Crowdfunding 101: A Guide To Collective Investing

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Grip Invest
Grip Invest
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Dec 22, 2023
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    Crowdfunding-101

    Crowdfunding has a long history, with online crowdfunding roots tracing back to 1997. It happened when a British band’s (called Marillion) American fans pitched in to fund their tour. Often confused with donations, crowdfunding has evolved as a two-way value exchange and investment structure.

    In this article, we will understand crowdfunding from a business perspective.

    What Is Crowdfunding?

    In earlier times, companies sought funds through bank loans, bonds, venture capitalists, or public offerings (IPOs). But, in the 2000s, another avenue ‘Crowdfunding’ gained popularity.

    Crowdfunding is like asking people to chip in money to raise funds for a startup,  business expansion, projects and even philanthropic causes. There are creators and backers who define the dynamics of the crowdfunding model. 

    Benefits Of Crowdfunding For Companies

    • Faster Access To Funds: Crowdfunding has emerged as an alternative way of funding businesses. It helps to raise capital from a large group of investors. This can be a faster way to receive funds when compared to traditional funding methods.
    • Free Marketing: Crowdfunding campaigns can generate publicity. It can increase the visibility of the business. Moreover, it garners brand awareness and a new potential customer base.
    • Validation For Your Product/Service: In the case of crowdfunding for a business startup, you can gauge the interest in terms of your product's market fit. It can help you create effective business strategies based on feedback and market response.
    • Global Reach: Crowdfunding platforms allow companies to attract investors worldwide. It can bring a diverse set of investors that believe in your vision.

    Limitations Of Crowdfunding For Companies

    1. No Guarantee Of Success: A crowdfunding campaign/deal may not reach its funding goal. If it fails, no capital is raised.
    2. Costs And Fees: Platforms often charge management fees or transaction costs. It can impact the overall amount of funds companies receive.
    3. Oversaturation: Most crowdfunding platforms are very competitive. It can be challenging to create visibility and stand out.
    4. Time-Consuming: Planning a crowdfunding campaign is time-consuming and takes significant effort.

    Types Of Crowdfunding

    Crowdfunding Models

    Crowdfunding is a method of raising capital by collecting small contributions from many people. Over the years, it has gained popularity due to its ability to connect potential backers with the campaign owners through online platforms. There are several types of crowdfunding, each serving different purposes, which are discussed below.

    1. Equity-Based Crowdfunding

    Crowdfunding for business startups has recently gained popularity. Under equity-based crowdfunding, early-stage businesses or startups raise capital in exchange for an ownership stake. It allows investors to become shareholders in the startup and may even get additional benefits like voting rights. Crowdfunding platforms act as middlemen and connect businesses to a broad set of investors. In India, equity-based crowdfunding is termed as illegal.

    Characteristics

    • Easy Access To Capital: Early-stage startups can access funding from various investors. This is also known as startup seed funding. It is easier than traditional venture funding for startups.
    • Diversification: Investors can diversify their portfolios by contributing smaller amounts to various startups. But, this investment carries high risk.
    • Community Engagement: It fosters a sense of community since investors are stakeholders in the company's success.

    2. Debt-Based Crowdfunding

    As the name suggests, individuals or businesses raise funds by borrowing money from a large set of investors. It is also known as “crowd lending”.

    In exchange for capital, investors receive fixed interest over a specified tenure. It can cover debt instruments like P2P lending, etc. Crowdfunding platforms facilitate transactions and manage the repayment process.

    Characteristics

    • Structured Repayment Terms: Crowdfunding platforms often show a predefined repayment schedule. It contributes to a clear understanding of when lenders can expect repayments.
    • Risk And Return: Lenders might face the risk of borrower default. But they also receive periodic interest, which tends to be higher than FDs, PPFs, etc.
    • Regulatory Compliance: Platforms are subject to stringent regulatory oversight to protect investors. It is essential to ensure that platforms are regulatory compliant before investing.

    From an investor’s perspective, there is another option in the world of alternative investments. The structure differs from debt-based crowdfunding, but the basic idea remains: Pooling money from the “crowd”. LoanX by Grip Invest is a rated, SEBI-regulated, and listed instrument offering a stable, fixed income as monthly returns. Here, you do not have to wait for funding goals to be achieved. Based on the schedule, you can generate returns as soon as you invest.

    Working of Debt-based Crowdfunding

    3. Donation-Based Crowdfunding

    In this type, individuals contribute money to support a cause, social initiative, or charity. It combines the power of community with financial support and gives a feeling of contentment to the donors.

    Characteristics

    • Philanthropic Intent: Participants support the causes aligning with their beliefs. The motivation stems from a desire to make a positive impact.
    • No Monetary Returns: Participants do not receive any financial returns in exchange for their money.
    • Role Of Online Platforms: Platforms serve as intermediaries and help campaigners create, share, and manage funds. It connects “people in need” with “people who want to help”.

    4. Reward-Based Crowdfunding 

    In this model, backers contribute funds to a project in exchange for non-monetary rewards. Through this, the creators can transform their dreams into reality by garnering global support. Unlike the traditional financing models, the creators offer non-monetary incentives to those who believe in their vision, which can be products, services or perks.

    Characteristics

    • Incentivised Backing: Participants are motivated by the promise of receiving returns. Rewards are often based on the level of contributions.
    • Tangible/Intangible Rewards: Rewards can include tangible items like products, services, merchandise, coupons, etc. It can also include intangible items such as exclusive access, experiences or shout-outs.
    • Time Limited Campaign: Most campaigns are created for a limited time to create urgency among the backers.

    Conclusion

    Crowdfunding has opened up a new possibility for bringing creators and backers together and offering them a dynamic way to concretise on a project. Crowdfunding leverages the collective support of individuals to fund startups, projects, ventures, etc. In recent years, it has become a more accessible, democratised approach to fundraising. Your support is not just an investment but a vote for collective investing in the shared vision.

    Want to invest in listed debt instruments through a crowdfunding-like structure? Explore Grip Invest’s SDIs. These are rated, listed, and SEBI-compliant investment options where investors pool money in exchange for a fixed return.

    Frequently Asked Questions

    1. Is crowdfunding only for startup funding?

    In short, no. It can include charitable causes, pooling money for debt instruments, creative endeavours, etc.

    2. What security measures are in place to protect the backers?

    Security measures vary from platform to platform. The measures also depend on the type of crowdfunding. Always research the platforms’ credibility before investing your funds.

    3. Do backers influence the project’s development?

    Usually no. They might receive regular updates about the stages of a project. But, they do not exercise direct control over the project's decisions.

    4. What is social crowdfunding?

    It refers to using crowdfunding platforms to raise funds for social projects or humanitarian causes.

    5. Is crowdfunding regulated?

    In India, market regulator SEBI moderates the rules for crowdfunding.


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    Disclaimer - Investments in debt securities are subject to risks. Read all the offer-related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading. This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip Invest”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip Invest or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest does not guarantee or assure any return on investments and accepts no liability for the consequences of any actions taken based on the information provided. For more details, please visit https://www.gripinvest.in/. 
    Registered Address - 106, II F, New Asiatic Building, H Block, Connaught Place, New Delhi 110001. 

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