Types of Crowdfunding
As already shown from other perspectives, crowdfunding could be seen as an umbrella term, uniting different approaches due to the underlying aim in any initiative. In literature there can be found different approaches, dividing types of crowdfunding. (Massolution 2013) This section should give an overview on recent efforts trying to classify crowdfunding into different types.
Based on the findings of Lambert and Schwienbacher (2010), Larralde and Schwienbacher (2012) classify different crowdfunding approaches based on the type of rewards offered to the participating crowd members. Their attempt show the following distinct business models:
- Donations: According to Lambert and Schwienbacher 22% of a given sample of crowdfunding initiatives rely on donations. Profit maximization often goes hand in hand with standardized, lower quality products, whereas not for profit organizations are more inclined to produce high quality products. This not-for-profit pattern meets the objectives of donors, thus could explain the success of donation-based crowdfunding without offering rewards in physical or financial terms. Additionally, investors who do not make a living off their artistic talent are enabled to give another artist a break or a go. (Artsupport Australia 2012)
- Passive investments: The highest stake of initiatives offers some form of rewards to attract investors. As shown, this does not automatically include the chance for investors to become actively involved. Entrepreneurs choosing this type of crowdfunding are solely focused on raising capital but not using potential other support from the crowd.
- Active investments: Offering the potential to become active in the project and giving away rewards is seen as the active investment- business model. The entrepreneur benefits not only from collected money, but also from feedback on the product or knowledge about and contributed by customers.
According to this distinction the varying types of potential investors may be clustered. According to Mollick (2013) crowdfunding platforms refer to their funders as philanthropists, investors (expecting financial rewards) or – in between of these contrary positions- early customers with varying motivations. Different business models were developed in order to meet the needs of distinct projects. (De Buysere et al. 2012) Hemer (2012) first contributes a classification of crowdfunded projects in order to be able to identify which type of project is a candidate for which form of crowdfunding. He suggests the following categories, followed by more specific sub-values:
- Commercial background or objectives of the initiative or project:
o Not-for-profit: Projects with societally important goals for instance in the area of foreign development aid, charity, and public research projects etc.
o For profit: Projects focussing clearly on commercial goals like setting up a company, promoting new private goods, funding of a commercial music album or movie, etc.
o Intermediate: projects which are not clearly assignable because their potential (commercial) development cannot be foreseen As Belleflamme et al. (2013) show, compared to other forms not-for profit organizations are significantly more likely to achieve their funding goals. Further they note that such organisations find it easier to solicit their initiatives and attract capital by donors, as their focus is not mainly monetary driven.
- Original organisational embeddedness:
o Independent and single: Projects set up by individuals without any background in an institution or organisation
o Embedded: Projects originally initiated from within an incumbent private or public organisation and intended to remain part of that organisation
o Start-up: Projects that may start as independent ventures but are intended to lead to the foundation of an organisation (private or public) with unlimited scope To highlight important differences between the types of crowdfunding, Hemer (2012) suggests usage of delimiting terms, in particular:
- Crowd donations: An altruistic act almost without any obligation for the recipient to give his backer anything in return
- Crowd sponsoring: Initiator and sponsor agree on a defined reward which the initiator is obliged to give
- Crowd pre-selling: This form of crowdfunding initially helps to produce something and the promised return is the delivery of an early version or a prototype of the outcome.
- Crowd lending: This type is defined by the interest paid and the lending period. An alternative to this could be long-term lending based on the revenue sharing principle. The creditor pledges a risk-bearing loan. Instead of frequent payment of interest, he gets a predefined amount, including an agreed share of the venture’s earnings. This amount could range from a total loss – in case of bad performance – up to a multiple of the original loan.
- Crowd investing: This type ultimately comes with the highest burdens in administrative terms. Crowd funders invest equity, the rewards are either shares, dividends and/or voting rights. Referring to that point, Kaufmann et al. (2013) suggest the term crowd raising, to help distinguish it from existing, legal types of crowdfunding. They classify potential rewards as either impact bonds (providing no interest or ROI but do allow to retake the initial amount invested) or impact stocks (providing investors with actual ROI).
As funding can take the shown forms, the complexity of the inherent process varies greatly, illustrated in the following graph:
Combining knowledge, shown in the paragraphs before, it is possible to map, how different types of crowdfunding best suit the nine different combined-types of initiatives. This mapping exercise is shown in figure 11:
Ordanini et al. (2011) contribute another perspective to distinguish different types of crowdfunding. They take the risk/return ratio for customers (i.e. crowd members), combined with the type of payoff expected into account and come up with three different types:
- Models characterized by high levels of risk/return ratio; rewards are predominantly material payoffs to consumers; activity is quite similar to what venture capitalists are doing
- Models characterized by low levels of risk/return ratio; coming with a broader set of potential rewards, allowing also for emotional rewards
- Models characterized by little or no risk; close to charitable activities where only non-material payoff is expected Massolution (2013) contributes a further taxonomy that is determined by the proposed exchange between creators and investors. Quite similar to Hemer’s contribution shown above, the report states four established and one emerging model (thus not considered in the coding manual):
- Donations: Investors donate money without expecting to receive tangible benefits
- Rewards: Investors support campaigns in order to receive some kind of reward
- Equity: Investors receive equity or equity like shares in return for their investment
- Lending: Investors lend money and expect the future repayment. Interest payment is not mandatory in any setting.
- (Royalty: Investors support creators in order to get a share of revenue in return for their investment)
Focusing on the intermediary role of crowdfunding platforms there can be differences identified in terms of collecting pledges, gaining access to a set of potential investors and offering provision of financial services. The most accepted model of collecting pledges is the so called “all or nothing” approach. Initiators target a sum of money that must be completely reached within a pre-defined period of time. If the target is not reached no money is paid out to initiators, however early supporters get their pledges paid back. Especially in a reward-based setting this – also called threshold pledge system – is a means of risk reduction. Using the “keep it all” approach a crowdfunding platform will immediately pay out funds to initiators, even if the predefined target is not met. This funding mode is common for projects that serve social or personal causes. (Massolution 2013, Martinez-Canas et al. 2012) Mollick (2013a) found that increasing funding goal size is negatively associated with success (within a reward- and donation-based crowdfunding setting). Surprisingly, duration of funding a project decreases the chance of success. Longer durations may be a sign of lack of confidence. Especially in equity-based crowdfunding access often is restricted. The “club model” says that potential promoters have to be accredited and take use of a closed investment club, not offered to the public directly. Acting as a cooperative intermediary contributing promoters are invited to make decisions with the system of “one person one vote”. In the micro-lending setting there has to be distinguished between the aim of supporting (funds for low-income clients are provided) or lending (peer to peer lending of small amounts of money directly between individuals without intermediation of a traditional financial institution). (Martinez-Canas et al. 2012)
Text and Graphics: Archetypes of Crowdfunding Platforms A Multidimensional Comparison, Florian Danmayr, Steyr, Austria, 2014
Photo: Swiss Mountains, PropTech Switzerland