Fundamentals of crowdfunding

Crowdfunding is a new way of raising money online. It has been making the right kind of buzz for the last few years. Over the past decade the popularity of crowdfunding has only increased as people have taken to raising money for medical, social and business reasons. Crowdfunding has helped save lives by sponsoring surgeries, chemotherapy and other expensive treatments. It has helped in building schools. Crowdfunding has been of use for victims of mob lynching. It is therefore a weapon one can use to battle any kind of financial situation. Being aware about this practice  is important.

Crowdfunding is essentially a process where you raise a large amount of money for any specific reason from the crowd. A lot of people come together and donate small amounts of money to raise a large sum. It is done through a fundraising platform where you start a fundraiser. Your fundraiser is essentially an appeal for help on a crowdfunding site where through text, image and video you can make an appeal for your cause. When you write your fundraiser, you also set a deadline with which you finish raising money. You also set a goal or target amount for yourself.

Once your fundraiser is written, you go to various people and share the link to your fundraiser with them. For example, you popularize your fundraiser on social media platforms, write emails to people who you think will be interested. Once your goal amount has been reached, your crowdfunding platform hands over the money to you. If your goal amount has not been reached, your platform still hands over the money to you provided you have not gone for an “all or none” approach .

An “all or none” campaign is a campaign in which you do not take any money from any of your contributors if you cannot raise the goal amount within your deadline. This technique is often used in crowdfunding model related to business. It is not something that you use when you are crowdfunding for a medical cause.

There are four common types of crowdfunding.

  1. Donations-based crowdfunding
  2. Rewards-based crowdfunding
  3. Equity crowdfunding
  4. Debt crowdfunding

Crowdfunding in India is however limited to the first two types as the two latter kinds are illegal in India.

Donations-based crowdfunding means that you raise money from your contributors as donations. You do not give them anything back other than constant updates about the project/person for which/whom you raised the money. Donations based crowdfunding works like any other fundraising drive offline. But this involves technology and can be done from your home. It also means that people find it easier to pay money to your cause as they can pay using their bank accounts.

Rewards based crowdfunding is slightly different from donations-based crowdfunding. In rewards-based crowdfunding, you are given a small reward in return for your donation. This may be a memento, a product or something else. Rewards based crowdfunding can come in handy with NGO and business crowdfunding ventures.

Fundraising in India may be restricted to these two forms but equity and debt crowdfunding is also quite popular.

Equity crowdfunding involves raising money online in the form of shares in your business venture in order to float your venture. It can be particularly useful for small business ventures. In return the contributor gets some amount of ownership of your company.

Debt crowdfunding, also known as crowdlending is when a lot of people pay small amount of money and raise a large amount of money to lend to you for your business. You pay back the amount with interest. The riskier the venture, the higher is the interest rate.

These are some of the basic things that you need to know about crowdfunding. There is much more and the internet can help you with that. But I have attempted to explain the fundamentals to you here.

Peter Simpson

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