The internet seems to have leveled the playing field for a lot of small businesses. It has created opportunities that never existed in the past.
We have heard stories of people who started a business by borrowing small amounts of money from family, friends and acquaintances.
There have even been tales of a film producer borrowing a very small amount of money from thousands of people from an entire village to finance his movie. These are stories that have been circulating the world even before the internet.
So how has the internet changed things?
In the internet era, the entire crowdfunding market has become more organized and anyone without connections can list his project online, and give himself a fair chance of getting funded by the crowd.
What is crowdfunding?
As the name suggests, it means funding from the crowd. Whenever we think of raising capital for our business, we think of banks, angel investors, and venture capitalists.
However, with crowdfunding, a business or any creative project can get funded by regular people who can all contribute small amounts of money. If 10,000 people invest $10 each, that’s $ 100,000. Not too bad, right?
In 1997, the British rock group Marillion raised over USD 60,000 in donations from their fans.
Crowdfunding is becoming an alternate financing solution for startups and creative projects.
Some experts estimate that crowdfunding could overtake funding from venture capital in the year 2016.
There’re essentially four types of Crowdfunding
- Donation: Investment is made by people who believe in a cause and do not expect a return on their investment.
- Debt: Investors receive interest on their money along with the sum invested.
- Equity: People invest in an opportunity in exchange for ownership in the business.
- Rewards or other value: Investors receive something of value in exchange for their investment. It could be merchandise, concert tickets, a role in a movie, membership to an exclusive club or any other form of value in return for their investment.
Crowdfunding has come a long way since its early days. The SEC in the US has also created rules to permit equity crowdfunding.
In India, the laws relating to crowdfunding are still a little bit hazy. If it involves equity, it can come under the SEBI scanner; and debt is governed by RBI rules. So it’s important to understand the laws while evaluating your funding options.
Numerous crowdfunding platforms have come up in the last decade. Many of these platforms charge a fee based on the amount of funds raised.
Kickstarter, Indiegogo, RocketHub are some of the most popular. Many of these platforms are becoming very niche, and are focused on specific industries.
For example, DiversyFund is an online crowdfunding platform for the real estate industry. They focus exclusively on real estate projects.
AppStori is a growing platform that brings together mobile app developers and mobile app consumers to facilitate the creation of apps.
Sportfunder connects sports fans to raise funds for sports related projects.
If you see the list of some of the top grossing crowdfunding projects, you can imagine its power.
- Star Citizen: A video game project raised more than 100 Million USD
- Elio Motors: A low-cost high mileage vehicle project raised more the 25 Million USD
- Pebble Time: A smartwatch project accumulated more than 20 Million USD on crowdfunding platform Kickstarter
Crowdfunding is here to stay. It has caught a lot of momentum in the recent past, and even law makers are beginning to understand its importance to the economy. Smaller projects that may not attract venture capital or institutional funds can now turn to this alternate form of capital.