Crowdfunding: What It Is, How It Works, Popular Websites

In the late 90s and early 2000 when a project or a company required capital to start they would take help from friends and family or borrow from financial institutions. Gradually, angel or VC investors joined the market. A new addition in the late 2000s was crowdfunding.

What Is Crowdfunding?

As understood from the name, crowdfunding is a way of raising money from a large number of people to finance projects and businesses. Crowdfunding makes use of social networking through online platforms to raise crowdsourced funds to achieve an objective.

There are basically four types of crowdfunding which are:

• Rewards:

It is the practice of donating to a business with the expectation of receiving a non-financial reward at a later stage.

• Donation:

This form of crowd funding is offered for nothing in return. It mainly works by rewarding people to raise funds for various charitable causes. The people who back the project or the company fully work to support it and do not expect any ownership or rights to the project.

• Debt:

Debt-based crowdfunding is the process of raising funds from individuals, in return for interest. A large number of retail investors, to remove the middlemen, lend money to a business. Two popular forms of debt-based crowdfunding are peer-to-peer lending and invoice financing.

• Equity:

It is a rigid form of raising funds by offering the company’s securities to investors in exchange of capital.

How Crowdfunding Works?

Crowdfunding decreases dependency on traditional fundraising methods. Most crowdfunding campaigns work with a set of goals or social mission that can draw interest of users. It is mainly used by startups as an early-stage investment and can help in developing brand, product, or service awareness.

From the investors’ standpoint, crowd funding can be profitable as they get to invest small amounts in multiple ventures, helping in a diversified portfolio. But investors must be sure that the funds are used for a credible cause. Crowdfunding offers investors greater liquidity than traditional investment channels. Additionally, the investors can be a part of the project which otherwise they may not have access to.

Crowdfunding has its own set of risks. Crowdfunding is mainly done online because of easy accessibility and scalability. Record keeping also is easier when done online. But nowadays it carries the potential threat of frauds and scams. Subsequently the fear of losing the entire investment remains, especially for first time investors.

So, there are regulations on who can fund and how much. These constraints are primarily imposed to protect the non-wealthy investors from putting the lion's share of their savings at risk. It is worth mentioning here that the success of a business is not dependent on funds only. It needs a practical business plan, networking, etc. Despite a strong financial backing, many start-ups may fail in their early stages of growth.

Crowdfunding Causes

Conventional crowdfunding is done to introduce a product or service or to support individuals affected by a tragic event, natural disaster, or a serious medical condition. Recently, some crowdfunding platforms are offering their support to creative people like artists, writers, musicians, or podcasters to encourage their creative work.

Some Popular Crowdfunding Websites

In India crowdfunding is a pretty new concept but it is slowly picking pace. Many start-up companies and businesses, mainly those in the medical and social impact sector, have benefitted through online crowdfunding. Some of the popular crowdfunding platforms in India are as follows:

• The HotStart:

This popular crowdfunding website has funded various projects, including medical care, education and food and beverage. It charges 10% of the funds raised.

• Indiegogo:

It is a reward-based platform that has a community-based approach. Indiegogo offers both fixed and flexible funding. For fixed funding the company or the individual must set a goal for a certain amount of money. If the target is not met, all funds are returned to donors. Flexible funding allows any amount of monetary support. There is no need to set any kind of goal for this offering.

• GoFundMe:

The site allow donors to choose their campaigns and make donations through payment processors. It is mainly used for charitable initiatives but businesses can also gain from it.

• Ketto:

It is a Mumbai-based crowdfunding platform supporting projects related to healthcare, education, sports, animal welfare and personal care. It offers a cash pickup facility and also provides tax benefits to backers.

Most crowdfunding sites have specific rules. So one should read these rules thoroughly before choosing a platform.

Conclusion

With the government's Start-up India programme, young companies are looking for convenient ways to raise easy and quick capital. And this is why crowdfunding happens to be a viable platform to reach out to people who can help new ventures in India.

In crowd funding a business venture in its nascent stage raises funds from different people either through donation or investment via a specified online platform. This brings us to a very crucial question involving transparency. Recently with many doubtful crowdfunding platforms, it is important for the start-ups to become more transparent and easily traceable.

Though SEBI has declared digital equity crowdfunding platforms as illegal, funding through donation/reward based crowd is completely legal in India. But crowdfunding is not an easier process.

If you are not certain about how to raise money for your business, then avail of a business loan. IIFL Finance offers business loans that can be used either to start a new set-up or manage the day-to-day operational expenses of the business. IIFL Finance offers loans at competitive interest rates and flexible repayment terms. For more details approach the nearest branch or log in to the company’s website.