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There has been widespread confusion over these two terms: Crowdfunding and ICOs in new-age startups fundraising. Even though being closely related in terms of technicalities, still there exists a thick line difference between the two. Let’s get to know them one by one below.
Crowdfunding
Crowdfunding is a process of raising funds through mutual efforts of family, friends, individuals, investors, etc. It is a method of raising the monetary contribution for funding a venture or a project primarily via the Internet.
This is very different from traditional arrangements of business finance. Traditionally, when firms want to raise capital or launch a new product, they rely on banks, investors, and venture capital firms. This limits their option to a few key players leaving no room for the new sources of finance.
This allows entrepreneurs to raise millions of funds from anyone willing to invest by providing wide fundraising options. Crowdfunding platforms like Kickstarter and Indiegogo allow millions of accredited customers to connect, centralize their fundraising campaigns and eliminate duplication of efforts.
How does it work?
This is an emerging sector that is still developing. It offers a wide spectrum of fundraising campaigns for finance, community-based projects, etc. Crowdfunding websites offer an overview of the project that one has pitched for and allow to invest and gain various other details about the project. There, details include information about how much a company wants to raise, the purpose of seeking funds, how many investors have already invested, returns, etc. Investors also have a 14 day “cooling period” in case they want to change their mind.
Types of Crowdfunding
There are different types of these methods namely reward-based, donation and equity:
Donation-based can be understood as a campaign where there is no financial return to the investor. It includes fundraising for disaster relief, charities, non-profit organisations, etc.
Under Reward-based, investors contribute in return for some reward in the form of products or services offered by a firm. Despite the reward it is still considered a subset of donation-based crowdfunding as there is no financial or equity return.
Equity-based allows investors to become part of the company. Equity owners are entitled to receive the financial return for their investment in terms of share in profits.
So, this was all about it, Now let’s jump to ICO!
Initial Coin Offering(ICO)
Initial Coin Offers have also emerged as a popular source of raising funds, especially for startups. To avoid the expense of an initial public offer and the hassle of convincing a venture capitalist to invest in the company, firms have found a way out using blockchain technology. The ease of transacting and exchanging through crypto-tokens, and the use of smart contracts has captivated firms to rely on the community to raise capital.
ICO is a means of crowdfunding through the creation and sale of digital coins or tokens.
Under ICO, smart contracts assign various functions to the cryptocurrency token holders. These tokens act as shares/stocks entitling token holders with certain rights over the platform’s future. Token holders are free to sell these tokens and close their relationship with the company at any point in time. To know how to invest in ICOs, refer to this article
ICO fulfills two purposes creation of crypto token and crypto coin that has its feature and blockchain. The process of ICO starts with the creation of a white paper that describes the business model, the amount of money needed, the duration of the campaign technical approach, etc. This document defines the maximum number of tokens that can be created. Once created these tokens are then issued for sale to the public.
Now, let’s see the differences they share!!
Difference between Crowdfunding and ICO
Accessibility: Unlike ICO, Crowdfunding projects are confined to a certain region or country. ICO has a greater reach and is accessible to a large number of participants. New token sales attract a large number of people as ICOs are advertised well on social media and other platforms.
Product: Crowdfunding uses a multitude of ways to gather people like textiles, technology, software, etc. Their main aim is to gather maximum investors to make the product launch successful. ICO primarily revolves around blockchain technology and is more tech-savvy. There have been various ICOs for ESports like Unicorn, and banking such as BABB, Bancor, etc.
Return on Investment: Crowdfunding such as donation-based crowdfunding does not provide any returns whereas people always invest in ICO to earn profit. ICO participants get a white paper as proof of their investment and share in the company.
Risk: Any sort of money exchange between parties involves risk. Therefore both ICO and crowdfunding are risky, though the degree of risk varies. Since ICO investment offers returns to the investor, which makes it more risky than crowdfunding.
Regulations and Legitimacy: ICOs are more lenient than Crowdfunds as the main motive of the company holding an ICO is to gain maximum investors. Crowdfunds are more legitimate and regulated as they involve patents, intellectual rights and government. The products undergo various tests to ensure that they are safe for use by the public.
Hope this article will help you resolve your confusion regarding crowdfunding and ICOs. Let us know your thoughts below!!