How many types of crowdfunding exist?

types of crowdfunding

Since the introduction of crowdfunding in Italy to date, many different types of crowdfunding have emerged, some have been added that did not exist before thanks to the development of regulations, and others have specialized in specific business areas. Knowing all the types of crowdfunding available to startups and SMEs and their characteristics is the first step in understanding which one is most suitable to the needs of your business or business idea.

Crowdfunding made its first, timid appearance in Italy as early as 2005, although only in an amateur form, with the historical platform Produzioni dal Basso, which is still active today. It was only after the phenomenon had gained traction in the United States that it began to take hold more structurally in Italy, starting from the 2010s.

The types of crowdfunding that played a significant role in this development were reward crowdfunding and donation crowdfunding, following the success of American platforms like Kickstarter, which allowed financing the development of new products by pre-purchasing them before their market launch or making donations for charitable projects. Concurrently, although at a slower pace, the experimentation with the first forms of lending crowdfunding began, initially known as "social lending," which involved a "social" loan gathered from numerous individuals on the web. It was the first type of crowdfunding that offered financial returns to campaign participants through interest on the loan.

A partire dal 2012 entra nel mondo del crowdfunding italiano l’equity crowdfunding, che introduce un coinvolgimento senza precedenti degli utenti nei progetti che finanziano: oltre che investitori che si attendono un ritorno economico, coloro che partecipano a una campagna di equity crowdfunding diventano soci dell’impresa che ha lanciato la campagna. Questo determina un più elevato livello di rischio dell’investimento ed effetti importanti nella struttura delle società proponenti, attirando l’attenzione delle autorità finanziarie italiane.

This leads to a turning point: in 2013 Consob drafts the first official regulation for equity crowdfunding at the European level, aimed at protecting investors and regulating platforms and companies. It is with amendments to this regulation that in 2019 debt crowdfunding was added to the types of crowdfunding listed so far, allowing the placement of bonds and debt securities through crowdfunding campaigns.

Lending crowdfunding, equity crowdfunding, and debt crowdfunding differ from reward and donation crowdfunding because they involve a compensation for the capital provided by campaign participants: thus, they are referred to as crowdinvesting.

Let us now look in detail at each of the existing types of crowdfunding.

Donation crowdfunding

This is the crowdfunding model based on the emotional, moral, and empathetic involvement of participants, who are called upon to support a social, ethical, environmental cause without receiving any material reward in return. Sometimes there is a symbolic reward, such as donors' names published in books, websites or plaques, and usually the initiators of donation crowdfunding campaigns are nonprofit or similar organizations.

Reward crowdfunding

Reward crowdfunding involves raising financial resources for the development of a project that offers supporters a reward in return. Typically, the project involves creating a new product, and the reward is usually the product itself, which supporters receive in advance of its market launch, or they may receive it under preferential conditions or in an exclusive and limited edition. The possible configurations of the reward are virtually limitless.

Lending crowdfunding

Lending crowdfunding has had several names: from "social lending" to "peer-to-peer lending" to the most widely used today, which is the one we adopt in this article. The concept, however, is always the same: an online raising of capital through a loan provided by many different individuals rather than by a bank. Thus, the hierarchical relationship between lender and recipient is broken: it is peer-to-peer lending. As it has spread as a tool for businesses and not just for individual projects, it has seen the investor base expand to include legal entities.

As with a bank loan, the repayment of the capital raised in lending crowdfunding also includes the payment of interest at regular intervals according to a predetermined rate. Therefore, in order to launch a lending crowdfunding campaign, you must demonstrate your ability to sustain and repay the debt.

Equity crowdfunding

Equity crowdfunding offers startups and SMEs the opportunity to sell equity shares to raise capital. Those who participate in equity crowdfunding campaigns become shareholders of the startup or SME they choose to finance, acquiring a proportional stake based on the capital invested. The financial return on the investment will mainly come from profit distribution (which, in the case of startups in Italy, cannot occur before 5 years from the company's establishment), the sale of the company, or the sale of the shares.

Debt crowdfunding

The most recent addition among all types of crowdfunding allows listed or unlisted SMEs to place debt securities (bonds, notes, minibonds, etc.) through a crowdfunding campaign primarily targeting professional investors but also certain categories of retail investors. The company recognizes an interest rate to investors who purchase these securities, disbursed through periodic coupons, in addition to the repayment of the capital upon the maturity of the security.

Types of crowdfunding: which one to choose?

Each of the types of crowdfunding listed has specifics that help you choose the one best suited to your situation.

Leaving aside donation crowdfunding, which mainly concerns nonprofit entities, the easiest type to attribute is reward crowdfunding: it is the ideal avenue for businesses that sell physical products and need resources for the implementation or promotion of novelties or to expand their market. This is not to say that reward crowdfunding in absolute terms is not a viable avenue for those involved in digital services or products, it can be just as useful but more complex to apply.

Lending crowdfunding is a very viable choice for those who need resources quickly for a specific goal because the campaigns are generally faster compared to equity crowdfunding and require fewer bureaucratic formalities. It is open to all categories of companies, not just startups and SMEs, and has become especially established as a financial tool to support real estate projects.

Equity crowdfunding, on the other hand, is particularly suitable for startups and SMEs that want to raise substantial financial resources for medium- to long-term development plans.

Finally, debt crowdfunding is reserved for companies in a more advanced stage of their growth journey, specifically for SMEs, including unlisted ones, with a well-established internal governance structure and potentially the prospect of listing on the market in the future.

These are general indications deduced both from current legislation (which will undergo some changes with the EU Regulation on crowdfunding) and current trends, but each company must then assess which path to choose according to its own specificities and needs.

If you want to find out more about the world of crowdfunding, join the Facebook group of Turbo Crowd, the first crowdfunding marketing consultancy: you will find lots of free content on all the growth opportunities available to businesses. To talk about your specific case, figure out what is the best route for you and what Turbo Crowd can do to support you, book a call with us!

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