Here’s All You Need to Know About Crowdfunding

This article explores crowdfunding’s meaning, types, sources, benefits and downsides, popular examples, and how to start a successful campaign.

What do you imagine when I talk about a fundraiser? A bunch of fancy celebrities gathered on a New York rooftop, sipping champagne and making pseudo intellectual toasts? Well, gone are those days. In the modern day and age, you have to look no further than your laptop screens. Crowdfunding has become and extremely popular source of raising funds for entrepreneurs and creators. So, if you’re a budding businessman, or just someone with an interesting idea, you’ve come to the right place. This article will tell you all you need to know about crowdfunding.

What is Crowdfunding?

Crowdfunding is a new phenomenon, when a lot of interested persons or individuals invest small amounts to make up the capital for a new project or business venture.

Crowdfunding mainly uses social media to connect entrepreneurs and investors; and basically, just increase the pool of investors, apart from the traditional financial institutions and venture capitalists.

It has created the opportunity for entrepreneurs to raise hundreds and thousands and lakhs of rupees- from anyone who has the money or financial strength to back their project. A forum is provided to creators, to pitch their idea in front of waiting investors. People can invest as little as $10 (approximately 700 rupees).

People use words crowdfunding and crowdsourcing interchangeably. In some cases, it is the same, but not in all. The former means sourcing funds from a group of people, while the latter means sourcing anything from knowledge, information, designs, etc.

Origins of Crowdfunding

Before crowdfunding, a business could be started by only those people who had the means, or those who could attract venture capitalists. So, when you think about it, crowdfunding is really the birth of a necessity. But it might have begun way before you think it might have.

In 1985, Paul Hogan and John Cornell tapped 1,400 Australian investors- to produce the blockbuster movie- Crocodile Dundee. This later became a franchise.

In the 1970s and 1980s, limited partnerships which required minimum investments of no less than $2,000, became a popular form of financing everything- from shopping malls, to oil and gas exploration.

And charities of course, having long relied on funding drives that aggregate thousands of small donations.

What is new with modern day crowdfunding or crowdsourcing is the emergence of powerful internet platforms- all around the world- that enable these funding campaigns. These crowdfunding platforms lower the costs of running a campaign by leveraging the geographic and social reach of the internet to connect fundraisers with millions of potential backers.

Types of Crowdfunding

There are 4 major crowdfunding models. It is convenient to classify them as per what they offer in exchange of the funds they receive. These models are:

1. Equity– Equity based sites like AngelList and CircleUp, provide a platform where people can sell shares of their company. Although, this forms only a small fraction of all crowdfunding activity. There are certain legal and practical constraints when it comes to equity crowdfunding, and there is need for more regulation.
   
   
2. Debt– Today, peer-to-peer lending sites like LendingClub offer a crowdsourced solution for debt. It’s part of a larger revolution in “Financial Teach” or “FinTech” internet software that aims to disrupt the traditional finance industry. While banks typically serve as an intermediary for loans, the peer-to-peer model allows one person, or many, to lend money directly to those who need it. This allows savers to earn more, and borrowers to pay less.
   
   
3. Reward– Rewards based sites are one of the major innovations in crowdfunding. Funders back campaigns that interest them, with the promise of receiving something in return (usually a copy of whatever project they are backing). Kickstarter is the most well-known example of this model, and has been used to fund everything from the creation of albums and short films, to the development of 3D printers and smartwatches.
   
   
4. Donation-There are charity platforms like Causes or Crowdrise. Fundraisers usually do not offer anything in return for donations, except for the information and feedback about the good deeds that those campaigns have enabled.
   
   

Prominent Crowdfunding Websites

Crowdfunding websites provide a forum to connect entrepreneurs with potential investors, by using social media platforms. In exchange, these sites charge a fee, usually a percentage of the amount raised.

1. Kickstarter: As of 2019, crowdfunding is mostly synonymous with Kickstarter, as it is the biggest crowdfunding platform there is: since Kickstarter’s founding in 2009, more than 160,000 projects have been successfully funded on the crowdfunding site, with more than $4.2 billion dollars pledged across all Kickstarter projects.
   
   
2. Indiegogo: Indiegogo started as a crowdfunding site initially focused exclusively on raising money for independent films, but began accepting projects from any category a year after its launch in 2007. Indiegogo is seen as a less strict and more flexible platform than Kickstarter, as it gives backers control over whether want fixed or flexible models
3. Bonfire: This is the best place to fund your products. Bonfire allows individuals and organizations to raise money for their causes and projects with merchandise sales.

