Crowdfunding: Feasible means for start-up project funding

Prime Minister, Narendra Modi Launched unique Start UP India – Stand Up India Scheme on 16th January 2016.

Crowdfunding is a type of unconventional finance, which has developed outside of the traditional financial system. Crowdfunding is a technique of raising capital through the joint effort of friends, family, clienteles, and individual investors. This approach taps into the collective efforts of a large pool of individuals, mainly online via social media and crowdfunding platforms and influences their networks for greater reach and exposure.

The crowdfunding model is based on three types of players:

Ø The project initiator who proposes the idea and/or project to be funded.

Ø Individuals or groups who support the idea.

Ø A moderating organization (the "platform") that brings the parties together to launch the idea.

Types of crowd funding:

There are basically four different types of crowdfunding:

(1)  Donation

(2)  Reward

(3)  Equity

(4)  Debt.

In donation type crowdfunding, the crowd gives money or some other resource because they want to support the cause.

In reward type of crowdfunding, individuals forming the crowd give money to a business in exchange for a “reward,” typically the product or service that particular company produces or provides. Reward-based crowdfunding has been made popular by crowdfunding sites that are different from Sterling Funder, such as Kickstarter and Indiegogo.

In equity-based crowdfunding, members of the crowd become part-owners of the company which is raising funds. It can be said that the company sells some or all of its shares to the members of the crowd. As equity owners of the company, the crowd realizes a return of its investment and, assuming the company performs well, receives a share of the profits, in the form of a dividend or distribution.

In debt crowdfunding, the company raising money does not sell shares, but instead borrows money from the crowd. The individuals lending the money receive the company’s legally binding commitment to repay the loan at certain time intervals and at a certain interest rate.

Benefits of crowdfunding:

The advantages of crowdfunding as compared to sources of funding are mentioned below:

Ø A customer base who are already committed to product business person.

Ø The opportunity for business persons to interact directly with their customers, who are also investors of project

Ø -The opportunity to get feedback from businessman’s customers while product is being developed and tested

Ø Free word-of-mouth marketing for businessman’s product through their supporters.

Ø Instead of providing a share to investors, businessman still own their business.

Drawbacks of crowdfunding:

Crowdfunding also has shortcomings. These can include:

Ø There is no guarantee that businessman will reach his funding goal in the set time.

Ø There is Lack of prestige.

Ø It may have negative impact on future financing options. Basically, Crowdfunding is good for projects that require relatively small amounts of capital.

Ways to initiate crowdfunding for start-up project:

Following are some steps to follow for crowdfunding to implement business idea or product.

Wise planning: Planning is an important part of crowdfunding. Since candidates are trying to show people why they should support their product, they need to evidently show them:

Ø What the product is?

Ø Why they should fund their product?

Ø The timeframe for developing their product if their funding goals are reached.

Ø The incentives and rewards businessman will give them for funding of product.

Entrepreneurs must set their goals: 

Candidates need to set goals so their supporters will know what to expect. These goals include:

·        How much funding you need?

·        The timeframe for your funding.

·        How long it will take to develop business or product.

It is important to manage anticipations, so businessman’s supporters can track their progress. Some crowdfunding websites will not allow to post your campaign unless you have a set funding goal and timeframe.

Choose where entrepreneurs would like to post their crowdfunding campaign:

There are a number of crowdfunding websites that let entrepreneurs post their business proposal to attract backers. The websites differ in:

o   The type of business ideas they will accept

o   The people they reach

o   Their requirements (e.g. some will require you to raise funds within a set timeframe)

o   Their fees (some may have upfront fees, others only charge if you successfully raise the funds you set as your goal)

o   How they can help to promote your idea.

Entrepreneurs will need to do some research to find one that best suits to their business needs.

Entrepreneurs must post their campaign:

To attract backers, entrepreneurs should try to make their campaign to be clear. This can be achieved by presenting their business idea in a unique way. If entrepreneurs need inspiration, look at successfully funded campaigns to see what you can learn from them.

Interact with audience:

Entrepreneurs can expand the reach and significance of their campaign by interacting with their audience on channels such as social media. Keeping supporters informed about their progress will also increase the chances of them marketing product to other people.

Entrepreneurs must thank their supporters: 

Once they have raised the funds according to requirement, they should thank their backers and give them the incentives and rewards they promised them. It's also a good idea to keep them in the loop throughout the implementation of business idea.

Legal issues for crowdfunding: Entrepreneurs may need to register for certain licenses or meet certain legal terms and conditions depending on the type of business idea they are raising funds for, and also the type of rewards or incentives they intend to give their supporters.

To recapitulate concept, Crowdfunding is the practice of backing a project or venture by raising financial contributions from a huge number of people.