Crowdfunding is basically a practice adopted to raise funds to run small ventures or projects by collecting small amounts of money from large sources. Crowdfunding can be also termed as an alternative source of financing. It is considered as a modern method to raise finance. People do go for Mutual fund investments but crowdfunding is also a good option to raise funds.
Funding initiates by carrying out three major steps that are as follows:
- The initiator who proposes the idea for a project or a venture to be funded
- Group individuals who further support the idea
- The platform that brings together both the parties to launch the ideal crowd Funding has been majorly used as a fund for creative projects, travel, medical expenses, community-oriented social etc.
Mechanism of Crowdfunding
Crowdfunding has been created a new emerging platform for entrepreneurs to raise money for the investment purpose. Crowdfunding provides a medium to anyone with an idea to rise it in front of waiting investors. The sites connected to crowdfunding generated revenue from a percentage of funds raised. Investors can choose hundreds of projects and can invest as little as $ 10. The funds are been raised from various internet platform sites such as Kickstarter, Indiegogo variety.
Process of crowdfunding is as follows:-
- Crowdfunding is obtaining small sums of money from various people for a particular project, business venture or charitable cause.
- It works on a web-based program or social networking sites to request funds for the fundraiser by showcasing the story to potential donors or investors.
- According to the laws in India, equity-based crowdfunding is prohibited, whereas peer-to-peer lending is managed by the RBI.
- Community crowdfunding which includes donation-based and rewards-based crowdfunding are right and are quite successful to increase funds for social causes.
- The crowdfunding websites typically impose a fee for using their program and assistance to bring money for the cause.
Crowdfunding isn’t just about borrowing money. Its community of investors can be a great way to test a product idea and get market insight. Ask for feedback from possible investors as to why they gave you a pass. A word warning exist, crowdfunding isn’t for the unconsciousness of the heart. You’ll need to actively raise your business and make interest to run your funding purposes. Once hit, you’ll need to work long and work hard to keep investors updated and involved.
Benefits of Crowdfunding in Business Growth
Crowdfunding is been considered as one of the finest and successful methods of raising funds by investors due to various benefits been listed below:
- It’s a more efficient and easy way to raise funds
If you are administering an early-stage business where you need to concentrate more on raising it and bringing seed capital in the project or venture. You may find it hard to get the time and give your attention to seeking conventional methods of raising capital. Rather of completing loan demands or trying to locate certified investors on your own. You can contact potential funders through a centralized location. This can done by beginning a fundraising campaign at a suitable platform. This approach might be more productive and efficient. But it will take your word out to potential investors using videos and reward systems.
- Crowdfunding provides validation and social proof
If you administer a very noticeable, effective fundraising campaign, you will be able to get the social proof and validation. You'll get social proof when proposed customers express interest in your product or service.
Usually, this shows the belief that people have in whatever you are doing and more people are likely to follow suit once early adopters verify your products. This social proof can then be turned into traction in terms of pre-orders, media attention and the number of backers. This is considered as priceless when you are pitching to investors.
- You get an opportunity to refine your business idea
When you begin a crowdfunding campaign, you admit yourself up for review and potential backers get to interfere into your business plan and ask the tough questions. This is a complimentary brainstorming session that enables you to improve your business idea. Thinking that the success of any startup depends on how well they identify and satisfy. It is important to grab every chance you get to receive feedback from clients. Crowdfunding gives you this opportunity to join with potential customers through complaints, ideas, questions, and feedback.
- Crowdfunding provides media exposure
Media coverage makes it attainable for more people to see your fundraising drive. This, in turn, creates a perpetual recognition of your startup brand among potential customers and investors. This may be in the form of live streaming, blog, a feature story or publication on a popular media network. When this happens, it works as a great platform for bringing backers who are outside your network.
An honourable mention on twitter or in a newspaper can have an important effect on your business. Even a blog feature can have a remarkable effect. It will connect you to major investors who otherwise you would not have reached. Whether such investors hear about your product or service via a popular blog or an campaign, managing a successful crowdfunding drive is a great parkway. It would be considered best way to attract the interest of new investors.
Basic Forms of Crowdfunding
This type of crowdfunding allows backers a reward for their investment. If they’re supporting a prototype product, subscribers at certain levels could get an early way to buy at a discount. They can also have the bragging benefits to own the product itself before their friends. Prizes aren’t limited to company products. Rewards could be, tee shirts. The rewards can be as wild as you want to make them.
The SEC (Securities & Exchange Commission) recently ruled that you can use crowdfunding to allow backers to have an equity stake in your business. This has the potential of competing for traditional venture capital. Thus the SEC has taken an intense interest in the technicians and growth of this new revenue stream. Be aware: If you plan to launch an equity-based campaign, ensure that you know the rules.
- Lending-based (debt-based, or crowdlending)
This can be an excellent way to secure a loan because it can offer a lower interest rate and more flexibility in the terms. Investors in this form of crowdfunding seek equity in the business they’re investing in, which makes it related too. But subtly different from equity-based crowdfunding. In equity-based crowdfunding, investors take portions of your business with the hope that those shares will grow in value.
If your organization is a certified nonprofit, you can practice crowdfunding to raise donations. A charitable organization, like a homeless shelter, could, for example, increase funding for an upgrade to their kitchen facilities.
This article concludes that to stop wasting your time in today's fast and changing environment on loan petitions rather we should adopt the modern technique to raise funds successfully. The one and only crowdfunding which helps in raising funds quickly.
"RAISE TOGETHER, GROW TOGETHER"
This article is written by Naman Mittal, who is a content writer at WealthBucket. India's one of the legal portals. They offer and deliver services such as income funds, large-cap funds, midcap funds. small-cap funds, debt funds and Many more. Start investing today and reach on top.