Understanding Music Crowdfunding: Definitions & the Four Types

An excerpt from Crowdfunding For Musicians: Understanding Music Crowdfunding: Definitions and the Four Types of Crowdfunding (August 2012).

Defining Crowdfunding

Ethan Mollick provides a reasonable definition of crowdfunding in his draft document, The Dynamics of Crowdfunding: Determinants of Success and Failure (July 25, 2012, p. 5):

“Crowdfunding refers to a variety of different efforts by entrepreneurs – cultural, social, and for-profit – to fund their efforts by drawing on relatively small contributions from a relatively large number of individuals using the internet, without standard financial intermediaries.”

That’s pretty good given that crowdfunding tends to occur using web-based platforms to get a lot of people to provide funding in small amounts. In addition, I’m quite comfortable with the term “entrepreneur” being applied to artists given that crowdfunding specific projects does have an entrepreneurial element.

However, this definition is time-sensitive. “Standard financial intermediaries” refer to recent history. Crowdfunding platforms are currently non-standard financial intermediaries that will eventually become the most recent standard intermediaries.

Mollick does not include microfinance which can cover a variety of financial services to micro-entrepreneurs. I consider the lending aspects of microfinance to be one of the four types of crowdfunding.

The Four Types of Crowdfunding

The four current types of crowdfunding are:

Donation-based – supporters make donations

Lending-based – supporters loan money

Reward-based – supporters provide funds in exchange for rewards

Equity-based – supporters provide funds in exchange for equity

Though this approach to categorizing crowdfunding is readily apparent, depending on your definition of crowdfunding, one source that has been widely cited in the press is a recent study from Crowdsourcing.org.

Currently most discussions of crowdfunding center around reward-based crowdfunding, as practiced on such sites as Kickstarter, and equity-based crowdfunding, which is already legal in the UK and possibly other nations as well. Equity-based crowdfunding, or what I sometimes term “crowdinvesting”, is coming to the States via the recently passed JOBS Act.

Crowdfunding Music

This blog and most discussions of crowdfunding music focus on reward-based crowdfunding. Typically musicians and music-related companies set a funding target and offer various rewards arranged in tiers based on amounts pledged. These rewards usually include whatever is being funded, i.e. a record album on vinyl or tickets to a performance on a tour, in which case crowdfunding becomes a form of presale.

However, rewards are often a heterogeneous mix of the products or events being funded, acknowlegement of support such as listing in album credits and special experiences such as house concerts.

To further complicate matters, supporters will sometimes contribute funds above those required for a particular reward level without expecting additional return. Such actions add a donation element to reward-based crowdfunding.

Of course, if you’re not worried about a strict definition, you probably already recognize that music crowdfunding typically entails musicians or music-related companies funding whatever it is they need to do by collecting funds from a large number of self-selected individuals who are offered rewards for their contributions. Currently this process is facilitated by crowdfunding platforms though some folks will go it alone with hacked together setups or such tools as IgnitionDeck.