Crowdfunding platforms have seen a huge increase in the amount of funds raised for individual and business causes in recent years. Some have even taken to these platforms to borrow money from willing backers or investors.
Here’s what you need to know about generating funds through crowdsourcing.
What is crowdsourcing?
By definition, crowdsourcing is the practice of obtaining certain needs by soliciting from a larger population. Some things that may be crowdsourced are goods, services, information and funding.
Crowd financing, in particular, is popular for both business and charity purposes.
In fact, crowdfunding has seen an increase in activity in recent years – with start-ups and entrepreneurs using crowdfunding platforms to secure capital.
Most people use “crowdfunding” and “crowd-sourced funding” interchangeably, but the Australian government formally introduced a scheme that differentiated between the two in 2017.
Crowdfunding v crowdsourced funding
Business Victoria defines crowdfunding and crowd-sourced funding (CSF) as follows:
Crowdfunding refers to funding platforms that artists and entrepreneurs use to gather financial support for their projects. Campaigners typically use crowdfunding platforms such as Kickstarter and Indiegogo.
Crowdsourced funding is a government scheme launched in 2017. It is a new way for small and medium-sized businesses to gather funding support from the public. The Australian Securities and Investments Commission (ASIC) administers the laws surrounding CSFs. ASIC also requires platforms that offer CSFs to hold an Australian Financial Services Licence (AFSL).
Who are involved in crowdsourcing?
There are three parties involved in crowdsourcing to successfully raise capital:
- Campaigner(s) refer to the individual or group that starts the campaign. This is the party that requires financing for its project or business venture.
- Backers, donors or patrons refer to the people who pledge financial support for the project or business campaign. Depending on the type of campaign, backers may be considered lenders, donors or investors.
- Platform refers to the intermediary or company that bridges the campaigners and potential backers. Depending on the type of funding campaign the platform hosts, the underlying company may be required to secure an AFSL.
Types of crowdsourced funding
Individuals and businesses may launch funding campaigns for profit or charity.
For-profit crowdfunding
- Equity crowdsourcing
Campaigners that launch equity crowdfunding campaigns typically aim to establish a business using the collected money. Backers who provide financial support for an equity crowdfunding campaign are generally given an equity stake proportional to the amount they provided.
It’s similar to buying company shares from the stock market – with the exception that the company has not yet launched.
Platforms that support equity campaigns must have an AFSL to operate to avoid breaking the law. - Loan crowdsourcing
Some platforms allow campaigners to access funding and treat the collected monies as a form of loan.
This means the campaigner and backers must agree on terms, interest rate and repayment frequency. - Rewards-based crowdsourcing
This type of campaign is popular with entrepreneurs because they don’t need to share ownership of the company. They also won’t need to pay back any money to their backers – just the “reward” that was selected during the campaign.
Campaigners may simply ask potential backers to pledge specific dollar amounts in exchange for small to large rewards. For instance, they may simply give discounts for smaller pledges and a sample of the product for higher pledged amounts.
The crowdfunding site “Kickstarter” has pulled off many rewards-based crowdsourcing campaigns successfully.
Not-for-profit crowdfunding
This type of crowdfunding refers to campaigns that are specifically launched for charitable causes.
Campaigns may be created by any individual or institution to generate donations for their supported cause.
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