Calling all budding entrepreneurs who have fabulous ideas, but no funds to see them to fruition. Come meet the new kid on the monetary block called crowdfunding – a new concept that’s making dreams come true and giving several business ventures the financial wings to fly.
What is crowdfunding?
Forbes defines it as “The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” Thanks to the digital age that we live in, the ‘large number of people’ mentioned in this definition can be from anywhere around the world.
How does crowdfunding work?
There are several online crowdfunding platforms that are effectively helping to fund everything from business ventures, to animal welfare, to education, and even holidays.
When it comes to business, it isn’t just tech product companies that register on these platforms. Artists, comic book creators, musicians, and filmmakers among others, are all using crowdfunding to make their dream projects a reality. In addition, NGOs are jumping on the bandwagon to fund charitable causes.
Different platforms have different rules and criteria. Some are only open to entrepreneurs and insist that working prototype be ready before a funding campaign is opened. Some ask for a detailed presentation on the business venture and reserve the right to reject a campaign. Other crowdfunding platforms are more flexible and allow all kinds of business-related, personal, and charitable funding campaigns to run on them.
Most platforms take a percentage of the donations as their fee (after all, crowdfunding platforms are businesses too) and some platforms take a registration fee that covers certain services such as guiding members on how to run a successful campaign. Another rule that a few crowdfunding players enforce is the ‘all or nothing’ criterion. This means that if the entire amount of the campaign isn’t funded within a certain time period, then the person running the campaign gets nothing and all contributions till that point are returned to the contributors.
Generally, anyone can sign up and create a crowdfunding campaign with a few simple steps of registering, adding campaign details with a photograph or video, and then sharing the campaign across all networks, particularly social media. That’s right, a lot of crowdfunding campaigns aren’t successful if they don’t get exposure. So, if you are too shy to let people know that you are asking for money, then this route isn’t for you. If not, share, share, share and share some more on Facebook, Twitter, your blog, email, and other networks, and watch those contributions flow in.
There are four kinds of crowdfunding models. These are:
Donation-based crowdfunding – Contributors simply donate money to finance a certain cause that they believe in. They get nothing in return.
Reward-based crowdfunding – When a business promises to give all those who contribute, something in return (usually a discounted or free final product).
Debt-based crowdfunding – When all contributions are considered loans that will be paid back to the contributors, when the business takes off.
Equity-based crowdfunding – Monetary contributions against company shares issued to contributors.
Now, the Indian Companies Act 2013, states that a private limited company cannot have more than 200 shareholders, unless they have a public offering. This makes equity-based crowdfunding illegal in India. Apart from this, there are some other grey areas that you may have to navigate if you are considering this as a financing option, within India.
Unlike in the US and Europe, where crowdfunding is rather more developed and regulated, crowdfunding is still at a very nascent stage in our country. This article won’t cover the taxation and regulatory implications of using this means of financing. In fact, while there are several crowdfunding platforms in India, the Securities and Exchange Board of India (SEBI) hasn’t as yet set any related rules and regulations in place. There also isn’t much information about costs related to transferring contributions to Paypal accounts or to Indian bank accounts. You will probably need to talk to your bank and to a Chartered Accountant to get more clarity, before you venture into the world of crowdfunding.
Some startups that are registered in the US or Europe, can still raise funds without any barriers, on global platforms such as Kickstarter, GoFundMe, and Indiegogo. You can read some huge success stories here.
If you’d like to know more crowdfunding, we can point you to the websites of a few Indian-specific platforms. However, do note that we in no way endorse any or all of these. This is purely for you to do some reading and research, to understand which platform is best suited for your needs. Here they are:
Whether you are a young entrepreneur with a brilliant idea for business, or a talented creator who needs finance to successfully complete a project, we hope that crowdfunding will work well for you. Drop us a note if it does and once your business is up and running, do check out our other articles on how cloud telephony can really benefit your startup.