A huge part of crowdfunding success is choosing the right model for your project. While all types of crowdfunding are based on the same principle of raising cash from the crowd, each of these models operates on different mechanisms that make them appropriate for specific projects.

There are basically three models of crowdfunding available – the right model ultimately depends on the type of project you are doing and the stage of business you’re in.

  1. Donation-based

This is what most people think of when they hear the word crowdfunding, perhaps because it is the most straightforward approach. In this model, a contribution is made to a campaign out of charity. The donor doesn’t receive anything in exchange for their contribution other than a good feeling for being able to help.

With that being said, donation-based crowdfunding is more suitable for charities, social causes and political campaigns rather than for business ventures.

  1. Reward-based

As the name suggests, the contributors in this type of campaign get something in return for their donations, albeit not financial in nature.

Sometimes the recompense is a simple thank-you reward or a perk in exchange for their support, such as a discount on the business’ services. But most often the reward offered is the prototype or product that the project owner is trying to launch. As such. Many people think of reward-based crowdfunding as some sort of a presale.

According to Sally Outlaw, founder and CEO if crowdfunding consulting provider Peerbackers.com, this model is the best bet if you are a startup or a trying out a new venture. For one, since you do not owe the contributors any money, it means you are not starting your venture in debt. Another benefit is that you don’t need to give away shares of your company. Once you have delivered the perks you promised, it’s a done deal.

  1. Investment-based

In this model, businesses seeking capital tap the crowd for micro-investments. In other words, entrepreneurs and startups sell ownership stakes via crowdfunding platforms, thus creating opportunity for individuals to become shareholders and potentially earn financial return.

This method is typically regulated by the government, which is why many crowdfunding platforms only allow accredited investors to participate. Regulations are often implemented to allow only those individuals earning at least $200,000 a year or those with a net worth of $1 million to back a campaign.

If you are a new business, it doesn’t make sense to try to sell shares in a venture that hasn’t gained traction yet. But if you already have some sort of success in your chosen arena, you can use equity-based crowdfunding to raise capital for growth.

Other types of crowdfunding

Some less popular models of crowdfunding are royalty-based and peer-to-peer lending.

In the first model, the reward backers get is a percentage of revenue from the project, once it starts generating capital. An example of this is a mobile app website where investors can back an app before it’s launched, and then cash in a portion of the revenue once the app starts selling to the public.

As for peer-to-peer lending, there is obviously financial debt involved. This is where individuals lend their money in small increments to project owners and expect repayment with some fixed interest rate. This has become a typical alternative to conventional bank loans, as it is easier for the business to score funding since there are less strict lending standards and the backers are attracted to getting a return.

Conclusion

Choosing the best form to use is the first decision you must make before launching a campaign. You don’t want to unwittingly sell off shares of your company and risk losing control over it at some point. While that rarely happens, it remains a possibility.

Once you have figured that out, you can then move on to creating a winning campaign and choosing the right platform to launch it. It takes time and effort, but a little advanced planning is always worth it.