How many types of crowdfunding exist?

Since the introduction of crowdfunding in Italy to date, so many different different types of crowdfunding, some have been added that did not exist before due to the development of legislation, and others have specialized in specific business fields. Learn about all types of crowdfunding available to companies that need to raise capital and their characteristics is the first step in figuring out which is best suited to the needs of your business or business idea.

Crowdfunding made its first, timid appearance in Italy back in 2005, albeit only in amateur form, with the historic platform Productions from Below, still active today. Only after the phenomenon had taken hold in the United States did it begin to take hold in our country in a more structured way from the 1910s onward. If you want, you can learn more about the whole crowdfunding history, which we will quickly summarize in the next paragraphs in its most recent stages.

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.

Beginning in 2012, the Italian crowdfunding world entered theequity crowdfunding, which introduces unprecedented user involvement in the projects they fund: in addition to investors who expect a financial return, those who participate in an equity crowdfunding campaign become partners of the enterprise which launched the campaign. This results in a higher level of investment risk and important effects in the structure of the proponent companies, attracting the attention of Italian financial authorities.

This leads to a turning point: in 2013 Consob elaborates the first official regulations for equity crowdfunding at the European level, aimed at protecting investors and regulating platforms and companies. It is with the changes to this regulation that in 2019 the types of crowdfunding listed so far were added to the debt crowdfunding, which allows the placement of bonds and debt securities (Mini bond) 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

The reward crowdfunding provides for the collection of economic resources for the development of a project that offers in return to the supporters a reward (reward): usually the project consists of the creation of a new product, and the reward is the product itself, which supporters receive in advance of its market launch, or at subsidized conditions or in an exclusive, limited version. The possible configurations of the reward are almost endless. This type of crowdfunding is particularly effective in the creation of a community of customers, supporters and fans and is ideal for tech or creative products. It is a way not only to raise capital, but also to market test and market in an innovative and competitive way. Find out how they work and which are the best reward crowdfunding platforms.

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.

The great advantage of lending crowdfunding is the rapidity with which it achieves liquidity, compared to other lending channels. It is particularly appreciated by the real estate.

As with bank lending, 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 need to demonstrate your ability to sustain and repay the debt. Find out how they work and which are the best lending crowdfunding platforms.

Equity crowdfunding

Equity crowdfunding offers companies the opportunity to Sell shares to raise capital. Those who participate in equity crowdfunding campaigns become partners in the startup or SME they decide to finance, acquiring a share in it proportional to the capital invested. The economic return on the investment will come from the distribution of profits (which in the case of startups cannot take place before 5 years from the establishment of the company), the sale of the company to third parties or the sale of shares.

Equity crowdfunding is the most complex type and the favored by startups. However, it can also be used as a "shortcut" to achieve IPO, with the crowdfunding listing, so it is also an attractive tool for large and structured enterprises.

Find out how they work and which are the best equity crowdfunding platforms.

Debt crowdfunding

One of the latest arrivals among crowdfunding types, as of 2019 it allows Listed or unlisted SMEs to place debt securities (bonds, debentures, minibonds, etc.) through a crowdfunding campaign aimed initially mainly at professional investors, today at all categories of investors. To investors who purchase these securities, the company recognizes a interest rate, disbursed in periodic coupons, in addition to the repayment of principal at the maturity of the security.

The new frontiers of crowdfunding: Participatory Financial Instruments and Tokens

Innovation does not stop: new types of financial instruments that can be placed through crowdfunding campaigns to raise capital are emerging. The first, already in use, are the Participative Financial Instruments, particular debt or equity securities that can be sold to selected investors on customized terms: we have discussed them extensively here.

The second, still under study and experimentation, are the tokens, or digital assets which disproportionately broaden the nature of securities that companies can offer to their potential investors to raise capital. Token placement campaigns take the form of Security Token Offering. We talked about it in our article on tokenization.

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.

The lending crowdfunding is a very good choice for those who need to resources in a short time for a specific purpose, because campaigns are generally faster than equity campaigns and require less paperwork; it is open to all categories of companies, as well as individuals, and has emerged primarily 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.

The most innovative types of crowdfunding are open to all categories of companies and are particularly suited to those that need high customization of capital raising.

These pointers are general, and each company should start from them and then evaluate its own specific situation. Our first advice is to try the Crowdometer To see if crowdfunding is right for your project!