There are four types of crowdfunding models recognised by the Financial Conduct Authority – the organisation responsible for regulating financial services in the UK – and it might be helpful to look at some examples of crowdfunding models to see how this type of fund raising activity works.
In practical terms, crowdfunding can be used in many different ways by entrepreneurs, companies, writers or charities as a way of raising money for their idea, project or business plan.
1. Donation based crowdfunding
The Left Bank Leeds Garden project was established to develop and improve a community space in the grounds of a Grade II listed former church building in inner-city Leeds.
The idea behind the project was to create an accessible and welcoming place that could be enjoyed by the local community and improve their well-being. In addition, the garden offered opportunities to volunteer, meet fellow residents and reduce social isolation.
The campaign organisers used the online crowdfunding platform, Crowdfunders, to raise £10,000 in donations from 65 supporters; money which will be used to buy plants and shrubs and run a community planting day.
2. Reward based crowdfunding
The Pound Project is an innovative, independent publishing company whose ethos represents one of the better examples of crowdfunding being used to raise the profile of new and emerging writers; and rewarding them for their efforts.
The project showcases the work of one writer at a time every other month and sets a minimum funding target of £500 using Kickstarter as their primary crowdfunding platform.
Supporters can pledge from as little as £1 to up to £200 and are rewarded in several ways including: online access to the latest piece of writing, 10x signed copies of the printed edition of the book, a T-shirt, tote bag, one-to-one mentoring with the author.
From the money raised, the writer receives £250 and 50% of the net profits after publishing costs are deducted from income.
3. Loan based crowdfunding
The borrower is the UK’s largest blender of fruit juices and sells concentrates, purees and natural juices to its customers.
They needed a loan of £220,000 and approached a peer-to-peer lending platform – The Lending Crowd – to refinance an existing short-term loan facility. They also needed additional working capital to finance the growth and expansion of their business.
4. Equity based crowdfunding
Mike’s Fancy Cheese is an award-winning artisanal cheese maker based in Northern Ireland who produce a blue cheese known as Young Buck using raw, unpasteurised milk.
The founder needed capital to set up the business and acquire premises, equipment and provide initial working capital until he could sell his first batch of cheese, As a start-up business, it was difficult to secure a business loan as he had no collateral to offer the lenders (in the form of assets such as his house), so instead the founder took the decision to offer equity in his business to outside investors.
Mike’s Fancy Cheese used Seedrs an online equity crowdfunding platform to raise the £80,000 capital he needed and in return he gave up 40% equity in his business to 98 individual investors.
Types of crowdfunding models
To learn more about crowdfunding and how it works please click here.
