Crowdfunding 101: What is crowdfunding, anyway?

Crowdfunding is a hot topic. It suddenly feels like everyone is talking about it, yet you haven’t gotten on the bandwagon. You’re dying to know—what exactly is crowdfunding?!

Take a deep breath. I’m here to ease the perplexity and explain what crowdfunding is so that instead of shying away from the topic, you can actively engage in conversations when it comes up.

Let’s be clear that crowdfunding is not a new concept.  What is new is the modern-day variation of crowdfunding, which has exploded on various social media platforms, including Facebook and Twitter. This is where you have likely seen crowdfunding appeals and where your curiosity about what it is began.

Crowdfunding essentially means financing a project by raising money from a large number of people who you may or may not know.

So, do people just give away money to fund strangers’ projects?!

I knew you would ask. Most of the time, no.

People who invest in a business venture or project by way of crowdfunding tend to do so because they believe in the idea or concept behind the project. It may be something innovative, it may be something progressive or unique, and, if you believe in it enough, you might feel like supporting the cause. But, chances are you want something in return and that reward might come in various flavours:

  1. A reward, also known as rewards-based crowdfunding: In return for your contribution to the project, you are given a gift, which may be a sample of the product being produced, but it also may be an unrelated item such as a gift card or promotional item. Alternatively, you may receive an intangible reward such as an invitation to a private launch party or advanced access to the product or service being produced.
  2. A share in the venture, also known as equity-based crowdfunding: Your reward is in the form of gaining a small piece of ownership in the venture itself.
  3. Interest payments plus principal, also known as debt-based crowdfunding: In this case, you are lending funds to a project and you expect to be paid interest payments plus principal.

The specific type of crowdfunding used depends on various factors such as the amount of funding required, the urgency, the prospect of gaining alternative financing and the willingness to give up ownership in the project.

And then, of course, there are charitable humans who don’t want anything in return and are game to participate in donation-based crowdfunding, which has no reward attached to it at all. Naturally, this type of crowdfunding is often used to raise funds for not-for-profit causes.

So now that you know what all the fuss is about, hopefully you won’t have to back away from those never-ending conversations on the subject. Now that you’re in the loop, maybe you’ll even start up the next conversation at a networking event or dinner party. Who knows, you might even contribute to the next crowdfunding appeal you see on social media.

Keep the conversation going

Are you bewildered by the idea of crowdfunding or can you keep up with the frenzy that is consuming so much social media attention?  Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Romi-Lee Sevel, CPA, CA

Romi-Lee has a professional background in audit and assurance services for private companies. She is passionate about accounting education and has spent more than 6 years in various teaching roles. She currently lectures financial accounting courses at York University and facilitates various modules in the CPA Professional Education Program. Romi-Lee is committed to community service and has many years of volunteer experience in various leadership positions; she is especially passionate about mentoring CPA students, which she has been doing since the inception of the CPA mentorship program. This year she has served as a member of the CPA Ontario Mentor champion workgroup.