/ What is crowdfunding

Basics of Crowdfunding

Thanks to Michael Sullivan who coined the easily understandable term ‘Crowdfunding’ in 2006. Since then, this became a widely used word which was so easy to communicate and explain.

We often have great ideas or creative projects in mind. But seldom do we have sufficient finances to go ahead and complete the project.

Now, what if someone says, there's a way to generate enough interest on your project among people, who can also potentially support and fund your project?

Sounds interesting, isn't it?

Crowdfunding is surely an interesting way to generate interest, finances and much more for your dream project (More insights about this towards the end).

But first, what is crowdfunding actually?

It is exactly what the name suggests...

Crowdfunding is the practice of funding a project or venture by soliciting small monetary contributions from a large number of people, usually online.

Supporting any project/cause or campaign by a group of people by contributing some amount of money is called crowdfunding.
This means when a group of people together make any project a success by contributing their share (financially) towards a cause, art/tech project, or a company.

So where does crowdfunding find its place in the general sense?

If you are a business, you either bootstrap (great!) or if you are in deficit of funds you borrow from banks or you approach investors. Similarly, if you are an innovator or a creator or an artist having a great idea, you either use your personal finances or approach a production house to fund your project. While some of these options do work, they come with their own challenges. Suddenly you operate in a controlled environment, with limited creative and operational freedom; or you spend a lot of time scouting for the right source of financial infusion.

In contrast raising money through crowdfunding gives you the freedom to gather finances at your own will from not one entity but from the crowd, who are large in numbers contributing relatively smaller amounts. It really is a way to democratize the access to capital and fund raising.

Did you know that crowdfunding has been in existence far longer than you might think?

Crowdfunding as a model and by definition is virtual. The phrase ‘typically via the internet’, explains this. However, crowdfunding as a concept is pretty old; it existed even before the Internet boom.

Did you also know - The Statue of Liberty was Crowdfunded?

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When The Statue of Liberty was gifted to the US by the then French government, it was delivered to New York in 1885 in pieces to be assembled, but the granite pedestal on which the statue had to be mounted wasn’t ready due to shortage of funds to complete the same. Post rejections from the government to pay for the pedestal’s remaining cost of $100000 in that day’s money, a renowned publisher Joseph Pulitzer decided to launch a fundraising campaign in his newspaper The New York World. The fund-raising campaign could raise $101,091 - enough to cover the last $100,000 to complete the pedestal and have money left over for a gift for the sculptor - Frederic Auguste Bartholdi. The campaign used a single collection point - the newspaper - to raise money from about 1,25,000 donors each pledging as little as pocket change.

Let's take an example from our own India.

What if someone told you that a film was crowdfunded in India way back in 1976?

And no, it was not funded by affluent people as a favour to the film maker.

It was funded by farmers…

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In 1976, Indian feature film named Manthan managed to raise ₹ 10 Lakh through 5 lakh farmers of Gujarat. The movie is a cinematic depiction of The Indian White Revolution led by Mr. Verghese Kurien. When Shyam Benegal couldn’t convince studios or producers to bankroll the film, Mr. Kurien himself suggested Shyam about raising the funds from the milk farmers, to this extent Mr. Kurien asked the milk farmers to forego their daily earnings from the milk corporation by just Rs. 2. The farmers were convinced by the narrative that they are forgoing this small amount to fund a feature length film that tells their story. Thus Rs. 10 Lakh were raised by 5 lakh farmers of Gujarat. The icing on this mammoth effort is, the same farmers travelled in hordes from their villages to the towns and cities of Gujarat to watch the movie with their families by buying the ticket.

Types of Crowdfunding: Crowdfunding in the modern times has broadly four variations to it as represented in the image below

Source: Consultation Paper on Crowdfunding in India by SEBI

SEBI

Donation Based Model : Funds raised for a cause/project typically between 100 to a few thousand rupees. Donation is a model where the donor does not get any reward beyond gratitude of the campaign owner. As the name suggests, donation based crowdfunding campaign is run to raise money for a non-profit cause.

Reward Based Model: Receiving something in return for the contribution to a project (such as an existing or future consumer product or a membership rewards scheme). People working on creative and artistic projects generally see this type of crowdfunding a better fit. One of the solutions offered by Goodclap is reward-based crowdfunding. This will be discussed further in our upcoming blogs.

Peer-to-peer/Debt Based Model: In Peer-to-Peer lending, an online platform matches lenders/investors with borrowers/issuers in order to provide unsecured loans and the interest rate is set by the platform. Some Peer-to-Peer platforms arrange loans between individuals, while other platforms pool funds which are then lent to small and medium-sized businesses.

Equity Based Model: A project funded by investors, usually large sums ranging from a few thousands to millions in some cases. These investors are then rewarded by issuing the shares of the company which they funded. It refers to fund raising by a business, particularly early-stage funding, through offering equity interests in the business to investors online.

Key Takeaway :

With so many variants to it, Crowdfunding is surely emerging as an alternate source of financing for different players ranging from emerging artists to start-ups. Crowdfunding industry in India is still in its nascent stage and is expected to be driven by some of the policy decisions taken by MCA and SEBI. Watch out this space for regular updates and interesting stories around crowdfunding.

P.S: Interestingly, people crowdfund for reasons beyond money. Crowdfunding is often used for idea validation and marketing.