What Is Crowdfunding? – A Friendly Fundraising Alternative
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
Do the names Pebble and Oculus sound familiar to you? The first makes smartwatches, while the other sells virtual reality headsets. Both have two different products, yet they have something in common: Pebble and Oculus are crowdfunding success stories, blowing past their funding goal and delivering on what they promised. Fitbit, another player in the smartwatch space, scooped up Pebble in 2017 for $23 million, and Facebook bought Oculus in 2014 for a whopping $2 billion.
Money raised through crowdfunding rose 33.7% in 2019, and North America sees $17.2 billion each year in crowdfunding money, according to Fundera. For a long time, venture capital and angel investors were seen as the only way to raise money for a new business. But more and more business ventures are now turning to various forms of crowdfunding, like or online platforms reserved for accredited investors.
Related: Best Crowdfunding Investing Apps
In this article
What is crowdfunding?
Crowdfunding is a process where individuals or a large group of people (called backers in crowdfunding parlance) contribute money to support a project, often in exchange for rewards. A business can use crowdfunding to get funding and resources for its product, project, or venture. When a business uses crowdfunding to raise money, it can create a marketing campaign highlighting the product's or service's benefits and encouraging people to invest in the business.
Businesses also use crowdfunding to market their products or services and gauging the public's interest. The company can sell more and make money if the product is successful. Kickstarter, GoFundMe, and Indiegogo are three of the most famous crowdfunding platforms.
Earn Real Money Fast by Filling Out Surveys!
- Sign up for FREE & complete your profile
- Earn points for taking surveys
- Redeem your points for cash or gift cards
- $55k+ Paid to Survey Junkie members daily
- Complete 3+ surveys a day, earn up to $100/mo.
Types of crowdfunding
Crowdfunding has evolved since its nascent days in the early 2000s. Donation-based crowdfunding, rewards-based crowdfunding, and equity-based crowdfunding are a few types of crowdfunding.
Rewards-based crowdfunding
Rewards-based crowdfunding is the most popular type of crowdfunding. In this type of crowdfunding, contributors give money in the hopes of receiving incentives from the business or company being funded. The reward is usually a product.
This type of funding is particularly popular with smaller companies that are just starting and do not have the capital to grow their business independently. It can also be a great way to generate buzz around a particular product and generate interest among the public in a way that traditional advertising techniques may not be able to accomplish.
Equity-based crowdfunding
When a company raises money from a pool of investors and gives them equity in the company, this is known as equity-based crowdfunding. You can leverage equity-based crowdfunding to raise money, including offering investors a share of ownership in the company, charging a fee for the investment, or both.
An investor will typically invest a small amount of money in exchange for a stake in the company. In return, the investor will usually receive an ownership share in the company and regular updates from the company on the progress of the business. Many different equity-based Crowdfunding sites can be used to fund a business. CircleUp, EquityNet, and Fundable are a few examples. These websites allow businesses and entrepreneurs to post information about their crowdfunding projects and to seek funding from the crowd.
Debt-based crowdfunding
This type of crowdfunding is similar to a traditional loan in which a company seeks money from individuals or institutions to finance its operations. The owner of the business or institution offering the loan is known as the lender, and the individual or business seeking financing is known as the borrower.
Like equity-based crowdfunding, many debt-based crowdfunding platforms can be used to raise funds from investors. The most popular crowdfunding websites include peer-to-peer lenders Lending Club and Prosper. These sites allow lenders to search for borrowers and offer loans directly to them. Borrowers must then decide whether or not to accept the loan offer, and the money is sent to their account once they accept it. Interest is charged on the loan based on the interest rate set by the lender. Once the loan is paid back in full, the funds are sent back to the lender’s bank account.
Earn Real Money Fast by Filling Out Surveys!
- Sign up for FREE & complete your profile
- Earn points for taking surveys
- Redeem your points for cash or gift cards
- $55k+ Paid to Survey Junkie members daily
- Complete 3+ surveys a day, earn up to $100/mo.
Best crowdfunding investing apps
Real estate
Fundrise
If value investing is your thing, then you don't have to look further than Fundrise, a real estate investment platform founded in 2012, which currently manages over $1 billion of equity on behalf of more than 300,000 individual investors. As of June 30, 2022, its investors have collected over $194 million in dividend payments. When looking to deploy your investing capital, Fundrise looks for "low-ego, results-driven people," and its portfolio is designed to withstand periods of economic distress.
There's essentially no barrier to entry as you can start investing with as little as $10, but the company says its $5,000 investment product is the most famous. Have more money to invest? Fundrise accepts up to $100,000 in initial investment, but this account level is only open to accredited investors.
RealtyMogul
The RealtyMogul platform boasts more than 245,000 members, collectively investing $875 million in real estate projects. Investors can use RealtyMogul to browse, conduct due diligence and invest in individual commercial properties and real estate investment trusts (REITs). These investment trusts have a minimum investment threshold of $5,000 and have an annualized rate of between 4.50% and 6.00%. Distribution frequency depends on the REIT and is made monthly or quarterly.
