Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet.Goran Calic, "Crowdfunding", The SAGE Encyclopedia of the Internet, 2018 Crowdfunding is a form of crowdsourcing and alternative finance, to fund projects "without standard financial intermediaries". Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing. Vol. 29, pp. 1–16. In 2015, over was raised worldwide by crowdfunding. One of the companies that obtained money through crowdfunding is Bonaverde in Berlin.
Although similar concepts can also be executed through mail-order subscriptions, benefit events, and other methods, the term crowdfunding refers to internet-mediated registries. This modern crowdfunding model is generally based on three types of actors – the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organization (the "platform") that brings the parties together to launch the idea.
The term crowdfunding was coined in 2006 by entrepreneur and technologist, Michael Sullivan, to differentiate traditional fundraising from the trends of native Internet projects, companies and community efforts to support various kinds of creators. Crowdfunding has been used to fund a wide range of for-profit entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, and community-oriented social entrepreneurship projects. Although crowdfunding has been suggested to be highly linked to sustainability, empirical validation has shown that sustainability plays only a fractional role in crowdfunding. Its use has also been criticized for funding quackery, especially costly and fraudulent cancer treatments.
History
Funding by collecting small donations from many people has a long history with many roots. Books have been funded in this way in the past; authors and publishers would advertise book projects in praenumeration or subscription schemes. The book would be written and published if enough subscribers signaled their readiness to buy the book once it was out. The subscription business model is not exactly crowdfunding, since the actual flow of money only begins with the arrival of the product. However, the list of subscribers has the power to create the necessary confidence among investors that is needed to risk the publication.
War bonds are theoretically a form of crowdfunding for military conflicts. London's mercantile community saved the Bank of England in the 1730s when customers demanded their pounds to be converted into gold – they supported the currency until confidence in the pound was restored, thus crowdfunding their own money. A clearer case of modern crowdfunding is Auguste Comte's scheme to issue notes for the public support of his further work as a philosopher. The "Première Circulaire Annuelle adressée par l'auteur du Système de Philosophie Positive" was published on March 14, 1850, and several of these notes, blank and with sums, have survived. The cooperative movement of the 19th and 20th centuries is a broader precursor. It generated collective groups, such as community or interest-based groups, pooling subscribed funds to develop new concepts, products, and means of distribution and production, particularly in rural areas of Western Europe and North America. In 1885, when government sources failed to provide funding to build a monumental base for the Statue of Liberty, a newspaper-led campaign attracted small donations from 160,000 donors.
Crowdfunding on the internet first gained popularity and mainstream use in the arts and music communities. One of the earlier instances of online crowdfunding in the music industry was in 1997, when fans of the British rock band Marillion raised US$60,000 in donations through an Internet campaign to underwrite an entire U.S. tour however this was not crowdfunding in its true sense as it wasn't asked for by the band and only reluctantly taken. The band subsequently used this method to fund their studio albums. This built on the success of crowdfunding via magazines, such as the 1992 campaign by the Vegan Society that crowdfunded the production of the Truth or Dairy video documentary. In the film industry, writer/director Mark Tapio Kines designed a website in 1997 for his then-unfinished first feature film, the independent drama Foreign Correspondents. By early 1999, he had raised more than US$125,000 through the site from various fans and investors, providing him with the funds to complete his film. In 2002, the "Free Blender" campaign was an early software crowdfunding precursor.Blender Foundation Launches Campaign to Open Blender Source on linuxtoday (July 22, 2002)'Free Blender Fund' campaign archived 2002 The campaign aimed for open-sourcing the Blender 3D computer graphics software by collecting €100,000 from the community, while offering additional benefits for donating members.Membership "People can subscribe to become Foundation Member. Members who subscribe during the campaign period, get additional benefits for their support. During campaign: – Costs: minimum one time fee of 50 euros (or US$50)" (archived 2002)
The first online crowdfunding platform, ArtistShare launched in 2001, was innovative in providing an opportunity to mix various rewards.Dalla Chiesa, Claudio; Handke, Christian (2022). "The art of crowdfunding arts and innovation: the cultural economic perspective". Journal of Cultural Economics. 46 (4): 573–607. . As the model matured, more crowdfunding sites started to appear on the web such as Kiva (2005), The Point (2008, precursor to Groupon), Indiegogo (2008), Kickstarter (2009), GoFundMe (2010), Microventures (2010), YouCaring (2011), Crowdfunder (2012), and Redshine Publication (2012) for book publication.
