FinTech Tip: Investor Guide To Crowdfunding, Crowdlending, Crowdvesting, Crowdfinance, Crowd___. Terms 101.

Disclaimer - I am selfishly writing this post so that Small & Midsize Businesses that we support at FundPaaS, can raise capital from what we call CustVestors or customers turned investors by first educating them on the crowdfunding lingo. I am also trying to protect investors and increase financial literacy; a long term passion of mine since completing Morgan Stanley's Reach For Excellence program in 2007 where I focused on bringing financial services to underbanked groups and a few years later, the same passion continued as I started my first FinTech business in 2011, BuckSprout.  One of the earliest Robo-Advisor startups seeking to automate the investment management process for $10 a month. I use to say that we had a 3D vision to Democratize, Demystify and Disrupt the Financial Advisory process. Not sure if it worked but I hear that #FinTech and #Robo-Advisors are the talk of the town nowadays. Perhaps the most expensive lesson I've gotten on timing.

Let's start with definitions:

1) fund

noun: fund; plural noun: funds

1.    a sum of money saved or made available for a particular purpose.

verb: fund; 3rd person present: funds; past tense: funded; past participle: funded; gerund or present participle: funding

1. provide with money for a particular purpose."the World Bank refused to fund the project"
2. synonyms: finance, pay for, back, capitalize, sponsor, put up the money for,subsidize, underwrite, endow, support, maintain; More… (from google)

2) Crowdfunding: (not new by the way)

Yes, is that simple. The crowd, a set of individuals and/or entities, providing money for a particular purpose. Crowdfunding has been around for a long time (1885 has a cool example below) but limited to pooling money without an expectation of financial return (not an investment per se). Until the passing of the JOBS Act in 2012, crowdfunding as an investment using general solicitation means like social media was not possible. Below is a quick summary for how to fundamentally distinguish and parse through crowdfunding portals in the future.

Crowdfunding types 

Crowdfunding (i.e. not investments)

• Donations: the crowd pools funds and donates that money without expecting anything in return other than a great feeling inside and a greater mission to be accomplished. Like curing cancer.
• Rewards: the crowd can fund a company to receive a reward in return like being the main character behind a novel or a simple tweet ;-)
• Pre-Orders: the crowd can fund an early stage product company to help it commercialize a product that backers want. Effectively buying the product early and usually at a discount. Once built, the product is shipped to you. Usually. Perform as much due diligence as you can to avoid fraud.

Equity & Debt Crowdfunding (i.e. investments for financial gain)

• Equity Crowdfunding: through equity crowdfunding, you are taking the financial risk and could very likely lose 100% of the principal invested in an early stage company (e.g. startup operating in a garage). However, the golden rule applies in that high risk carries a probability of a high reward payoff. One of the earliest investors in google, is claimed to have netted 5.1MM shared which is over $3Bn based on today's share price of $600.70. Not your everyday scenario. Not financial advice. Do your homework before you buy equity in an early stage company. Something as silly as a founder dispute can implode a company. To learn more, look up "angel investing".
• Note: the payoff on an equity investment IS NOT overnight and it's usually NOT an income generation strategy. You should expect to hold that investment for at least 5 years until a company has an exit (e.g. sells itself and hopefully for a profit) so that all shareholders can share pro-rata. These investments are typically illiquid, which unlike stocks of public companies, privately held stock doesn't usually have liquidity (lots of people buying and selling it)
• Crowdvesting: a generic portmanteau that joins Crowd and Investing. A new word used to distinguish investing vs. donating by the crowd. As a rule of thumb, treat it with the same level of risk as a equity & debt crowdfunding.
• Debt Crowdfunding: instead of buying equity in an early stage company, you can lend ANY company  or ANY person money. So the financial instrument is the only difference. It's more like an I OWE YOU / LOAN between you and a company that carries an interest rate, re-payment frequency and an expiration date at a basic level. In plain english that means, money in your pocket if the company is solvent and paying back its creditors on a regular basis (monthly, quarterly, semi or annually) interest and the full principal of the loan upon the maturity date (i.e. expiration date). The company can also go under and there goes your I OWE YOU.
• Note: the payoff on a debt investment IS NOT overnight and it's usually an income generation strategy. Financial return can come from the interest repayments, appreciation of the underlying value of the assets used as collateral for that loan or if issued at a discount (see zero coupon bonds issued by the US Government if you want to nerd it out).
• Crowdlending: a type of crowdfunding activity typically characterized by the crowd lending to either a person, as is the case in peer-to-peer lending (P2P) or to a business, which alters the suffix and recipient of funds (i.e. P2B). It's the same thing as Debt Crowdfunding and would typically carry less risk than an equity investment depending on the willingness and ability of the issuer (the borrowing party in the IOU) to repay its debts.
• Synonyms: to crowdfund or to crowdfinance any asset is the same darn thing. At least according to my financial training and google definition above. Funding and Financing are synonyms.

History Brief

The first recorded successful instance of crowdfunding online occurred in 1997, when a British rock band funded their reunion tour through online donations from fans. Inspired by this innovative method of financing, ArtistShare became the first dedicated crowdfunding platform in early 2000s. (fundable) One of earliest incidence of crowdfunding can also be seen in one of the world’s most famous landmarks. "The Statue of Liberty was partially funded by the crowd after the American Committee of the Statue of Liberty, who were tasked with raising the money for the statue, fell short by more than a third and the New York Governor Grover Cleveland rejected the use of city funds to pay for it. That was 128 years ago in the summer  1885" source

The statue’s savior came in the form of renowned publisher Joseph Pulitzer who decided to launch a fundraising campaign in his newspaper The New York World. For the curious and history buffs (ehm fellow nerds, go here)

Equity | Debt Crowdfunding Timeline

More here: FinTech $50MM answer to the SMB Funding Question

It's just becoming apparent to folks entering the industry from traditional financial services backgrounds, that educating even the most sophisticated investors is still necessary as many of them tend to confuse crowdfunding as only something related to donations or rewards given that the earliest pioneering platforms, Kickstarter (est. 2009) and Indiegogo (est. 2008) are NOT investment platforms. They are portals where anyone willing to support any cause, small business or otherwise, can pool funds together to get a product, t-shirt, public mention, perks, etc in return but not a check in the mail.