Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Nov 19, 2012

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Crowdfunding has become a billion dollar industry, according to a Crowdfunding Industry Report.

The report by Crowdsourcing.org, a neutral professional association, stated that in 2011, nearly $1.5 billion was raised by crowdfunding platforms (CFPs) — and that number is only expected to rise. The total number of CFPs was 452 in April 2012. It is estimated to rise to 536 by December 2012. Some of the prominent websites include Kickstarter, IndieGoGo, ProFounder, Rockethub, and MicroVentures, among many others.

Crowdfunding on platforms such as Kickstarter does not include types of business loans where equity or payment must be given. Instead of offering company equity in exchange for the business loans, as some websites offer, new platforms like Kickstarter promote pre-determined gifts for their monetary donation. For instance, bands might offer their new album, while writers might give away a copy of the book they are raising money for.

Crowdfunding build companies off of community support rather than high interest business loans. Supporters who donate might receive a small gift, but they usually donate because they believe in the project. Whether for credit issues on business loans, or other reasons for lack of funding, many successful projects would not be around today if not for crowdfunding.

There are three crowdfunding models: donation, lending and equity.

Kickstarter runs off of the donation model, and has become the most popular crowdfunding website with more than five million visitors and nearly 3,700 ongoing products. The organization started in 2009 and has launched over 76,600 campaigns with an average of 32,000 being successful. Kickstarter alone has raised nearly $350 million for successful campaigns.

Another major website, IndieGoGo, has funded 100,000 projects from more than 196 countries.

According to the Crowdfunding.org report, more than 1 million successful campaigns occurred in 2011. Although donation-based campaigns were more frequent, the equity-based campaigns were larger in monetary size.

Now that technology has erupted in this format, regulation will ensue.

President Obama’s Jumpstart Our Business Startups (JOBS) Act goes into effect in January 2013. The JOBS Act will soon cap crowdfunding lending at $1 million, significantly smaller than some of the most successful campaigns yet. The new JOBS Act is expected to increase opportunities for businesses and therefore create more jobs.

Previous successful projects missed the regulatory mark and skyrocketed past their initial donation estimates. One highly profitable example was for video game developer Chris Roberts. Instead of turning to business loans to finance the upcoming “Star Citizen” game, he turned to a crowdfunding plug-in IgnitionDeck. Roberts’ fans paid $6.22 million to finance the new game, turning it into the most profitable crowdfunded video game.

“Crowdfunding should be about what the people want,” Roberts said in a Crowdsourcing.org release. “If [backers] are telling you how they want to spend their money, you should listen to them.”

Despite the millions of campaigns, the craze is not stopping. According to reports, the estimated worldwide crowdfunding is estimated to reach $2.8 billion by the year’s end.