Investments in individual properties, such as office, multifamily, retail and industrial, is open only to accredited investors. Minimum investments range from $25,000 to $50,000 for three to seven years.
CrowdStreet
Investors on the CrowdStreet platform have invested 656 projects since 2014 worth $3.41 billion. Investments boast an internal rate of return of 19%, and the hold period is about three years. Creating an account is free; they don't even ask for your credit card information. The company makes money by charging a management fee. One of the easiest ways to invest with CrowdStreet is through its C-REIT fund, which comprises a portfolio of over 20 investments, but is open only to accredited investors willing to invest at least $25,000. The holding period is five to seven years. The company doesn't have investment options for mom-and-pop investors, however.
PeerStreet
Real estate investment opportunities are posted daily on PeerStreet, and there's also an automated investing option that auto-invests based on the criteria you've given. But PeerStreet is only open to accredited investors, which means you must have a net worth of more than $1 million and an income of over $200,000. However, you only need $1,000 to begin investing with PeerStreet. At one to 36 months, investment terms are shorter than other platforms. The company charges an asset management fee of 1% of net proceeds; the loan listing page always shows the fee you'll be charged.
Streitwise
Streitwise has real estate investment opportunities for both accredited and nonaccredited investors. The company has delivered 21 straight quarters in dividends averaging 9.2%. For context, the last dividend came in at 8.4% in the second quarter of 2022. You can put as little as $5,055 to work, and you have the option to crank that up in $500 increments once you've made the initial investment. Streitwise charges a 2% annual fee deducted from the dividend payment. The company doesn't charge any other fees.
RealCrowd
RealCrowd has funded more than $6.5 billion in real estate and has over 250 investment opportunities for its members. The company isn't open to retail investors, meaning only accredited investors can invest through RealCrowd. The minimum investment is $25,000 and can go up to $50,000. Each investment page lists the internal rate of return and the equity multiple.
Groundfloor
The company offers short-term, high-yield real estate debt investments. When signing up, you'll be asked how much money you'd like to invest; you can start with as little as $10. Then, you can look at available investment opportunities, including options based on your risk tolerance. Once you've linked your bank account with your Groundfloor account, you can begin putting your money to work. Debt products aren't too risky, and the company has generated more than 10% returns over the last six years. Repayments are typically received in six to nine months on average.
Earn Real Money Fast by Filling Out Surveys!
- Sign up for FREE & complete your profile
- Earn points for taking surveys
- Redeem your points for cash or gift cards
- $55k+ Paid to Survey Junkie members daily
- Complete 3+ surveys a day, earn up to $100/mo.
Equity/venture capital
StartEngine
StartEngine, launched in 2015 in California, is a prominent equity crowdfunding platform that democratizes investment in early-stage companies. Gaining momentum with Kevin O’Leary as a strategic advisor in 2020, it has facilitated over $1.1 billion in startup funding, aided more than 750 startups, and grown to over 1 million users. Recognized as the 10th fastest-growing private company in California, StartEngine, uniquely funded by its own investors, acquired competitor SeedInvest in 2022, further solidifying its position in the market.
Pros
- Allows businesses to access a large pool of investors.
- Crowdfunding has become a more affordable alternative to traditional forms of financing.
- Crowdfunding lets investors deploy capital in a vast range of companies and products.
Cons
- Some campaigns are only open to accredited investors.
- Many companies go bust after getting the money, leaving investors with heavy losses.
- Campaigns require heavy social media marketing.
Do I receive something if I invest through crowdfunding?
It depends on the type of campaign. For example, you wouldn't get anything if you gave money to a donation-based campaign, but you would receive something, like a product, if you invested in a rewards-based campaign.
Which crowdfunding platforms can I trust?
So could begin with Indiegogo, which is a large crowdfunding platform. If you're looking to invest in start-ups, you can turn to SeedInvest; if you'd like to deploy your investing capital, you may want to consider StartEngine. If you're just looking to get a product in return for the money, GoFundMe and Kickstarter are worth exploring.
What is the JOBS Act?
The Jumpstart Our Business Startups Act was enacted in April 2012, and it allowed retail investors to participate in the equity crowdfunding industry, which was previously exclusive to accredited investors.
The bottom line
In common parlance, crowdfunding is a nebulous term used to describe any fundraising initiative involving a large pool of people contributing relatively small amounts of money to fund a particular project or venture. While this sounds like a good idea, in theory, several potential problems can arise from this type of strategy, including fraud, an inability to raise enough money to meet the company's needs, and other unforeseen complications. While none of these things is necessarily a problem in all situations, companies need to be aware of the risks associated with using this strategy when trying to determine the best way to raise money for their startup or small business.
There are many potential pitfalls associated with crowdfunding, but in many cases, it is possible to avoid these issues by researching and reading the business plan carefully.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
Share this article
