How do Crowdfunding Work


Crowdfunding is the act or practice of funding a project /cause by raising monetary contributions from a large number of people. It also goes by other names such as crowdsourcing and alternative finance.

The concept of crowdsourcing funds itself through a number of channels including mail-order subscriptions, benefit events, ballroom galas among others. However, the important means of receiving funding is by internet-based registries.

The typical form of a crowdfunding project involves three principal parties: the initiator of the project and owner of the idea/cause, people and corporate bodies who support the cause in cash or kind; and a supervisory platform that brings the other two parties together.

Crowdfunding has found increasing application in financing a broad range of for-profit and non-profit projects and campaigns including entrepreneurial pursuits, artistic and creative projects, medical expenses, travel, or community-oriented social entrepreneurship projects.

History of Crowdfunding

Crowdfunding has existed from the early 1730s. At that time, London’s mercantile business community supported the efforts of the Bank of England in helping to convert the British Pound into gold bullion. This action by these business groups in London helped retain confidence in the currency and also funded military conflicts at the time.

Drawing from this success, the cooperative movement of the 19th and 20th centuries relied on this model of crowdfunding for its operations. Collective groups, such as community or interest-based groups commenced pooling subscribed funds to develop/finance new concepts, products, and efficient means of distribution and production, particularly in the hinterlands of Western Europe and North America.

Modern Day Crowdfunding

The idea of crowdfunding has evolved over the years. This evolution has been advanced, in no small measure, by the advent of the Internet. The Arts and Music industries are among the first sectors that launched projects based on the concept of Crowdfunding.

The British rock band Marillion, had its entire USA promotional toured footed by funds raised by fans via an internet-based campaign. The campaign raised more than 60,000 USD. The music group, buoyed by the success of the concept, subsequently funded the launch of their musical albums through crowdfunding.

On the heels of the success recorded by Marillion, several other crowdfunding sites and projects took off in earnest. They include the following:  Artistshare in 2003, Indiegogo(2008), Kickstarter (2009) and Microventures(2010). The list also includes Sellaband, a platform focused on the propagation of the works of music artists.

Types of Crowdfunding

There are two primary forms of crowdfunding and a number of off- shoots which  are explained thus:

  1. Reward-based Crowdfunding

Under this category, entrepreneurs sell a product or service in advance without incurring debts or offering equity ownership of the business model. This type of crowdfunding holds sway with ventures in the science and technology arena, free software development, inventions and innovative products as well as civic projects.

In this concept of crowdfunding, distance is no barrier to donors making monetary contributions. Studies show that funding usually increases as the target project nears completion. This situation is attributable to more people buying into the overall thrust of the campaign or scheme.

Usually, reward-based crowding projects enroll supporters/donors who are family relatives and close friends.

  1. Equity Crowdfunding

Under this form, the sponsor/donor receives a stake in the ownership structure of the business, in compensation for the money received.

Equity Crowdfunding is guided by the business laws of the country of operation. In the United States, for example, Equity funding is viewed as the offer of securities and the creator/project owner must provide a stable structure for the product or service and must register the business appropriately.

The other sub-categories  of Crowdfunding include;

Software Value token

In this instance, the creator/owner of the project ( a software application or its derivative) offers a digital or software token to contributors/donors.

Other crowdfunding concepts are Debt-based, Litigation as well as Donation-based crowdfunding schemes.


If the definitions above do not satisfy your curiosity as to the workings of a typical Crowdfunding project, then this illustration should suffice.

Imagine a story involving a thirsty crow that had traveled for miles in search of water to drink. Fortune smiled on the bird, as it soon chanced upon a pot of precious water. But a snag existed. The pot was half-filled with water, and our crow could not reach the surface with its beak.

So it came up with a solution. It saw a pile of pebbles close-by and began to drop one stone after another into the pot of water. Before long, the water’s level had risen to a sufficient height for our crow to drink to its fill.

The story above surmises the working of a Crowdfunding project. The crow represents you, the project creator, the gap in the pot of water represents your lack of wherewithal in actualizing your goal or project, each pebble represents the contributions of donors/contributors while the pot is the medium or fundraiser page that brings you in contact with your donors.

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