As our everyday demands continue to evolve in conjunction with technological innovation, startup companies are rapidly proliferating to fill these previously non-existant needs. While most startups fail within the first few years, recent successes have proven to be quite lucrative. Companies such as Uber and Airbnb have taken simple business ideas and transformed them into multi-billion dollar companies. These exorbitant valuations aren’t realized from day one, and during the initial growth phase, a startup can be quite dismal. Raising the necessary capital to take a new company live is the most common problem faced by startups. Crowdfunding has been popularly utilized as a means for new companies to source initial investments. While still relatively new, crowdfunding has developed into a legitimate means of raising capital. (For more, see: What Crowdfunding Means To Investors.)

Crowdfunding

Crowdfunding is the practice of funding a company or project by raising capital from a large number of investors, rather than a small group of wealthy individuals, a bank or an issue of stock. Since the advent of digital technology, crowdfunding is typically done via the internet. As of 2013, the crowdfunding industry boasted $5 billion for numerous businesses and startups. 

Crowdfunding can be done in a number of ways. Donation-based crowdfunding typically facilitates the production of goods. Investors contribute to a project in exchange for future goods or services. Donation-based crowdfunding has been made popular by platforms such as Kickstarter and Indiegogo. Conversely, investment crowdfunding is when many small investors (the "crowd") exchanges money for securities. This can be done by lending crowdfunding or equity crowdfunding. Lending crowdfunding is when investors lend money to a company with the understanding the loan will be repaid with interest.  Equity based crowdfunding allows business owners to source investments in their startups by offering equity in the business. The Lending Club, Crowdfunder and SeedInvest are notable platforms in investment based crowdfunding. (For more, see: Crowdfunding for equities? Fool's Gold.)

The Lending Club

As a leading platform in lending crowdfunding, The Lending Club offers a more transparent alternative to traditional banks. Borrowers are prescreened for credit worthiness and given an instant quote for their desired loans. Likewise, investors can build a portfolio of loans that receive monthly payments and interests. Claims of better interest rates for borrowers and higher returns for investors have made The Lending Club a popular crowdfunding platform and alternative to traditional bank loans.

CrowdFunder

While The Lending Club operates on a small scale between individual borrowers and investors, CrowdFunder connects entrepreneurs with investors around the world in order to facilitate the company’s growth. Entrepreneurs seeking investment capital are provided with a robust investor network within the Crowdfunder online platform, while investors look for the next Apple or WhatsApp being developed in a garage. With access to global funding markets, users of Crowdfunder have a wider access to capital and growth.

SeedInvest

Similar to Crowdfunder, SeedInvest is a leading equity-based crowdfunding platform connecting investors and borrowers.  Since its opening in early 2013, SeedInvest has raised over $285 million in collective investor interest and $15 million in total capital raised. SeedInvest differentiates itself from other investment crowdfunding platforms by offering investors its service free of charge. Typically, equity based crowdfunding platforms keep a percent of returns through carried interest. As a result SeedInvest makes money from offering a more premium service for startups listed within its databases.

The Bottom Line

As of April 2012, The Jumpstart Our Business Startups Act (JOBS) was passed in order for small businesses to source funds from non-accredited investors. Typically startups and small businesses would have to take out a bank loan to raise initial capital. As a result of the JOBS Act, the crowdfunding industry can continue to operate and grow in its current space. The phenomenal success of crowdfunding shows the public's support for startups and small business projects. Notably, Indiegogo and Kickstarter have witnessed much success as leading reward based crowdfunding platforms. For entrepreneurs seeking large investment capital, Crowdfunder and SeedInvest offer services to connect companies to a large number of investors.  As small industry and startups continue to grow, the crowdfunding industry will grow to meet their demand for funds.