This is the first of the two part articles series on Crowdfunding – an idea that changed the eliminated banks, made it easier for smaller business to access the funds and also gave an alternative form of investment for individuals. The term Crowdfunding came as an offshoot of Crowdsourcing model. While Crowdsourcing enabled startups to source their key tasks to the online crowd at cheap rates, Crowdfunding took care of their funding needs at rates lower than the traditional finance. In most cases, Crowdfunding would precede Crowdsourcing unless our funded firm has good credit terms with their suppliers and can get ahead in its operations without any need of funds.
Broadly speaking, there can be three types of individuals or organization which seek financial assistance on Crowdfunding platforms –
- A law abiding business entity focused on profit making
- An individual or organization needing funds for charity or a project that’ll bring a social change. Such projects do not function for the purpose of profit making.
- A project meeting the creative aspirations of an individual or an organization
Crowd funding platforms can offer funding solutions exclusively to either of the above three sectors or for more than one sector. In return, the websites may charge the business a fee or commission. Further, there are four ways by which the concerned individuals or organizations looks forward to finance their projects –
1. Equity-based Funds: This is very similar to Initial Public Offer of a privately held company except that there is no securities exchange involved. The investors receive equity shares against the funds they provide for the project. This form of funding comes under the securities and investment laws of the country.
2. Debt based funding: Individuals with surplus funds can lend their money to those who need it at some interest rate. The borrowings rate of interest is usually less than what is charged by the banks. This gives an incentive to borrowers who are in need for loans. A peer-to-Peer loan is one of the most popular debt-based funds. It is an attractive investment opportunity for those who would otherwise earn a low return on their savings.
3. Donations: This form of funding is more relevant in context of charitable works like – relief programs during natural calamity or sponsoring a child’s education etc. These are projects effecting a social change and hence are anticipated to be funded by the crowd
4. Rewards: Under the rewards scheme, the project owner promises to reward the funder in lieu of the funds he contributed. An example can be say our entrepreneur will develop a paid Android Utility App which is then offered to all the funders as a reward.