written by | May 30, 2022

What Is Crowdfunding and How Is it Beneficial for Businesses?

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This article is all about highlighting various intricacies of the crowdfunding process. If you’re on the verge of starting a new campaign for the same, there are some factors you need to know before launching a crowdfunding campaign.

Most importantly, one should know the ins and outs of fundraising through crowdfunding and pay special attention to rules and challenges.

Did You know?

According to a study from Statista, crowdfunding is getting more attention from users at a steady pace. The study found that the entire amount of funds that got a raise due to crowdfunding campaigns developed by 33.7% in the past year.

Also Read: What Is Series Abcd Funding? How It Works & What Are Different Series of Funding

What Is Crowdfunding?

In its simplest form, crowdfunding is a process through which individuals can donate money to help fund a project or cause. Crowdfunding for companies can be a wise choice to gather funds. These individuals may not receive something in return for their generosity, which can take the form of donations, equity, products, or services.

These donations allow entrepreneurs to test their ideas before a larger group of investors. These funds are then used for the project or cause. Crowdfunding has become a viable alternative to traditional bank loans in many cases.

In most cases, crowdfunding campaigns are a way for entrepreneurs to raise money for a new business venture, product launch, or a worthy cause. These campaigns are typically conducted online to garner the support of as many people as possible to meet the fundraising goal.

What to Consider Before Launching a Crowdfunding Campaign

What platform to choose: Choosing the right platforms essential to attract enough crowdfunding. This research won't take long. 

The platform's fee: Expenses are already included in running a crowdfunding campaign. So make sure you don't go with an overly expensive platform. 

How to structure donation perks: In the model of reward crowdfunding, it is common for the donor to receive perks in return for their contribution. It could be a certificate, an online thank you or even several products after they're manufactured.

Defining your goal before the campaign is live: Sharing videos, podcasts, etc., is always vital before your campaign is live. Your aim should be to let more and more people know about your business and the reasons behind your crowdfunding campaign. 

What to do during the campaign:

What Are the Types of Crowdfunding?

There are many different types of crowdfunding, including donations, debt and equity-based models. Depending on your goals, you may want to use a combination of these models. Consider who your intended investors are and their financial and social history. Listed below are the main differences between these three types of crowdfunding.

For more information, read our overview of each model to determine which one is best for you. Then, choose which type of funding will work best for your project.

Rewards-based Crowdfunding

Rewards-based crowdfunding involves asking many people for a small amount of money. In return, backers receive a reward, usually an item or a percentage of the company's revenue. The two most popular rewards-based platforms are Kickstarter and Indiegogo. You can also use equity-based funding to raise money for an existing business. But make sure you choose the right type of crowdfunding before you begin your campaign.

Equity-Based Crowdfunding

Equity crowdfunding permits contributors to become part-owners of the business by trading capital in exchange for equity shares. The equity owners are paid the financial benefit (share of the earnings in the form of distributions or dividends) as a proportion of their investment. This method is more popular than the other two.

Donation-Based Crowdfunding

Donation-based crowdfunding is done for charitable purposes. Individual donors donate cash or in-kind to the project without expecting any return. Since there is no set amount of money that each donor can pledge, donations can be large or small. 

Donation-based crowdfunding works best for charities or humanitarian causes since it discourages people from investing large sums. This type of crowdfunding isn't ideal for capital-intensive projects, however. Those looking for an income stream can use the type of crowdfunding that's most appropriate for their specific needs.

Examples of Successful Crowdfunding Sites

Take a look at the top 4 crowdfunding for small businesses to big businesses websites, which cover many different scenarios, to raise money in your next fundraising campaign:

  • GoFundMe
  • Kickstarter
  • LendingClub
  • Indiegogo

Crowdfunding Rules

If you’re going to use crowdfunding for small businesses, be sure to follow the rules. Several rules apply to the Crowdfunding process. These rules are intended to prevent people from investing in companies they don't understand or are not eligible to do so. In general, the rules are designed to protect investors and small companies.

  • Crowdfunding portals cannot offer investment opportunities until they have obtained registration with the Securities and Exchange Commission (SEC).
  • In particular, crowdfunding rules restrict subjective criteria, such as the number of investors, which can result in a negative outcome for small startups.
  • Although crowdfunding rules are geared toward small businesses, they do not exclude large, established companies from offering securities. 
  • Companies must not fall under any "bad actor" conditions or have a history of securities law violations. They must also abide by ongoing reporting requirements.
  • Crowdfunding rules do not prohibit companies from offering shares of their business profits to accredited investors. However, this is not a good option if the company has a complex capital structure or an unidentified business plan. 