• Crowdfunder: Crowdfunder helps start-ups get funding through venture capitalists and angel investors. It has an excellent marketplace and gives businesses the help they need to go from Pre Seed to Series A.

• DonateKindly: DonateKindly specializes in providing free crowdfunding and donation tools for school organizations and teams.

• Fundrise: Fundrise allows individual investors access to private market real estate, a world previously only accessible to large institutions. It’s billed as an alternative to investing in the stock market. 

• GoFundMe: GoFundMe is a for-profit crowdfunding platform that allows people to raise money for events ranging from life events such as celebrations and graduations to challenging circumstances like accidents and illnesses.

What’s in it for the investors?

In the case of reward-based crowdfunding, investors usually get a sample or copy of the product they have invested in. For instance, new video games are a popular crowdfunding investment for gamers, who are rewarded with advance copies of the game.

Equity-based crowdfunding is growing in popularity because it allows start-up companies to raise money without giving up control to venture capital investors, and it offers investors the opportunity to earn an equity position in the venture. 

Elements of a Successful Crowdfunding Campaign

To ensure the success of your crowdfunding campaign, entrepreneurs must look to apply the things mentioned below:

• Have a group of enthusiastic members of your family and friends, willing to invest initially, and spread positive word of mouth
• Make sure you know how to sell your product. Present a viable business plan, and mention the tangible and intangible benefits of funding the project
• Have different rewards for different levels of donation. This tricks the investors into donating more in quest of a better reward
• Staying active on social media sites is important until you have reached your goal, so people keep spreading the word, and funding your campaign

Benefits of Crowdfunding

• Serves as an alternate strategy for firms to raise money
• Even before the product is rolled out, a loyal customer base is created for the product of people who feel like they have a stake in it
• Eliminates the geographical barrier, through the use of various internet platform and social media
• Serves as an extremely effective way of spreading word of mouth, and being able to involve as many people in the funding process as you can

Downsides of Crowdfunding

• Without an extremely compelling story, people might not invest in your product
• On sites such as Kickstarter, you can’t collect the money until the fundraising goal is achieved. If this doesn’t happen, it’s a lot of wasted time and effort which could have been invested effectively somewhere else
• Banks and venture capitalists, apart from providing funds, provide much needed advice and help in the incubation of a business
• There exists a risk of getting sued if a company fails to deliver on the promises made or rewards offered

Popular Examples of Crowdfunding

1. Oculus VR: The American company specializing in virtual reality hardware and software products, was funded through the site. In 2012, founder Palmer Luckey launched a Kickstarter campaign to raise money to make virtual reality headsets designed for video gaming available to developers. The campaign crowdfunded $2.4 million, ten times the original goal of $250,000. In March 2014, Facebook acquired Oculus VR for $2.3 billion in cash and stock. 

• M3D: A company founded by two friends that manufactures small 3D printers. David Jones and Michael Armani raised $3.4 million for their Micro 3D printer on the crowdfunding site in 2014. The tiny 3D printer, which comes with a variety of durable 3D inks to go along with it, is now available at Staples, Amazon, Brookstone and elsewhere, and the company has sales ranging between $10 and $15 million. 

• Notre Dame– The 850-year old French Catholic Cathedral in Paris, caught fire on the 18^th of April 2019. It was a culturally strategic and his historically significant monument. More than 50 crowdfunding campaigns were launched on the Go Fund Me crowdsourcing platform, United States, to restore the cathedral, for visitors to Paris from all over the world. These campaigns hit the $1 billion mark in under a week. This faced criticism from several people, who said if the millionaires and billionaires used this power to help reduce poverty, or help the society, we’d be better off. But this truly goes on to show you the power of crowdfunding.

• Albert Pinto Ko Ghussa Kyun Aata Hai– This film released in 2019 was a remake of the cult 1980 film with the same title. The film required 30 lakh rupees to complete its post-production phase. It received half the amount through online channel Muvizz.com that later took the movie for crowd-funding to raise the remaining amount. The balance sum was raised in a two-month-long crowd-funding campaign, which was used for the post production, animation and VFX of the film.

• Exploding Kittens and Cards Against Humanity– These are two extremely popular board games that have been incorporated by the use of crowdsourcing campaigns and have gone on to become incredibly successful.
  
  

Crowdfunding has been growing at a steady rate worldwide, opening new opportunities and avenues for both entrepreneurs and investors. Crowdfunding has already demonstrated its ability to innovate, create wealth, among a lot more. But it also has certain downsides, which the users must remain wary of.

The fact that there is still a lot of untapped potential in this idea and its structure is definite. But what is the true limit of this idea? Only time will tell.

Tags: crowdfunding