Waiting for the right time to start your own business or have a next multi-million dollar business idea. Crowdfunding empowers you to be an entrepreneur by helping you bring entire business and better thingamajigs to life overnight.
So what is crowdfunding? Is it different from crowdsourcing, more importantly, how can you use it to provide venture capital for any startup?
What Is Crowdfunding?
Crowdfunding is a popular concept that emerged in the US and the UK. As of now, it has become an emerging way of raising capital entailing the use of social media networks – Facebook, Twitter, LinkedIn and some dedicated websites. The modern business environment considers crowdfunding as a way of connecting investors with the modest business startups and projects, using an online transaction portal that eliminates all the possible barriers to entry.
Simply stating, it is a general process of asking people for donations, which is then used as the capital by startups. As crowdfunding involves pitching ideas directly to the internet users, offering financial banking, entrepreneur and small business owners can leverage it as an option to bypass venture capitalists and angel investors. Eventually, it also provides you, a unique opportunity to validate the concept and scope of a project in the targeted markets.
There are ample resources like Kickstarter and Indiegogo available on the ‘World Wide Web’, allowing entrepreneurs and startups to initiate their crowdfunding ventures. Remember, using these platforms is easy at the same time needs creativity. Build web pages hosting information, promotional videos and images of the products or services for which you need funding. Ensure that the pages you create are catchy, explanatory and engaging for the audience.
It is a better practice to offer special rewards in return to the viewers or funders pledging support to your venture. Ordinarily, the rewards must vary depending on the amount of funding received. As of now, startups and entrepreneurs offer equity or profit share to investors and offer subtle benefits equating exclusive merchandise, advance access to new releases, or personal incentives to normal funders/donators.
Crowdfunding Scenario In India
India undeniably is emerging as the most promising economy in the world. It hosts a population over 1.2 Bn, with the dramatically rising middle-class segment. It would not be wrong to say that the power of capital formation necessary for crowdfunding lies in the hands of this rapidly increasing middle-class Indians. Presently, equity crowdfunding has not been a popular model in India. Nevertheless, anticipation cannot be denied that in the near future, it will hit the Indian market with equal optimism.
Related Article: Year 2016: The Year When Funding Will Become Truly Democratic
As of now, Ketto, Wishberry FuelADream, Catapooolt, and Crowdera are some of the eminent crowdfunding platforms in India. In the coming year, dozens of such platforms will coexist in the virtual world. Due to lack of regulatory issues, a majority of the recent Indian crowdfunding platforms are still in the rewards and donation phase.
Important Crowdfunding Drivers In India
India is one of the biggest countries having Non-Government Organisation (NGOs). These NGOs deliver a better and sustaining environment for the future of crowdfunding. Consequently, the newly drafted Companies Act mandates, all companies need to spend at least 2% of their earnings on corporate social responsibilities. This, in fact, is the best option that will accelerate India’s crowdfunding scenario.
Typically, there are three major crowdfunding models in India
- Donation Model: In this model, investors or individuals financially contribute to the development of a project without expecting anything in return.
- Lending Model: Under this model, investors or individuals usually lend or invest money in a project with the expectations of either getting repaid or getting rewards, according to the agreed terms and conditions.
- Investment Model: Investors and individuals financially contribute to a project in order to gain an equity stake in that project.
Indian Crowdfunding Scenario – Major Challenges
Fundamentally, the concept of crowdfunding is not new to India. Since historical times, the temples and worshipping places were built using public donations. Yet, the concept of online crowdfunding is definitely new for the evolving corporate ecosystem in India.
Indians are not very investment-friendly. Consequently, the typical Indian mindset is still not ready to accept today’s crowdfunding model. Entrepreneurs and innovative startups need to initiate revolutionary concepts that will change this peculiar mindset; eventually, motivating people to participate in crowdfunding activities.
Despite the fact that so many thriving e-commerce companies hail from India, people here are not accustomed to trusting online transactions. With the current demonetisation move, people have started believing in digital transactions. This can be seen as a major step towards the evolution in the Indian crowdfunding scenario.
Equity-based crowdfunding is still not legalised in India making it prone to a few legal issues. On the contrary, the United States recently passed the Jumpstart Our Business Startups (JOBS) Act, legalising equity crowdfunding. In India, the concept of crowdfunding is gaining immense momentum leading to a hypothecated fear that these funds could scale up at any time. Owing to the recent currency demonetisation, peers are worried that money-laundering schemes might run in the name of crowdfunding activity.
The SEBI needs to set up a regulatory framework for finding and restricting such activities, if any, persist. In addition to that, crowdfunding activities involving the sale of securities need to be regulated either under existing SEBI norms or under Collective Investment Scheme/Alternative Investment Funds. Together, these initiatives will bring about a greater transparency and trust in the entire Indian crowdfunding scenario.
Creative Strategy And A Positive Approach Leads To Success In Crowdfunding
If you are thinking of using a crowdfunding model to finance a business, project, product or services, you need to build a project or product where you think you are filling a hole. Part of the trick is to be creative, be visible, be engaging and show them things that either they have not seen in a long time or they have not seen it before.
- Tell them why your idea is good and how it will ignite interest in people.
- Focus on how your idea is different and destined to sell offering a subtle value to customers.
- Highlight the difference between your idea and the one that existed before (If there was any). Anything with appropriate IP rights, personality and brand image with existing customer base is destined to attract funding.
- As far as possible have just about tangible proofs that will excite people – a visual aspect related to your project always helps people in better visualisation of the idea.
- Let them know that you understand your target audience and you are prepared to cater them.
- Factor all financial variables, including reward fulfilment, costs involved and crowdfunding platform fees and the taxes.
- Calculate a specific amount that you will need to kick off the project; a valid and realistic amount is always appreciated garnering better response.
- Sensibly build a budget allowing enough breathing room in certain areas and factors in conservative projections.
- Have some great rewards and incentives in mind to give as a return gift to backers and donators.
- Map out your reward tiers and plan how you will be offering them with what amount in mind.
- Plan few meaningful and unique rewards that will keep people talking. If possible, create some singular rewards that can be utilised in social media campaigns or for press outreach.
- Most importantly, examine other crowdfunding projects; analyse the successful as well as failed projects. This will enhance your knowledge on approaches, techniques, and strategies that work to transform your crowdfunding initiative into a prominent success.
Without a doubt, crowdfunding in India is looked upon as a key factor in raising funds for startups and new ventures. The US and other countries have already started implementing laws and regulations for this function effectively. There are no serious concerns if India brings crowdfunding under the legal scrutiny.
After all, an efficient and the all-inclusive crowdfunding system is about to play a catalytic role in bringing startup ideas into reality. Moreover, entrepreneurs and startups should not shy away from using crowdfunding models as an essential means of raising capital. Remember,
“Together we can and we will evolve as an expeditiously performing economic society.”
About The Author
[The author of this post is Anand Mahajan, CEO, Sphinx Solution -an accredited company rendering web, ecommerce, mobile app development, big data and business intelligence services.]