Crowdfunding stands for funding projects by raising investments from a group of people via the Internet. Usually, Crowdfunding campaigns are run by start ups or social organizations. The crowd, generally speaking, invests smaller funds in a project or a campaign they support. The investors are most likely to be motivated idealistically. The rewards are generally in terms of acknowledgement or smaller returns. Equity based Crowdfunding for real estate or Crowdlending on the other hand follows a profit-based model.
Crowdfunding is a relatively new phenomenon in the history of the Internet. Before it became technically feasible and reliable to conduct financial transactions – which is a requirement for successful Crowdfunding – organizations and platforms used the crowd as a knowledge source for Wikis, for instance. This source-based collection of information was coined Crowdsourcing.
The first Internet based Crowdfunding project of its kind was launched in 2003. The platform ArtistShare collected funds in order to finance music projects and artists.
WHAT DOES IT MEAN FOR POTENTIAL INVESTORS?
Crowdfunding includes different types of crowd-based investments of projects. Backers can make non-paid contributions and also investments with profits to be made in mind, as it is the case with Crowdinvesting and Crowdlending. The market for profit oriented Crowdfunding projects already outweighs the Crowdfunding investments in volume. However, projects like the Stromberg film in 2011 and the development of the “Back to the Future” Hoverboard in particular came to the public’s attention. For entrepreneurs with creative ideas and for those who wish to raise funds for social projects Crowdfunding has become a real alternativeto traditional bank loans. This is mainly due to the following reasons: A successfully accomplished project has a community to back it up. Furthermore, it may be difficult for young entrepreneurs to get approved for traditional loans otherwise.