Fixing The Taxonomy Of Crowdfunding



  • The classification of something

When it comes to the taxonomy of crowdfunding, I think there is some room for improvement.

When I sat down to begin a crowdfunding guide a while back, I referred to four types of crowdfunding: equity, debt, donation and rewards. Most resources I’ve seen have included these four types or some version of them.

An Informed Public

Recently I’ve spent quite a bit of time covering crowdfunding and education. Education is a challenge, and it is part of the reason we launched this site. I think the crowdfunding industry faces educational challenges for a few reasons.

The first and most obvious reason is that crowdfunding is a bit complex. There are all these different versions and permutations, hundreds of platforms and constant innovation. I literally spend almost all of my time trying to keep up and I have a hard enough time. Consider the casual observer…

A second reason is that the media is all over the place with their own terminology and descriptions. Every time a journalist uses the term “Kickstarter investor” we risk a potential backer getting the wrong idea about how Kickstarter works. When the public’s money is involved it is extremely important to speak in accurate terms.

To be fair, the media plays an absolutely critical role in bringing attention to all forms of crowdfunding. It is important that the public knows about this new form of capital formation. The reality is that in digital journalism especially, everyone is trying to be first. Sometimes attention to detail suffers a bit as a result. (I’m certainly not immune to this!)

A third problem is that there is little incentive for the big rewards-based crowdfunding players to be really explicit in how they work and what their rules are. Platform A could put a big notification on all of their offerings: “Contribute at your own risk! No guarantee of delivery!” Platform B could mandate that all rewards say “Donate $50 and maybe you’ll get _____.” However, conversions would take a hit as a result, less offerings would be funded, and platforms would generate less revenue.

The Moment Of Truth

I had a bit of a eureka moment on this subject when I was watching this clip of Sherwood Neiss, principal of Crowdfund Capital Advisors, on Bloomberg’s Money Moves.

Notice he refers to two types: donation and investment crowdfunding. At first I felt something was missing, but the more I thought about it the more it made sense.

Each of these two types has two subtypes. Donation crowdfunding is comprised of rewards and donation crowdfunding. Investment crowdfunding is comprised of equity and lending.

This taxonomy solves a couple of problems:

  1. It defines all types of crowdfunding in two very simple terms… you’re either donating or you’re investing.
  2. Rewards-based platforms may say “Hey, wait a minute… we exchange rewards for contributions. That isn’t donation!” Well, that statement ignores the fact that the contributor needs to be willing to part with his or her funds in the case that the backed project fails.

Education By Design

Investment crowdfunding is pretty cut and dry. However, there are still too many people that don’t fully understand how rewards-based crowdfunding works, and it is the most popular type. I’d argue if one backer doesn’t get it, contributes to a campaign and loses their money as a result of failure without understanding the risks, that is a missed opportunity.

Maybe if we collectively referred to donation and rewards-based crowdfunding as donation crowdfunding, that would help the public understand the risks involved with backing a project.

So, what do you think? Are there really only two types of crowdfunding?