Definition of Crowdfunding Based on Donation
Donation-based crowdfunding is a way of making money for a project by asking a large number of contributors to donate a small amount to it individually. In return, as the donation size increases, the backers may receive token rewards that increase in prestige. However, the funder may receive nothing for the smallest sums at all.
Often called crowdfunding rewards, the donation tokens can include pre-sales of an item to be created with the funds raised. Crowdfunding based on donations may also be used in an effort to raise funds for charitable causes.
Because this kind of crowdfunding is predicated on donations, funders don’t get any ownership or rights to the project — nor do they become project creditors.
- Donation-based crowdfunding is a way to raise money by soliciting donations from a large group of people.
- Donation levels can be set with perks or rewards associated with them.
- Crowdfunding based on donations is different from loans or equity, since there is no promise to repay or ownership stake.
How Does Crowdfunding on Donations Operate?
Where an entrepreneur or inventor has a brilliant idea for a new product or service, crowdfunding offers an innovative means of raising money, as opposed to conventional ways of borrowing money through banks or private loans or selling equity shares. The entrepreneur can pre-sell their product to a large number of backers through donation-based crowdfunding, each donating a relatively small sum towards the project. The entrepreneur may also provide token incentives of increased value or importance to promote higher donation amounts while maintaining full ownership of the supported project or business.
Kickstarter, Indiegogo, CrowdFunder, and RocketHub are examples of donation-based crowdfunding platforms. Donation-based crowdfunding platforms are GoFundMe, YouCaring.com, GiveForward, and FirstGiving and they are focused on fundraising for charitable causes. These services typically take a fee of 5 percent–10 percent of all donations.
Different Crowdfunding Uses
Charities could look to crowdfunding as a means of gathering support for relief efforts or as a cause the organization is promoting. For example, disaster relief charities may seek funds to assist people affected by devastating storms or earthquakes in searching, rescuing, recovering and treating. Specific needs campaigns, such as financing the transport of food and clothing to the disaster area, may exist. The donations may be obtained to fund temporary shelter construction or medical supply procurement. Crowdfunding could also be used to pay for rebuilding infrastructure and utilities which would otherwise not be covered by government disaster funds.
Donation-based crowdfunding can be seen at its core as equivalent to microfinancing. Securing money requirements is not as strict as using a financial institution, and the amount of funding being sought may be smaller than the minimum amount of loan or credit available from a bank or traditional investors. However, for the final sum raised by such a platform, it is not unheard of for it to far surpass the initial target sought. There were also instances of large crowdfunded campaigns that never delivered on the tokens or products promised.