Crowdfunding: A New Innovative Model of Providing Funding to Projects and Businesses

Abstract

This report examines an innovative new model of providing funding to projects and businesses, the Crowdfunding model. This new form of financing that allows people or businesses to seek small amounts in the form of donation, loan or investment from large numbers of people rather than large amounts from a few, has emerged in the US and numerous European countries in recent years. In 2011 alone, $1.5 billion was raised through crowdfunding for projects and businesses in need of funds. Not only does the model provide finance but also access to a large number of people who can test and market an idea. Crowdfunding takes a number of different forms, the most successful of which has been the reward-based model where participants receive non-financial rewards in exchange for donating to a project. The model effectively harnesses not only the contributors’ desire for the reward but also the intrinsic or social motivations to back a project. Other forms of the model are, however, also growing rapidly. The most recent of these are: i) equity crowdfunding, where individuals receive small stakes in a privately owned young business in return for investment and ii), peer to peer lending to businesses, where individuals lend small amount to businesses in return for a competitive yield.

Keywords: Crowdfunding, innovation finance, equity, peer to peer lending