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.
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.
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.
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.
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.
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.
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.
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.
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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