The phenomenon of crowdfunding is older than the term "crowdfunding". The earliest recorded use of the word was in August 2006. Crowdfunding is a part of crowdsourcing, which is a much wider phenomenon itself.
The use of crowdfunding in the US has gained an increased presence since the JOBS Act and has a significant social media presence. "Approximately 25 percent of real-world relationships start online, with people of all ages migrating online to find a partner. Crowdfunding is doing for small businesses and entrepreneurs what dating sites have done for singles." Hollas, J. (2013). Is crowdfunding now a threat to traditional finance? Corporate Finance Review. Vol 18, issue 1, pp. 27–31. Those unable to procure funding from traditional methods may be interested in pursuing crowdfunding as an option; however, the success rate may be a deterrent. E. Mollick examined Kickstarter projects from 2009 through 2012 and found that many projects were not successful as only "3% raise 50% of their goal," and he stated that successful projects succeed "by relatively small margins."
Types The Crowdfunding Centre's May 2014 report identified two primary types of crowdfunding: Rewards crowdfunding, in which entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares. Equity crowdfunding, in which the backer receives shares of a company, usually in its early stages, in exchange for the money pledged.
Reward-based Reward-based crowdfunding has been used for a wide range of purposes, including album recording and motion-picture promotion, free software development, inventions development, scientific research, and civic projects.
Many characteristics of rewards-based crowdfunding, also called non-equity crowdfunding, have been identified by research studies. In rewards-based crowdfunding, funding does not rely on location. The distance between creators and investors on Sellaband was about 3,000 miles when the platform introduced royalty sharing. The funding for these projects is distributed unevenly, with a few projects accounting for the majority of overall funding. Additionally, funding increases as a project nears its goal, encouraging what is called "herding behavior". Research also shows that friends and family account for a large or even majority portion of early fundraising. This capital may encourage subsequent funders to invest in the project. While funding does not depend on location, observation shows that funding is largely tied to the locations of traditional financing options. In reward-based crowdfunding, funders are often too hopeful about project returns and must revise expectations when returns are not met.
In the United Kingdom, rewards-based crowdfunding has been adopted by public institutions as a mechanism for distributing grant funding. Crowdfunder, a British platform founded in 2011, pioneered a "matched crowdfunding" model in which public bodies pledge additional funds to projects that successfully raise a threshold amount from the public. A pilot delivered in partnership with Nesta, Arts Council England, and the Heritage Lottery Fund between 2016 and 2017 demonstrated that match funding could leverage significantly greater public contributions: £251,500 in institutional funding supported 59 arts and heritage projects, which collectively raised an additional £405,941 from 4,970 individual backers. The findings were published as Matching the Crowd, a research report produced jointly by Nesta and the Department for Digital, Culture, Media and Sport.
Prize draw crowdfunding A variant of rewards-based crowdfunding involves prize draws, in which participants donate to a campaign in exchange for entries into a draw for a prize, rather than a guaranteed reward. This model has been used primarily for charitable fundraising, combining the incentive of a high-value prize with the goal of raising funds for a cause.
In the United Kingdom, Crowdfunder has hosted several significant prize draw campaigns. Glastonbury Festival ran prize draws on the platform in 2024 and 2025, offering tickets to the sold-out festival in exchange for £10.
Equity Equity crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity. (also available as Scribd document ) In the United States, legislation that is mentioned in the 2012 JOBS Act will allow for a wider pool of small investors with fewer restrictions following the implementation of the act. Unlike non-equity crowdfunding, equity crowdfunding contains heightened "information asymmetries." The creator must not only produce the product for which they are raising capital, but also create equity through the construction of a company. Equity crowdfunding, unlike donation and rewards-based crowdfunding, involves the offer of securities which include the potential for a return on investment. Syndicates, which involve many investors following the strategy of a single lead investor, can be effective in reducing information asymmetry and in avoiding the outcome of market failure associated with equity crowdfunding.
Contributors may act as investors and receive shares directly, or the crowdfunding service may act as a nominated agent. Equity crowdfunding helps "the 90 percent of businesses that were left out in the cold" by traditional funding methods, which is why it has become such a viable option for business startups.
Equity-based funding is illegal in many countries, such as India. In the United States the JOBS Act of 2012 regulated the trend. This "legislation was intended to increase access to capital for the innovative companies" in need of investment capital and allows a pool of small investors to come together. The Regulation was updated in 2021 by the SEC allowing companies to raise to $5 million per year from unaccredited investors and allowing investors to invest more.
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