In the past, if you or a group of people wanted to start a business and required capital – there were only a few options. You could borrow a loan from the bank or raise money from friends, family, and investors. Or, pool all your savings together and bootstrap the project by yourself. All of this was time-consuming or required multiple legal formalities to be completed. Now, a new option is available – crowdfunding.
What Is Crowdfunding?
Crowdfunding is any financial method that involves taking small amounts of money from a large number of people. It works through individuals or organisations who invest or donate to crowdfunding projects in return for a potential profit or reward. Crowdfunding is also mostly done online, whereas other forms of financing mostly occur offline.
Types Of Crowdfunding
Now that you have a grasp of what is crowdfunding, let us focus on the different types of crowdfunding methods available.
1. Equity Or Securities Based Crowdfunding
This crowdfunding investment provides opportunities for people to invest in startups in exchange for equity or shares in the company. There are limits on how much investors can invest through equity crowdfunding. These limits depend on the investor’s income bracket and net worth.
2. Donation-Based Crowdfunding
Certain crowdfunding sites allow donation-based crowdfunding where people give money to a business, individual, or charity for nothing in return. They’re simply contributing to a cause or organization that they support.
3. Reward-Based Crowdfunding
You can organize crowdfunding for business where donors receive a reward in exchange for money. The rewards vary by the size of the donation, which incentivizes higher contributions. With reward-based crowdfunding, people can pledge money to creative projects, a novel piece of technology, or any other product or service. For example, a DJ or musician can raise money from sponsors in exchange for a copy of the new album or merchandise.
4. Loan-Based Or Peer-To-Peer Crowdfunding
There are certain crowdfunding platforms that allow peer-to-peer lending that helps companies bypass the banks. You lend money to individuals or companies in return for a set interest rate. Peer-to-peer lending allows individuals to obtain loans directly from other individuals without a bank or other financial institution acting as a middleman.
Benefits Of Crowdfunding
What is crowdfunding most beneficial for? It works best for individuals and SMBs. This will highlight the key advantages of choosing to launch a crowdfunding campaign instead of choosing the traditional route.
- Crowdfunding is an easy method for investors to diversify their portfolio with a low level of risk involved as it is not directly impacted by the stock market
- The process of investing in a crowdfunding campaign is easy with a large pool of suitable investment options available
- For companies, crowdfunding can be a great way to generate interest and early adopters for their products. Investors can double as brand ambassadors for the business
- Crowdfunding allows startups to bypass traditional financing methods which have a lot of competition
Risks Associated With Crowdfunding
Crowdfunding is a new concept and comes along with a certain set of risks for both the business and investors.
- A crowdfunding campaign requires a lot of hard work, marketing, and promotion that is effective
- There is a probability that the company does not achieve the donation target amount and may not be able to successfully launch in the market
- Crowdfunding requires educating and informing investors that generates awareness and leads to sponsorship
- The business you invest in through crowdfunding platforms may go bust and you may not receive any return on your investment including the original amount
- The shares of the company owned through crowdfunding are not listed on stock markets and thus may be difficult to sell, if needed
As a business, online crowdfunding is a fairly simple process. There are many crowdfunding websites available where you can register your company. Once an account is set up, create a campaign with all the details. Some of them include
- Project details like product or service offered
- Creating marketing materials like a video with all relevant information for backers
- Financing details with goal amount, money raised till date, equity (if offered), any rewards, number of sponsors, last date for investing, etc
Lastly, once the campaign is live, promote it among friends and social media and provide regular updates to investors.
Best Crowdfunding Websites
There are many crowdfunding sites available for a business today. Here is a list for all different kinds of crowdfunding needs.
Kickstarter is an enormous global community of over 15 million people. It helps artists, filmmakers, designers, musicians and other creators obtain resources and support. Kickstarter follows an “All or Nothing” model where if the goal amount is not raised before the deadline then everyone gets their money back. Kickstarter charges a 5% fee on the total amount collected and a payment processing fee separately.
If you are looking at crowdfunding for business, this is one of the most popular marketplace platforms. With this platform, you don’t have to have a deadline for raising money. You can apply equity, offer securities, revenue sharing and even cryptocurrency sales. Moreover, you can directly sell your product to Indiegogo’s network of consumers. Indiegogo charges a 5% platform fee for all projects.
Ketto is among the well-known crowdfunding sites in India. It allows individuals and NGOs to raise money via friends, family, relatives and well-wishers for social, creative and personal causes. The platform fees are 4.5-5% of funds raised, additional taxes, and payment processing fees. Also, Ketto has sections such as ‘Urgently Fund Required’ and campaigns that can provide ‘Tax Benefit’ to donors.
Wishberry is a rewards-based crowdfunding platform based in Mumbai. It accepts projects for film, music, dance, theatre, art, design, photography, comics and publishing. This website is strictly for creative projects. Beneficiaries must submit their project proposal for approval post which they can begin raising money. Their fees start at Rs.2,499 and upwards based on different categories.
Milaap is an online crowdfunding platform that enables anyone across India to raise funds for healthcare, education, sports, disaster relief and other personal causes. An individual, NGO, or social entrepreneurs can register on this site to raise funds. It also offers micro-loans to people in rural areas in the country to support projects related to education, water, sanitation, health, and energy. The platform charges a basic 5% platform fee for its operational and overhead expenses.
Key Tips And Takeaways
- In India, crowdfunding is governed by the rules of SEBI. Please read the relevant investor information before investing
- For a successful campaign, have a unique value proposition and also research the target audience and market t gain traction
- While comparing different crowdfunding platforms, make an informed decision on the various fees and commission levied on the amount collected
Crowdfunding gives small businesses a simple and flexible way to raise money online. To have a successful crowdfunding campaign, it’s important to promote it on all the right channels and provide ample information to investors. And with the increasing number of crowdfunding sites in India, founders and innovators have a range of options to choose from.