Crowdfunding

What Is Crowdfunding?

Crowdfunding is a way to raise money by gathering many small contributions from a large group of people, usually through an online platform. Instead of approaching a single bank or wealthy backer, a project creator or business posts a campaign that explains what the money is for and invites the public to contribute.

Campaigns generally fall into a few types. In reward-based crowdfunding, backers pay in exchange for a product, perk, or thank-you gift. In donation-based crowdfunding, people give money to a cause without expecting anything back. In equity crowdfunding, backers receive a small ownership stake in a company. In debt-based crowdfunding, sometimes called peer-to-peer lending, backers lend money that must be repaid with interest.

How It Works

Many campaigns set a funding goal and a deadline. On some platforms, the creator receives the money only if the goal is met by the deadline, an "all-or-nothing" model. On others, the creator keeps whatever is raised. Platforms usually charge a fee, often a percentage of the amount raised, plus payment processing costs.

For equity campaigns, the company typically issues shares or similar securities to backers. Because these offerings are regulated in many countries, companies often must provide specific disclosures, and platforms may limit how much an individual can invest.

Why It Matters to Investors

For individual investors, crowdfunding offers access to early-stage businesses that were once mostly open to venture capital firms and wealthy individuals. It can also be a way to support products or causes a person believes in.

The risks are significant. Early-stage companies often fail, and stakes in private companies are usually illiquid, meaning they are hard to sell before an exit such as an initial public offering or acquisition. Later funding rounds can also reduce an existing holder's percentage of ownership, a effect known as dilution. Reward-based backers may receive delayed products or none at all. Campaign terms and risk disclosures describe what backers actually receive and what could go wrong.