Crowdsourcing versus Crowdfunding: What Is the Difference?

You can rally your online crowd to conquer your own part of the world. Crowdsourcing and crowdfunding are about connecting people at a local level to create businesses that will benefit communities. Although the world is operating more and more as one global community through social media, people rely on local communities for bare necessities.

Crowdsourcing

Crowdsourcing is the online gathering of a group of people to share knowledge and wisdom to build a better product. Crowdsourcing first gained prominence in the world of programming in what was called open source. Open-sourced programming was a way for companies to leverage the collective coding power of essentially freelance programmers so that they could deliver a great product (code).

By opening it up to other programmers, people were allowed to clean up, fix, and/or improve the code. The theory was that opening up the proprietary code to the crowd wouldn’t make competitors but compatriots. The crowd would work together to make it better.

Most recently, this concept expanded into online collaboration through mediums like Wikipedia, an online encyclopedia of sorts, where the crowd’s wisdom fills the pages. Anyone is free to edit it, and together the information is more powerful than any one person could create.

Crowdfunding

It was only a matter of time before this community involvement moved into the financial arena. And in reality, it already had.

Donation-based efforts

The American Cancer Society (ACS) has been crowdfunding for decades. It hosts events like Making Strides Against Breast Cancer, in which teams form to raise money to fight cancer. Large groups of people pool donations together for a good cause — in the case of ACS, to the tune of half a billion dollars since 1994! However, any charitable giving, whether to a church, National Public Radio, or AIDS walks, is really crowdfunding.

And the crowdfunding concept doesn’t apply just to charity. Politicians crowdfund their re-election campaigns all the time. The theory is, if they can actively engage voters with campaign contributions, those voters will have a vested interest in the success of the candidate.

Unfortunately, this can also be seen as one of the biggest problems with politics. Politicians are constantly out there looking for capital to fund their campaigns . . . so much that they aren’t always focused on policy.

One of the reasons for President Obama’s 2008 success was his ability to harness the power of crowd donations. His campaign was able to raise over $50 million from over a million passionate followers. These people spoke not only with their voices but also with their wallets.

Instead of relying on individual large contributors, the Obama campaign went to hundreds of thousands of Americans and asked them for small contributions. It was the difference between winning and losing for Obama. It also shows you the power of pooling small dollar contributions together.

Most recently, people have used crowdfunding to raise money for art-related projects. Probably the most well-known platform for doing so is Kickstarter. Started by a guy who wanted to raise money to put on a concert, Kickstarter has become a crowdfunding phenomenon where people from all over the world are helping to fund mainly art-related projects — to the tune of $250 million in 2012!

Microfinance projects

Back in 1983, a man by the name of Muhammad Yunus started the Grameen Bank. The goal was to leverage the undeveloped skills of the poor by providing the money to entrepreneurs to create businesses. The unique feature was that there was no collateral. The bank would provide micro-loans to borrowers (98 percent of them being women). Peer pressure would ensure that borrowers followed through with repayments. It was so successful that Yunus went on to win a Nobel Peace Prize.

Although Yunus’s efforts were funded by microfinance organizations and community development banks, individuals like Matt Flannery and Jessica Jackley saw the ability to expand the opportunity by allowing the crowd to step in and pool their resources in the same way to help entrepreneurs in the developing world.

Their story led to Kiva. Kiva allows people in developing countries to lend money via the Internet to people in developing countries. Kiva doesn’t pay out any interest on the loans it facilitates. People do it to help others around the world, to be a part of something other than themselves, and to build a stronger global community.

Crowdfund investing

Over time, people have become comfortable giving to causes they believe in or entrepreneurs in the developing world who need financial assistance to create their own jobs. Now they’re bringing these concepts home. Instead of just giving your money away because it feels good or is the right thing to do, now you can do so and own shares of stock in that business!

For decades investors have been used to investing in Fortune 500 stocks listed on public exchanges. Now you’ll be able to invest in businesses in your own backyard.

Although some of these businesses may have the potential to be high-growth businesses, not all of them will have the ability to make you rich. They will, however, provide tangible benefits that money invested in a Fortune 500 company can’t provide — benefits like convenience, service, and a sense of community.

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