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What is Crowdfunding? How Does Crowdfunding Work? Research Team | Posted On Monday, January 13,2020, 04:27 PM

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What is Crowdfunding? How Does Crowdfunding Work?



What is Crowdfunding?

Crowdfunding is a type of business investment where a group of investors invests surplus capital into business ventures that need a regular supply of money. The process involves pooling funds online with the help of small contributions from a large number of people. This is a low-cost and effective way of raising business funds.

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Investors can invest in projects and businesses through dedicated websites and thus helping small entrepreneurs to fund their businesses. These websites also help NGOs to raise money and is instrumental in funding various social causes like medical treatments, funding education or disaster relief.

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Types of Crowdfunding:

Here is a complete list of the various types of crowdfunding options:

  • Donation-Based Crowdfunding: It works in a similar manner as charitable donations. Here the campaigner mainly uses the funds for social causes like treatment, funding education of the poor, disaster relief, etc. Thus the campaigner does not need to return the funds to the donor.
  • Reward-Based Crowdfunding: In this type of crowdfunding the returns will be reward-linked and depends on the project that you are funding. This is similar to donation-based crowdfunding as here you will not get a return on invested capital or equities.
  • Investment-Based Crowdfunding: Here you can invest in a business and get equities in return. This model of investments is mainly based on evaluating the business venture on its potential for success in the future and its share values.
  • Peer-To-Peer Lending: This method is also known as the loan-based crowdfunding model. This is a very common form of crowdfunding in India that allows the interested lender to invest in a project or business of his liking. The investor, in this case, receives an interest rate thus benefitting the entrepreneur with a significant low-interest rate than the open market. This model of investment benefits both parties and cuts off the need for a middle-man which results in low-interest rates. Recently the RBI has devised guidelines to monitor and regularize P2P lending.

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How Does Crowdfunding Work?

Crowdfunding is mainly collecting small amounts of money from investors for a specific project or a business venture. This method is mainly used by small a business that doesn’t have access to share market for raising money. Crowdfunding is a good way to fund business expansion or arrange working capital without seeking a bank loan.

Crowdfunding is mainly conducted through online websites that give businesses a platform to raise funds from a large number of people. When you visit these sites, you can get an overview of the business that you are interested to invest in. However, you have to register with the website to get a detailed insight into a project or to invest in it.

The fundraising campaigns mainly consist of a business pitch that includes an overview of the business, the business plan, management details and details of the money that is needed to fund the project. Depending on the crowdfunding platform i.e. reward-based crowdfunding or equity-based crowdfunding the businesses can offer equity or rewards in exchange for the investments.

If you wish to invest in such businesses here are a few things you should check:

  • How much money the business wants to raise?
  • How much money it has raised so far?
  • The rewards or equity offered
  • The investments will be used for what purpose?
  • How many people have already invested in the project?
  • Is the investment profitable for you?

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How to do Crowdfunding for Startup Business?

Start-ups and small businesses can make use of the web-based platforms to raise funds by pitching their vision to potential investors or donors. The crowdfunding websites usually charge a fee from these businesses which are using their platform and services to raise money for the cause. Reward-based crowdfunding and donation crowdfunding is common in India and are mainly used to collect fund for a social cause. 

Interested investors pledge money through these platforms. The crowdfunding platforms charges cut money and the remaining amount is passed on to the start-up. Start-ups need to constantly pitch their business to the investors and drive their interest to achieve the fundraising targets. On raising the funds, these start-ups have to work hard to keep the investors updated and engaged, as well as focus on growing and achieving their business targets.

In India the crowdfunding industry is estimated at Rs. 300 crores. There are top 10 crowdfunding websites that help raise money for medical emergencies, creative ventures, start-ups, social cause and even personal needs like funding education. Listed below are the top 10 crowdfunding platforms in India:

  • Ketto
  • Milaap
  • ImpactGuru
  • Wishberry
  • Fuel A Dream
  • Dream Wallets
  • BitGiving
  • TheHotStart
  • Catapooolt
  • Start51

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