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The 3 Types of Crowdfunding

Crowdfunding is quickly becoming a key method used by entrepreneurs to raise capital for their new or existing business.

What is Crowdfunding? Crowdfunding is the process of getting a group of regular individuals (versus banks, venture capitalists or angel investors) to collectively fund your venture. Just as the name sounds, it is “funding” from the “crowd” of people you know or meet online.

Importantly, there are 3 core types of Crowdfunding based upon what you give back to those who fund you.

First, you can give them equity in your business. This is thus known as equity-based Crowdfunding. Currently, in the United States, this form of funding is not fully legal due to SEC regulations. However, the Entrepreneur Access to Capital Act hopes to change this and may be passed later this year.

Secondly, you can give those who fund you rewards or future value. I call this type of Crowdfunding rewards-based Crowdfunding. In this type of Crowdfunding, in return for their dollars, you promise the funder something in return. For example, you may say you are developing a new product that will eventually retail for $100; and that if you give me $60 today to fund my growth, I will give you the $100 product later when it is ready. Other types of rewards may be publicly recognizing funders on your website, or inviting those who fund you to a launch party.

The third “reward” you can give those who fund you is a bit less tangible than the others. This type of Crowdfunding is known as donation-based Crowdfunding and is essentially giving donations to a non-profit organization. For example, for years, Wikipedia has raised millions of dollars from individuals throughout the world who have funded the website. With donation-based Crowdfunding, funders may gain recognition, tax deductions and often simply the good feeling that they have done the right thing.

What is so exciting about Crowdfunding is that it expands the scope of funding sources for your venture to just about anyone. And particularly if you have a big social network, you can quickly find thousands of people to chip in to fund your business.

Also, what I really like about Crowdfunding is the market research it provides. If you are starting a new business and you can’t find anyone to crowdfund you, then maybe your idea isn’t that good and you should start over. On the other hand, if tons of people love what you’re doing and are willing to fund you, you’re probably onto something great!

Dave Lavinsky, Growthink - Founder

Want to learn more? Visit www.crowdfundingformula.com to learn more about how you can use Crowdfunding for your business.

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