Meaning of Crowdfunding

By | April 4, 2021

The term “crowdfunding” is made up of the two English words “crowd” (meaning: mass, horde) and “funding” (meaning: financing, support). “Crowdfunding” is often translated as “crowd funding”.

  • Crowdfunding refers to project or company financing from a large number of different donors.
  • The crowd is usually involved via a crowdfunding platform on the Internet.
  • With traditional crowdfunding, investors receive a non-material return for their commitment.
  • With crowd investing and crowdlending, the investments are profit-oriented.

Definition: crowdfunding – what is it?

Crowdfunding is a new type of project and corporate finance. Instead of a bank, founders or startups receive the capital they need to implement their ideas from a large number of investors – the crowd. Mostly they present their projects on a crowdfunding platform on the Internet and solicit supporters. Often a minimum amount is defined that has to be reached to finance the presented projects. The money collected must be used for the advertised projects.

Crowdfunding, crowd investing, crowdlending – a differentiation

There are different forms of crowd finance. Like crowdfunding, crowdfunding can be considered a generic term. In everyday parlance, crowdfunding often refers to a very specific form of financing in which the supporters of a startup or a specific project receive a non-material thank you after the successful implementation. For creative projects such as a film production, this can be a particularly personalized copy. In the case of a startup that wants to bring a new type of product onto the market, the supporters receive a corresponding copy, for example.

With equity crowdfunding the business interests of the investors are in the foreground. The crowd participates in a startup or in certain ideas and hopes for a high profit. If there is no success, there is a risk of total loss of the capital employed. Occasionally, economic and ideological motives overlap in crowd investing. For example, the members of the crowd participate in wind farms for ecological reasons, but at the same time want to make a profit. Basically, crowd investing is characterized by the fact that the crowd’s intention to make a profit is at least a major part of the motivation behind their investment. This crowdinvesting is also often referred to as crowdfunding by the operators of the respective platform. In practice, crowdfunding and crowd investing cannot always be clearly distinguished from one another. In public discourse, too, one term is repeatedly used synonymously for the other.

When it comes to crowdlending , investors are also interested in high returns. In contrast to crowd investing, the crowd here does not participate in startups or a project, but only grants personal loans . There are specialized crowdlending platforms for financing both private and corporate loans. The actual lending process is often handled by a bank. Only the money is collected via the crowdlending platform.

With crowd sponsoring , donors have idealistic motives for their investments. You have no ostensible business interest. Often, charitable, cultural or sports projects are supported by crowd sponsoring. As with other forms of crow financing, specialized platforms bring the initiators of the projects and the supporters together.

Crowdfunding platform brings founders and crowd together

In order to bring capital seekers together with interested investors in the best possible way, many crowdfunding platforms have focused on a specific industry. There are specialized crowdfunding platforms for the support of startups, but also, for example, for the financing of real estate projects or for projects to expand renewable energies. Some local platforms also specialize in financing regional or municipal startups and projects.

Well-known platforms for classic crowdfunding are, for example, Startnext, Kickstarter and Indiegogo. Posting projects and participating as an investor are often free of charge. If the required sum for the realization of the projects comes together, many platforms demand a commission.

Crowdfunding in Germany

Overall, the overall market for crowdfunding in Germany is growing rapidly. In particular, the profit-motivated forms of financing – i.e. crowd investing – are enjoying increasing popularity. According to the Crowdinvest Market Report 2019, the overall market for crowdinvesting in Germany increased by over 40 percent in the past year. Accordingly, around 422 million euros were invested in 2019 – in 2018 it was 297 million euros. The main growth driver was investments in real estate projects. In this segment, the increase was even 52.6 percent.