The Rise of Crowdfunding and its Different Types

The future of fundraising is democratic, digital, and driven by the crowds. This is the era of crowdfunding!

Once perhaps a ‘scrappy’ online phenomenon, crowdfunding has entered the mainstream to disrupt and democratize how entrepreneurs, artists, nonprofits and others access capital. The core premise is simple, yet profoundly transformative: raise funds by collecting small contributions from a large number of backers, usually via the Internet.

From Kickstarter campaigns creating million-dollar consumer products, to GoFundMe funding medical procedures and family emergencies, to equity crowdfunding turning every day people into investors, the crowd has immense untapped power to make ideas happen.

This article will explain what crowdfunding is all about and breakdown the main models of crowdfunding.

What is Crowdfunding?

Crowdfunding refers to raising funds from a large group of people to finance a project, cause or business. It harnesses the power of technology and social media to connect fundraisers to potential contributors and supporters.

Traditionally, financing opportunities used to be limited for most people. However, the concept of crowdfunding changes this by allowing entrepreneurs and startups to present their ideas and get backing from their network and the broader public.

You may have seen and even used online platforms such as Kickstarter, GoFundMe and Launchgood to participate in various crowdfunding campaigns.

The concept is centuries old, but the internet has created new crowdfunding models and made the process exponentially easier.

Crowdfunding at the Time of The Prophet ﷺ

Did you know that there was crowdfunding at the time of the Prophet ﷺ?

The famous companion of the Prophet ﷺ, Salman al-Farisi RA, has an amazing story. He started life in Persia as a Zoroastrian, became a Christian and eventually found Islam after being advised by a Christian monk to go to Arabia, where the last Prophet ﷺ was foretold to appear.

He would then notably go on to advise the Prophet ﷺ to build a trench during one of the battles with the Quraysh. This battle would come to be known as the ‘Battle of the Trench’.

During his journey, he was enslaved many times which led him to miss the battles at Badr and Uhud. This leads us to his story of how he was freed from slavery via crowdfunding:

The Messenger of Allah ﷺ said to me: “Draw up a contract of manumission, O Salmaan.” So I drew up a contract of manumission with my master in return for three hundred palm trees which I would plant for him, and forty uqiyahs.

The Messenger of Allah ﷺ said to his companions: “Help your brother.” So they helped me with the palm trees … each man gave according to what he had until they had collected three hundred small trees for me.

Then the Messenger of Allah ﷺ said to me: “Go, O Salman, and dig the holes where they are to be planted. When you have finished, come to me and I will plant them with my own hand.” So I dug the holes for them, and my companions helped me.” - [al-Musnad (5/441)]

The Different Types of Crowdfunding

Charitable Crowdfunding

The first model is donation-based or charitable crowdfunding, which is the type of crowdfunding  we see in the hadith we just discussed. The companions donated funds to Salman RA to help him free himself from slavery.

The rise of the internet has seen the proliferation of online crowdfunding campaigns by bespoke crowdfunding platforms such as GoFundMe or even LaunchGood, which facilitates Islamic charity fundraising.

Debt Crowdfunding

Another way to make money from crowdfunding is via debt-based crowdfunding. This involves issuing a loan that will be repaid with interest and is commonly done by peer-to-peer (P2P) lending platforms which allow individuals to lend to each other.

Obviously lending money for interest is strictly forbidden in Islam so this would be a no-go for Muslims. The alternative to debt financing is of course equity financing, which brings us on nicely to the next option.

Equity Crowdfunding

Equity crowdfunding allows people to invest in businesses. The contributors provide capital in exchange for equity (shares) in the company. In contrast to debt crowdfunding, investors are not guaranteed a return (i.e. interest), instead, they share in the profit/losses of the company.

This allows people to invest in projects they couldn’t do on their own and also provides businesses with an alternative funding source. Equity crowdfunding is also a good way for businesses to empower their customers and make them invested in their success.

We have written another article here that explores equity crowdfunding in a lot more detail.

Rewards-based Crowdfunding

The last type of crowdfunding we’ll cover is rewards-based crowdfunding. This model is commonly used for creative projects, where contributors receive a reward, product sample or exclusive experience in exchange for their pledge.

Rewards-based crowdfunding is popular because it lets the creators get more involved with their supporters. When people fund a project, they get a reward back that is related to the thing they are helping to make. Some examples of rewards are:

• For a book project - Get a signed copy of the book once it's finished
• For a new app - Get early access to try the app before it launches

So the reward matches the project but it lets supporters feel more included. This works well because people want more than just to donate money. They want to feel part of the project they fund.

This model has helped lots of creative, community, and entrepreneur projects come to life. Small amounts from many backers add up through crowdfunding rewards. It's helping good ideas happen that otherwise may not get funding.

Final words

In this article, we’ve covered the four different types of crowdfunding. Crowdfunding is great to consider when seeking to invest, donate or support a project. However, it’s also important to remember to do due diligence into each project and platform before you support it.

It’s important to ensure that the platform that provides these opportunities is trustworthy and reliable and that the opportunities themselves are credible. For charitable crowdfunding, you should ensure that you are giving to causes that will deliver on their promises. For equity crowdfunding, you should ensure that the investments are good opportunities that have a genuine chance of making you a return.

Overall, the rise of crowdfunding is great for the world as it opens up new opportunities for both organizations and individuals.