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A cheering group of founders learning the difference between crowdfunding vs. crowdsourcing

Crowdfunding vs. Crowdsourcing: What’s the Difference?

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This article will dig into two increasingly popular methods: crowdfunding vs. crowdsourcing.

Nowadays, small businesses have no shortage of fundraising options. Between family rounds, angel investors, venture funding, and increased governmental support of enterprise and crowdfunding, it’s never been easier to expand a new venture.

Crowdfunding and crowdsourcing are similar in many ways, but they’re inherently different in others, which is why he have created this explanation to distinguish between crowdfunding vs. crowdsourcing. While they’re both used to leverage community collaboration to raise money, crowdfunding focuses on procuring funds while crowdsourcing focuses on ideas, skills or services. Here at Saffron, we believe that launching a business should be simple. That’s why we’ve put together a guide for crowdfunding vs. crowdsourcing, and how to use each business strategy to your highest advantage.

Crowdfunding vs. Crowdsourcing for Startups

A crowd of founders learning about the differences between crowdfunding vs. crowdsourcing.

Crowdfunding and crowdsourcing are commonly used business strategies for startups in particular. This is because they rely on networking and strong outreach campaigns rather than established relationships with high-tier investors. Out of any option for funding or business expansion, this is one of the most accessible. All that’s needed is a strategy to pique the interest of potentially interested backers and customers, and a way to keep track of funds while doing so.

Crowdfunding

Definition of Crowdfunding

Crowdfunding relies on donations and fund pledges from external sources. The startup business promises a reward to these outside funders in order to motivate them to give. It’s an excellent way to raise capital while also promoting a startup’s primary goods and services. For instance, a designer could offer a free garment to funders who have given over $100, or a business consulting company could provide a free monthly trial for those who donate over $1000.

The history of crowdfunding is only slightly over two-decades-long, with the first recorded successful crowdfunding occurring in 1997 when British rock band Marillion, crowdfunded from fans to finance their North American reunion tour. Now, there are plenty of crowdfunding companies like Kickstarter, Indiegogo, and Rocket Hub.

Types of Crowdfunding

Debt-Based Crowdfunding

Also known as crowdlending, people who put money into the business with debt-based crowdfunding expect interest payments from the startup. While this method of crowdfunding is the most similar to traditional business funding strategies, interest rates are much lower than local institutions. This makes it a great alternative for small businesses looking to expand.

Reward-Based Crowdfunding

A happy crowdfunder receiving her reward after a successful raise.

This type of crowdfunding promises its donors a service or product in return for their contributions. It’s also known as seed crowdfunding.

With the reward-based crowdfunding model, one doesn’t have to give expensive gifts to the contributors. For example, an inexpensive piece of jewelry or clothing from a jewelry or apparel start-up will suffice.

This is a very founder-friendly option if no additional goods need to be purchased for the production of the reward. If the startup already has a stock of products or if a service can be provided with no additional cost to the company but time, a startup owner can market and raise funds simultaneously.

Donation-Based Crowdfunding

An entrepreneur reading about crowdfunding vs. crowdsourcing on their laptop.

This is the simplest form of crowdfunding where the entrepreneur solicits for funds and people contribute without any expectations in return.

Donation-based crowdfunding is popular for causes and charities, although some for-profit business models have used it. It’s typically used by small business owners with no other access to any capital. Sending gracious thank you notes is a small token of appreciation that donation-based startups use to maintain loyalty and encourage future donations.

Equity-Based Crowdfunding

Also known as investment funding, this type of crowdfunding entails offering private company securities for investment in a business venture. Equity based crowdfunding is highly regulated and undergoes a lot of security checks.

Essentially, the group of investing companies provides small business owners the funding for their business in exchange for a small share of the business.

Related: 15 Low-Cost Franchises Worth Considering

Crowdsourcing

A founder reading about the differences between crowdfunding vs. crowdsourcing on his laptop.

Definition of Crowdsourcing

Crowdsourcing, on the other hand, has been in existence since 1714. The word “crowdsourcing” didn’t officially emerge until 2006, courtesy of author Jeff Howe’s work in Wired Magazine.

An example of historical crowdsourcing includes the 1936 contest by Toyota to redesign their logo, where they received over 25, 000 entries and identified the design with three Japanese Katana letters as their winner. That logo has gone on strong for decades.

Another is the designing of the Sydney Opera House, which was also a contest that attracted 233 entries globally from 32 countries. The winning design still stands today and is considered one of Australia’s most innovative landmarks.

As you can see, crowdsourcing can be a great way to rebrand or revitalize an existing company or to drum up interest in a startup for the very first time.

Types of Crowdsourcing

Crowd Contests

A presentation of a user interface at a crowdfunding conference.

This is the most common form of crowdsourcing because they offer a wide array of candidates to choose from. The startup provides a description of a task with a deadline, then many candidates propose an approach. Finally, the winner with the best approach is picked; depending on the funds available for the startup, the winner can be paid for their idea. Sometimes, crowd contests use an entry fee in order to gain funds. It’s a great approach for creative projects and smaller engagements.

Crowd Challenges

This crowdsourcing involves a challenge that brings a self-organized crowd together. The first step is to post the challenge on the internet and recruit a crowd to work on it. The crowd forms teams that compete to offer the best answer to the challenge and the winning team gets compensated. This type of crowdsourcing is used in innovation of products and services, and often involves a high-ticket bidding process.

Macro Tasks

With this crowdsourcing option, you can source for specific skills for a very specific job. A crowd is invited to perform the task and a single person in the crowd with the best idea is picked. The ultimate winner can be paid for their idea.

Now that you know the difference between Crowdfunding vs. Crowdsourcing, which one is for you?

Crowdsourcing funds for startups is essentially just a branch of crowdsourcing. If you’re looking for funds for your startup, crowdfunding is the way to go. If you’re looking to source services or end products to drive business results, then “crowdsourcing” is the right choice.

Key Takeaways of Crowdfunding vs. Crowdsourcing

A group of student founders learning about the differences between crowdfunding vs. crowdsourcing

Regardless of the size of your startup, it is important to know the difference between crowdfunding vs. crowdsourcing, as both crowdfunding and crowdsourcing can be a great way to inspire potential investors, funders, clients, and customers to explore your goods and services. For companies with a clear vision and fully developed product, crowdfunding can be a simple way to increase cash flow so that funds are available to keep providing this product. For companies open to development and change, crowdsourcing opens up opportunities for funding alongside innovation.

To help kickstart your crowdfunding process, and quickly incorporate your startup and gain access to on-demand growth services hassle-free, check out Mata for creators. With our startup business solutions, your crowdfunding and crowdsourcing initiatives are made simple and easy.

 

Related: What It Takes to Make a Startup in 2019

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