What is Crowdfunding?

22 January 2018 | 1602 Views | By Mint2Save

Even a big idea starts with a small start. Wanted to start your own business, but don’t have the financial resources? Where would you take the money from? Your Parents, Banks, Relatives, Friends. Ever thought of raising money from the public? No, no we are not talking about bringing an IPO and listing your start-up on the index, we are talking about the swag new way of raising funds, known as “Crowdfunding”.

What Exactly is Crowdfunding?

Putting it in simple terms, it is a method of raising funds from the public by listing/expressing your idea on a platform. With the power of the internet, every process of Crowdfunding is done online, from listing your idea to asking for money, you can raise funds for your dream project sitting at your home with a click of a button.

The crowdfunding model revolves around three types of people:

the project initiator who proposes the idea that is to be funded
individuals or a group of individuals who support the proposed idea; and
a moderating organization (usually known as the “platform”) that brings the parties together to promote the idea.

Getting to the Point – Why is it Different?

10 years back, when you had to raise funds for your next venture, you had to go to the tedious way of creating a marketing plan, setting up meetings with bankers, venture capitalists (that too if they agree to meet you!), explaining the viability of your idea to your friends and family members and working on your plan side-by-side.

With crowdfunding, it provides you with a platform online where you can demonstrate/ share your idea to the public and it automatically gets displayed to the interested parties, drastically reducing the time and resources required to market your idea to the right public. It gives a platform to those voices and makes them readily accessible to those who want to invest here.

From people’s point of view, you don’t need to have millions in hand nor you are required to be a venture capitalist to invest in the start-ups. This is the best part of Crowdfunding, where essentially the crowd comes in to fund the venture, so as an individual you can invest as low as Rs. 500 on an idea or choose to fully fund the project, whatever suits you!

Types of Crowdfunding

Crowdfunding can majorly be identified to be of three broad types:

Rewards crowdfunding: Entrepreneurs presell a product or service to launch a business idea without incurring debt or sacrificing equity/shares. For instance, investing in new video games is a popular crowdfunding source for investment for gamers, who are rewarded with advance prints of the game.
Equity crowdfunding: The investors in this type of crowdfunding receive shares of a company, usually in its early stages, in exchange for the money pledged. Equity crowdfunding is attaining increasing popularity as it allows startup companies to raise funds without losing control to venture capital investors, and it offers investors the opportunity to acquire an equity position in the venture. The Securities and Exchange Commission (SEC) regulates investments in equity-based crowdfunding ventures.
Debt Crowdfunding: Investors under this scheme receive their money back with interest. It allows for the advancing of money while bypassing traditional banks.

Applications of crowdfunding

Crowdfunding is also being explored as a potential funding mechanism for many creative works such as blogging and journalism, music, independent film and for funding startup companies. It is being used in various fields to raise finance. Some of the examples of the same could be:

Food and agriculture: Several crowdfunding platforms have arisen that allow people to invest in food and agriculture-related opportunities. Examples of these are AgFunder, PieShell etc.

Journalism: In order to fund online and print publications, journalists are resorting to crowdfunding. Crowdfunding allows small start-ups and individual journalists to fund their work without the institutional help of major public broadcasters. Stories are publicly pitched using platforms such as Kickstarter, Indiegogo, Spot.us etc.

Science: A large number of platforms have also appeared that specialize in the crowdfunding of scientific projects. It allows young scientists to apply for their own projects in their careers early phase.

Benefits of Crowdfunding

The fundraiser can get instantaneous response for your idea. It reduces the amount of time spend on ideas that turn out to be unviable.
It is a fast way to raise finance with no upfront fees involved.
It can test markets and assess demand the proposed project.
It can establish a marketing platform that resonates with the target market.
Constant feedbacks at each stage of crowdfunding process, improvises the project before it is launched on a larger scale.
It decreases the cost of retail fundraising.
It increases the network of funders

Disadvantages of Crowdfunding

Failed projects damage the reputation of the business and people who have pledged money into such projects.
Public display of an idea or venture attracts the risks of it being copied.
Gaining the trust of the investors for the proposed project is also a difficult task.
High fear of misuse, it is the likelihood of a scam or an abuse of funds.
No direct physical interaction with the investors.
Crowdfunding technique isn’t a tool to raise crores of money for a big project.

Summary

Weighing all the pros and cons of crowdfunding is a great way to ensure that fundraiser gets started on the right foot. A fruitful crowdfunding campaign can serve as an optimistic signal for other funders and can help attract more funding or funding at better terms. It is important to consider all the options and go with the one that rewards the most for the time and effort that have been put it.

Crowdfunding isn’t just limited to financing or raising money for the next million dollar idea, it is being used for social causes too! People who are not financially able, can raise money for operating on a critical financial ailment, or an NGO can raise money for filing RTIs, or looking at the latest news trending, even a sportspersons like PT Usha are trying to raise money using crowdfunding to open her dream school of training future girl athletes.