Crowdfunding: A Primer, Part 1

Last week I attended a great seminar on crowdfunding hosted by the Boston Bar Association. The seminar was essentially a primer on all the types of crowdfunding, which I thought I might share with you all. This post will be a 2-part series: here in Part 1, I’ll give a brief overview of crowdfunding and its recent history and successes. In Part 2 on Friday, I’ll discuss some of the risks that can come up with crowdfunding.

Types of crowdfunding

Crowdfunding is generally broken down into four types: donation, reward, lending, and equity. Donation crowdfunding is the simplest form of crowdfunding — money is given with no expectation of reward or return. Reward crowdfunding involves giving some sort of tangible gift in exchange for the person’s contribution, usually in the form of the venture’s “swag” or the product the venture is trying to develop. Popular crowdfunding platforms in the donation/reward space include Kickstarter and IndieGoGo

Lending crowdfunding, also known as peer-to-peer (P2P) crowdfunding, involves individuals contributing to a loan package. Well-known P2P crowdfunding platforms include Prosper and Lending Club

Finally, equity crowdfunding involves individuals receiving some sort of equity or security in the company for their contribution. This sector is still a nascent one, as its legality is still pending on regulations required by the JOBS Act, but early notable platforms include Wefunder, which currently operates with convertible debt.

Crowdfunding, by the numbers

Crowdfunding has raised $1.5 billion since 2010, and is projected to hit $3 billion total raised by the end of this year. This represents 10% of the total seed money raised in that span of time. Approximately 500 crowdfunding platforms have funded over one million campaigns.

Unsurprisngly, P2P and equity crowdfunding raise the most money; the average P2P or equity crowdfunding campaign raises over $25,000; it also generally takes half as long for a P2P crowdfunding campaign to reach its fundraising goal than other crowdfunding methods. However, for every type of platform it usually takes just as long to raise the first 25% of the goal as the last 25%.

Conversely, two-thirds of all donation and reward crowdfunding campaigns raise less than $5000; however, the campaign failure rates are much lower than that of P2P or equity crowdfunding. On Kickstarter, 82% of campaigns that reach at least 20% of their funding goal go on to meet the goal; 92% of campaigns that reach at least 60% of their funding goal go on to meet it; overall, 46% of Kickstarter campaigns reach their funding goal.