Also Read: Seed Funding for Startups - Meaning, Eligibility and Process

The Challenges of Crowdfunding

It's important to consider every aspect of your campaign. While crowdfunding offers the potential to help startups raise funds, it's important to note that most campaigns fail. Lack of early traction is why many fail, and proper preparation will ensure that your campaign succeeds.

However, crowdfunding is also an excellent means of driving growth. In the case of the Shark Tank, participants leverage crowdfunding to boost their brand awareness and sell more products. 

Here are a few challenges of crowdfunding:

  • Crowdfunding campaigns with no prior track record are particularly vulnerable, as they are forced to build brand credibility with investors.
  • One of the most common problems faced by crowdfunding campaigns is generating interest among investors. If the project does not generate enough interest and cannot meet its targets, it may be considered fraudulent, as PandoDaily highlighted in 2014.
  • Crowdfunding is not free and is not a set-and-forget operation. It requires significant pre-planning and ongoing activity to ensure success. 
  • One of the most challenging aspects of crowdfunding requires extensive preparation. Unlike conventional financing, a successful campaign requires time, energy, and market research.
  • Proper coordination of your team and crowdfunding platform is essential. There are high chances of failure in situations of crowdfunding.

Fundraising has many benefits and challenges. Small businesses, particularly those without large investors, benefit from this type of funding. Some forms of crowdfunding require no repayment and don't require monthly payments. 

Another benefit of crowdfunding is the lack of monthly payments. A good pitch will demonstrate the value of the project and the need for funds. You will be rewarded in return for the money you've invested.

What Are the Crowdfunding Benefits for Investors?

While equity crowdfunding is riskier than debt investing, it's still a great way to support a startup, and the low buy-in costs make it a great choice for people interested in learning more about the process. Despite these risks, many investors find equity crowdfunding a great way to get into startup investing.

  • Investors can easily find new projects to support. 
  • When it comes to crowdfunding, there are a lot of benefits for investors. 
  • Crowdfunders can reduce their taxes. 
  • As an investor, you'll have the opportunity to invest in multiple ventures in one investment vehicle, increasing your chances of a big payout. 
  • Almost every business has a promotional page that investors can visit to learn more about their backing project. 
  • As an investor, the greatest benefit of crowdfunding is that it allows investors to diversify their sums of money across several investment channels. 
  • Investors can request that sponsors connect their bank accounts so that they can receive their money directly.

As with any other investment opportunity, crowdfunding may not be for everyone. A single blockbuster investment could recoup all your losses, so it's important to remember that it's important to choose your investments wisely. Because crowdfunding is a high-risk investment, it's good to diversify your portfolio. However, there's always a risk of losses. 

Tips for Crowdfunding Success

1. Share Relevant and Engaging Marketing Materials

As new crowdfunding initiatives are being launched each day, it's essential to distinguish your campaign apart from others. Creating strong marketing materials and propagating your campaign throughout your network are the most effective ways to gain recognition. You can launch podcasts, videos, and press releases, and there are many other ways also.

2. Communicate With Backers

To create a meaningful connection with your supporters, include sensory language and compelling imagery in your campaign. Make sure to communicate the tangible impact of each contribution so that your supporters will be encouraged to support the campaign and contribute their money.

3. Prepare for the Campaign

It isn't that tough to prepare for a crowdfunding campaign. Just make sure you don't boast out of the world. Be factual and realistic. To get the most out of crowdfunding, make sure you're prepared for the campaign before the time you launch it.

Make sure to inform your family and friends that you're launching the campaign. Keep active on your personal and business Facebook and Twitter accounts before launch. Give potential supporters every opportunity to reach your profile.

Conclusion

Those were the tips and techniques for launching and running a successful crowdfunding campaign. This article also suggested various types of crowdfunding and challenges that may hinder the way. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: Is crowdfunding legal for startups in India?

Ans:

The answer is a big Yes! Both Online Crowdfunding & Online Fundraising are completely legal in India.

Q: Which advantages of crowdfunding make it stand out?

Ans:

Here are three huge advantages of crowdfunding:

  • You can say crowdfunding can be a fantastic place for market testing & researching.
  • Crowdfunding contains minimal financial risk with nearly no start-up fees.
  • There is very little upfront fee. It means that there is some security if any risk takes place when you start.

Q: What are the successful examples of crowdfunding?

Ans:

A fine example of crowdfunding that attained success is Kickstarter. This platform is a rewards-based donation place, and it has been helping organisations raise revenue since 2009.

Q: What are some good crowdfunding startups in India?

Ans:

Here's a list of some amazing crowdfunding startup online platforms in India:

  • Kickstarter
  • Indiegogo
  • RocketHub
  • Crowdfunder
  • Seed & Spark
  • Charitable
  • GoFundMe
  • Kiva.Org

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.