Imagine an eBay-type website for investing and donating where you could login and browse causes and businesses, and find an “investment” that appeals to you.
You could contribute a small amount, become part of a community, and over time see the impact of your donation or investment.
Crowdfunding, at its essence, is exactly that — connecting “crowds” directly to those who need funds.
Crowdfunding websites offer a hassle-free way to find, vet, and support companies, causes and organizations, and contribute or invest directly without a middleman.
Crowdfunding makes investing more personal and impactful – giving you direct access to information and opportunities that were once the exclusive domain of people “in the know” or the privileged one percent of accredited investors.
The Mechanics of Crowdfunding
So, let’s say you have $100 to invest, lend, spend, or donate. There are four basic ways you could use your “hundie” to stimulate the economy, create jobs and make the world a better place.
1) Donation
You give $100 to a cause or company you support – it could be anything from your brother-in-law’s roofing company to a local animal rescue charity.
You give $100 to a cause or company you support – it could be anything from your brother-in-law’s roofing company to a local animal rescue charity.
Pros: It feels good to give. The social perks of joining a group of like-minded donors. Tax write-off when giving to non-profit organizations.
Cons: You “lose” your $100, and get nothing tangible in return. The usual tax liabilities apply to donations to for-profit companies.
Best for: Budding philanthropists and donors who want to support the ventures of their friends & family.
2) Pre-Sales
You pay $100 and in return receive $100 worth of goods (three cozy hand-knit hats; a rad smartwatch) or services (invite to a VIP opening party; your name printed in the program) as soon as those goods and services are available.
You pay $100 and in return receive $100 worth of goods (three cozy hand-knit hats; a rad smartwatch) or services (invite to a VIP opening party; your name printed in the program) as soon as those goods and services are available.
Pros: You get some cool stuff/services/perks and support creative types and small businesses at the same time.
Cons: No instant gratification, you have to wait for your “reward.” There is no guarantee that the ideas will be well executed.
Best for: Early adopters who want first dibs. Investors who want something “real” – a product or experience – in exchange for their support.
3) Loans
You make a $100 loan to an individual, cause or business, and are repaid according to an agreed-upon schedule. In some cases you may earn interest on your principal (the $100), but not necessarily. Your loan could help a local restaurant upgrade their kitchen equipment, or a Bolivian farmer buy seeds.
You make a $100 loan to an individual, cause or business, and are repaid according to an agreed-upon schedule. In some cases you may earn interest on your principal (the $100), but not necessarily. Your loan could help a local restaurant upgrade their kitchen equipment, or a Bolivian farmer buy seeds.
Pros: A low-risk way to make a difference. Better for the economy than leaving $100 in your bank account. Steady, predictable returns if you’re earning interest. Great for investing locally in small businesses who may not be suitable candidates for the “Investment” option below.
Cons: Often no interest is paid on your principal. As with any investment, there is some risk involved.
Best for: Low-risk investors who want a steady, consistent return (on interest-bearing loans). Investors who want to support local and/or socially responsible businesses without donating their principal.
4) Investment – Revenue Sharing and Equity
You invest $100 in a company in exchange for equity shares or a small percentage of their revenue. Your $100 gets you a little slice of the action, or a tiny piece of ownership.
You invest $100 in a company in exchange for equity shares or a small percentage of their revenue. Your $100 gets you a little slice of the action, or a tiny piece of ownership.
Revenue Sharing
Pros: Higher upside/ROI (return on investment) – has the potential to be much more lucrative than loaning your money.
Pros: Higher upside/ROI (return on investment) – has the potential to be much more lucrative than loaning your money.
Cons: High risk since returns are unpredictable. Longer-term investment if the company has no immediate revenue.
Equity
Pros: Owning a piece of something that could be the next big thing. The possibility of turning that $100 into $1,000 or more.
Pros: Owning a piece of something that could be the next big thing. The possibility of turning that $100 into $1,000 or more.
Cons: Long-term investment. High risk. For every Facebook there are a hundred Friendsters.
Best for: Long-term investors who can wait for a company to grow their profits and/or revenues (revenue sharing), or for an exit event (equity). Investors who want to participate in the wealth-creation cycle.
Currently, you can crowdfund using the first three methods: donation, pre-sales and loans. We’re still waiting for the crowdfund rulings from the S.E.C. that would make the “Investment” option legal for both accredited and unaccredited individuals.
But as you can see, there are still great ways to get involved, get your toes wet, and put your money to work.
You can make an impact, even if you only have $20 to spend.
Join the crowd!
