Great ideas deserve a chance to prove how they can really make a dent in the world. Till recently, ideators and budding entrepreneurs had institutional options like bank loans, equity investors or government subsidies to choose from, to fund their dream projects. With the rise of crowdfunding, the barriers to entrepreneurship have tumbled quickly and the power of the internet has fuelled new businesses like never before.
“Crowdfunding platforms raised $2.7 billion and successfully funded more than 1 million campaigns in 2012. Massolution forecasts an 81% increase in global crowdfunding volumes in 2013, to $5.1 billion”. ~ Crowdfunding Industry Report 2013
According to Forbes, the crowdfunding industry is set to grow by 92% in 2014.
These impressive numbers force the question, “Is my business idea suitable for crowdfunding? What type of crowdfunding platform would be best suited for me?”
These are the different types of crowd-funding options:-
#1. Reward Based & Donation Based
Crowdfunding sites that offer a reward – monetary or non-monetary – to donors in return for the money that they contribute to a project listed on the site come under this category. The rewards could be a direct monetary compensation or special editions of the product being created, a special service that they can redeem once the project is up and running or even a small branded gift that commemorates the pledge made by the donor.
Donation-based crowdfunding is similar to reward based crowdfunding and refers to projects where donors contribute money to a cause, a philanthropic project, a charity in need and so on but do not receive any monetary compensation for their donation. They may receive donor badges, thank you cards, small giveaways with the charity’s name on it etc. but no monetary quid pro quo.
Reward based and donation based crowdfunding were one of the first forms of crowdfunding and they remain extremely popular.
- Creative projects like funding a music band, producing a movie or an art installation
- Cause related projects like disaster relief and fundraising for charity
- Funding new business ideas, inventions and other research based projects
- Civic projects, donations to political parties and citizen journalism
#2. Debt based
Taking loans from banks is a time honored route to starting a new project – be it home improvement, setting up an art installation or starting a new business. With the new cautiousness that the banking industry has developed after the Great Recession of 2008 and the rising interest rates on institutional loans, entrepreneurs are turning to newer avenues for seed credit.
The crowdfunding industry has taken the basics of banking and spread the benefits among the masses. In the case of debt based crowd funding, the project initiator(s) or loan recipients receive money from individual investors or a group of investors in the form of a loan. This loan earns the investors interest as well as repayment of the principal amount donated. The rates of interest are arrived at through a reverse auction among the lenders and with arbitration by the crowd funding site. This model is also called ‘Crowd lending’.
The crowdfunding site takes over the responsibility of carrying out detailed background and credit checks of the recipients of the funds. They also arrange for fund transfers, help on arriving at the interest rate that will be payable to the investors and servicing the loans.
- New projects initiated by existing companies
- Individual entrepreneurs
#3. Equity based
Equity based Crowdfunding is a model where the investor receives an interest in the company or project in the form of equity shares in return of the money pledged by them.
This is a new, popular though often controversial form of crowdfunding, owing to the fact that many countries have strict regulations regarding sale of ownership interest in companies and their transfer between different entities over a period of time. Between 2012 and 2013, many countries have created new regulations that govern equity based crowdfunding, like the JOBS Act in the United States.
Purely business related startups where a part of the profits or part of the company’s ownership can be shared with the investors. Businesses can be in varying stages of development and can approach different crowdfunding sites that work with businesses at specified life stages of their existence.
Now that you know a little bit about the types of crowdfunding options that are available today, you need to figure out which one suits your project or business and go with the one that seems the best fit.
However, there are a few things that you must keep in mind before you start your own crowdfunding project:
#1. Crowdfund at the right stage of your business
Your business will need funding at multiple stages in its lifetime. Pick the right time to get into crowdfunding so that you don’t exhaust all your options when you need the next round of funding.
#2. Follow the rules of the crowdfunding site to the ‘T’
A good chunk of projects get rejected by crowdfunding sites. These are projects that do not adhere to the rules laid down by the sites or have a fundamental business flaw in them. Do not make this basic mistake. Read the rulebook before you play the game.
#3. Protect your idea if needed
A lot of innovators worry about their idea being copied if they start a crowdfunding project for their venture. If you are one of them, take proactive steps yourself. Most crowdfunding sites do not protect your copyrights. Morever, investors need to know an idea thoroughly before they put down money for it. File for a patent or a copy right BEFORE launching your crowdfunding campaign if you fear plagiarism.
#4. Get your messaging clear
Great ideas can languish with insufficient funds without clear messaging. Explain every aspect of your idea that is practically required by a potential investor to make a decision. Be interesting, draw them into your story, show them how they will make a difference to the world by contributing to your project. Spell out the exact benefits they stand to gain – monetary or otherwise. Nothing works like a great video. Use one if you can.
#5. Give out equity judiciously
Firstly weigh all your available options before you decide to go down the equity crowdfunding route. Giving up equity to unqualified investors can be problematic in the long run. It will interfere in decision making and restrict future fundraising efforts.
With the plethora of options out there, times have never been better for budding entrepreneurs, artists and innovators. Grab the opportunities that come with being in the golden age of entrepreneurship and pick a crowdfunding project that will take your venture to the next level.
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