments back with interest. This generally bypasses the traditional banking system in lending.

Equity crowdfunding: People invest in projects in exchange for a share in the project. Money is exchanged for the equity share in the project or the new venture. Similar to regular shares, if the project is successful, that value of the shares goes up otherwise they will face losses.

It is believed that the first online crowdfunded project happened in 1997 for Rock band Marillion. They could not tour after the release of their seventh album. Then American fans have raised an amount of $60,000 through crowdfunding with which they have played in the US.  They have made use of this source of funding even for their following three albums. Many other creative projects like films and journalism soon followed the suit.

The first crowdfunding website was built in 2001. In 2012 there were about 500 such online platforms.

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