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.
