What Is Crowdfunding?

The Main Categories of Crowdfunding and How You Can Get Involved

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Combining the best of crowdsourcing and microfinance, crowdfunding brings together various individuals who commit money to projects and companies they want to support.

It’s a young and quickly growing market but one that is transforming how people behave with their money. It's also transforming the ways businesses raise capital.

Massolution's Global Crowdfunding Report expects crowdfunding to become a $300 billion industry in just a few years.

But in many ways, crowdfunding is just getting started — the same consulting firms expect the industry to grow at a compound annual growth rate of 100% over the near term.

Currently, there are a few primary categories of crowdfunding:

Reward-Based Crowdfunding

What is it/How it works: Crowdfunding is synonymous with rewards-based sites like Kickstarter and Indiegogo. With reward-based crowdfunding, people can pledge money to a new creative art project, a novel technology product in development, or a music artist producing a new album. The smartwatch, Pebble, made the tech industry take notice when it received over $2.6 million in only three days of active crowdfunding on the popular crowdfunding site, Kickstarter.

Top playersKickstarterIndiegogo

Peer-to-Peer Lending

What is it/How it works: Ever loan a friend or a kid money? Well, new crowdfunding platforms, like Lending Club enable borrowers to get access to funds outside of traditional banking channels.

And those people willing to take a little risk to lend out money to other individuals can create whole loan portfolios at the click of a button. Lending Club, which is the 800-pound peer-to-peer lending gorilla, is literally lending billions of dollars every year.

Top playersLendingClubProsper 

Donation-Based Crowdfunding

What is it/How it works: Dr. Muhammad Yunus won the Nobel Prize for his work in microfinance.

With Yunus’ Grameen Bank, instead of charity to support the working poor, small loans are given to local entrepreneurs to help fund things like short-term inventory. Combine microfinance with online crowdfunding and you get sites like Kiva.org, which has been funding small business owners in emerging markets for over a decade.

Top playersKiva.org, GoFundMe

Equity Crowdfunding

What is it/How it works: The smallest slice of the crowdfunding pie, equity crowdfunding also contains the most potential to change the way individuals invest their money. Equity crowdfunding enables real investments in private companies In the equity crowdfunding space AngelList is building what many call the Android of venture capital while other firms like CircleUp and OurCrowd (full disclosure: I’m a partner at OurCrowd) are more like online venture capitalists that provide investors with access to invest in startups with as little as $1000.

Top playersAngelListCircleUpFundersClubOurCrowd

Other Types of Crowdfunding

Real estate: Entrepreneurs have identified an opportunity for crowdfunding real estate. Each real estate crowdfunding platform seems to take a different approach. Some are crowdfunding loans to buy properties or provide mortgages to buyers of real estate.

 Mosaic crowdfunds solar energy projects.

Top players: Fundrise, Realty MogulCrowdstreet

Human capital: Interested in investing in top athletes? Well, crowdfunding makes that possible. Earlier this year, Fantex made waves when it announced it would be IPO’ing investments that track the brand value of top sports stars. Need money for college without piling on debt? Would you trade a percentage of your lifetime earnings for paid tuition today? Built by former Googlers, Upstart lets you crowdfund your education.

There’s no doubt crowdfunding will see many different faces as entrepreneurs and individuals who support them experiment with the future of business finance. We’re just at the beginning.