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Things to Learn About Crowdfunding by Small Startups :

The startup boom in India is opening up new avenues of investment and Crowdfunding is one such concept. Crowdfunding is still in nascent stage in India but is gaining traction in the right direction. Crowdfunding involves sum total of investment by the large number of people(crowd) through online platform . In India market regulator SEBI (Securities and exchange board of India ) aptly sums up crowdfunding as “solicitation of funds from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause”.

Types of Crowdfunding :

Crowdfunding varies according to the product and services that startup offers and their growth model . There are three primary types including Reward-based, debt-based and equity crowdfunding.

1. Reward- based crowdfunding : Here the investors receive token of appreciation (rewards ) from the venture which could range from the product company offers or could be as simple as a t-shirt .Reward based crowdfunding is successful if the venture is capable of exerting and pitching the usefulness of idea to the public.

2. Equity Based Crowdfunding : In this type of crowdfunding, investor receive a share of the company in proportion to the money invested. It is like investing in an unlisted entity and hence very important that the investor understands the risk while committing investment in equity based crowdfunding. In India, SEBI proposed a legal framework in 2014 which is likely to be scrapped (Source :Business Standard). 3. Debt based Crowdfunding : In this type the contribution made by the investors is treated as a loan . The money invested earns a fixed interest and the company is liable to repay the amount invested after a fixed period. It is comparable to the institutional setup currently present for offering loan services. 

Things about crowdfunding startups need to learn : 

Positive aspects : 

1. Broad Investor base : It provides for wider access to the investors who believes in the venture and its goal.

2. Marketing : The marketing cost is cut out in crowdfunding platforms due to its large audience base. 

3. Proof of concept : Showing investors that the venture has received the credibility among the crowdfunding space gives a sense of positiveness among the angel and venture investors. 

4. Feedback: Feedback plays an important part in covering the loopholes in the venture and the idea pitched .The community participation during crowdfunding provides a platform to pitch new ideas and improving the current product . 

Problems: 

1. No legal Guidelines : The clear cut absence of law that govern the cyberspace makes it more prone to fraudulent cases. Hence legal framework is required and the government should take necessary steps. 

2. Digital Illiteracy : People in India are still not digitally literate and to make them believe in crowdsourcing will require time and efforts .

3. Audience support: The audience may not like the product .This will negatively impact the venture ands its position in the marketplace. Some of the crowdsourcing channels in India : Various new platforms have come up in the crowdsourcing space .

Some of crowdsourcing platforms are Ketto, BitGiving, Start51 ,kickstarter etc.A simple google search will give exhaustive list of all the platforms available. Success Story: Exploride is crowdfunded startup that has raised 3.4 crore rupees in funds .Exploride is based out in kerala and has been supported on the crowdsourcing platform for its idea.

This article has been contributed by Pramod Gulati, Content Writer, LegalRaasta — an online platform for legal services such as ITR filing, TDS return filing, Trademark registration etc.

This is a YourStory community post, written by one of our readers.The images and content in this post belong to their respective owners. If you feel that any content posted here is a violation of your copyright, please write to us at mystory@yourstory.com and we will take it down. There has been no commercial exchange by YourStory for the publication of this article.
LegalRaasta is an online sole solution for legal queries of entrepreneurs and SMEs.

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