Crowdfunding

Crowdfunding definition | What Is crowdfunding

What Is Crowdfunding-Crowdfunding Definition

It happens so frequently. So many times, brilliant ideas are unable to see the light of the day, not due to lack of hard work, talent or audience but because of not knowing the ‘right people’ and funds herein. Thus, there exists a gap between the incubation of an idea and its fruition. This gap highlights the need to ‘democratize’ access to capital. This is where Crowdfunding comes into the picture.
Crowd funding is an alternate source of finance which involves donations from a large group of people. It is also known as Social funding and is done via crowdfunding websites. Generally, the entrepreneur posts their business idea as a campaign idea on the website along with the description of the project. People who support the project, also called backers, offer donations.

On some websites, a monetary goal and a timeframe is needed to reach the goal. To incentivize people to support the campaign, many rewards etc can be offered based on the amount they donate- like merchandise, acknowledgment, discounts etc.

Crowdfunding Process

Typically, the process for a Crowdfund involves the following steps:

  1. Have a plan along with clearly outlined goals and aims
  2. Choose a platform: which depends on the number of supporters to be targeted. The owner should conduct a proper research into it beforehand.
  3. Develop a marketing plan: this involves identifying the target market, marketing style and time frame.
  4. Build a project campaign: this involves providing basic information to the audience like a. The aim, goals , reason for the project
    b. Why the people should support it
    c. How will it be funded
    d. Duration of Campaign- typically from 30 to 60 days for best results
    e. Create a video: for personal connect between the audience and creator and better understanding of the project
    f. Devise enticing rewards
  5. Launch of the campaign and execution of marketing plan- ensure all goes as per plan, direct and take corrective measures.
  6. Get the funds and complete the project

The Beginning and Growth of Crowdfunding

Sprisingly, it was the global recession of 2008 and the accompanying credit crisis which brought this method into the limelight. With markets crashing and banks being on the brink of bankruptcy, lending reduced to a trickle of its original amount. This forced people to look away from conventional places like the banks, Venture Capitalists, financial institutions etc, to see where they could find enough investment to help their ideas get off ground.
However, the founders of crowd funding were worried that this was a counter-cyclical business and hence, a dead horse once the economy began picking up. They need not have worried however, because the complete opposite happened. Instead of disappearing, this idea became more entrenched. This is because of some innate features of crowdfunding which makes it more than just a place to go when one needs funding and includes the various types of risks involved while starting a project.

Entrepreneurial Risks:Typically, when a budding entrepreneur wants to launch a new product, there are various type of risks involved. The most prominent is the financial risk which deals with how the project would raise money to fund all activities- ranging from research to marketing. But this is not the only hassle. There are two more risks- market risk and execution risk- that come up when the entrepreneur is trying to give birth to an idea. These risks cannot be tackled using traditional finance sources but are dealt effectively by crowdfunding. Hence, not only is crowdfunding here to stay but it is all set to make the entire social fabric of finance more sustainable.

Market Risk:Market risk is ascertaining whether there exists a market for your product. It is also used for brand building, building demand and community, ramping up awareness among other things.

Execution risk:This is the risk that the product would fail on launching. The way to go about it is to get smarter quickly via testing all of the assumptions on which the product has been designed and refine it as much before launch.
Some of the best sites available for crowdfunding are Kickstarter, IndieGogo, Experiment, FunderHut etc.

Some of the best available Crowdfunding Websites are Kickstarter, IndieGogo, Experiment, FunderHut etc.

Types of Crowdfunding

Read below the Crowdfunding Avenues ,various ways to enter the Crowdfunding game

1. Equity/Investing Crowdfunding

This is similar to regular crowdfunding in that here too we have a bunch of people who get together to provide funds. The difference is instead of a gift, reward, advance orders, etc. which is what is involved in vanilla crowdfunding, and the investors all have a vested interest in Equity Crowdfunding. Basically, you become the owner of the business to the extent of the proportion invested. In the past, only specific few were allowed to invest – typically accredited and forming 1% of the population. Now, there has been widening of scope and all can participate.

2. Real Estate Crowdfunding

For as long as anybody can remember, real estate has typically been the investment forte of the wealthy with the common man finding it too expensive and opaque. Real Estate Crowdfunding tries to change that. Here, anybody can invest and the basic concept is similar to normal Crowdfunding. Small investors pool in their income and become owners in proportion to amount invested. This alleviates the need to invest large sums as well as the hassles of managing the property, while still providing the returns of real estate ownership and more transparency. Typically, a project is underwritten and approved by the team. Then subscribers are invited to invest. The investment goes directly to the development of the project which ultimately is either leased or sold after completion.

3. Debt crowdfunding

This is similar to equity crowdfunding except that instead of shares and profits, the investors are known as lenders who receive interest payments and capital repayment on a timely basis. Thus, this is a form of loan given to the start-up from a group of people instead of banks. Also, unlike equity crowdfunding, It does not entail any ownership benefits.

4. Rewards-based Crowdfunding

This method involves receiving funds from backers in exchange for some kind of reward. This typically includes the item produced itself but may vary. This is the most popular form of crowdfunding. The investors are your average next door people and the amounts lie in the lower level range. Hence what makes a difference is the volumes. Two of the most famous rewards based crowdfunding platforms are Indiegogo and Kickstarter.

5. Donation-based crowdfunding

As the name suggests, it is based on the concept of charity and donation without expecting anything in return. The amounts are small usually and this kind is contributed by people more for personal satisfaction and emotional connection. Typically used for funding not-for-profit projects. The donors also get tax benefits depending on the tax rules. Popluar platforms include Crowdrise and GoFundMe.

Crowdfunding Examples

Crowdfunding Definition-Concept Of Crowdfunding
Crowdfunding Case Studies below highlight how relevant crowdfunding has been in fulfilling the gap between birth of an idea to its fruition:

1. Gravity Light:
Amazing example. This is a very novel concept where 30 seconds of lifting leads to the creation of 30 minutes of electricity. This is especially useful for the developing nations with an increase in focus on sustainable energy and has immense future potential in reducing the coal used. The inventors, from London incidentally, could not get Venture Capitalists and opted for crowd funding. This became not only a platform to raise money (about $300,000) but also to confirm whether a market existed for the product.

2. Kit Patch:
In this instance, crowdfunding was used to build the brand name. Kit Patch is a global mosquito repellent and much better than using a mosquito net. They used the platform to raise funds ($500,000) and build up brand awareness which is a very innovative way to advertise. This translated into reduced market risk.

3. Kinoma Create:
similar to Kit Patch, here too the aim was to build up a community before product launch. In this case, the company was a $5 billion one with no dearth of resources. Yet it used the crowd funding platform to create a community before it launched the JavaScript Toolbox.

4. Lava Mae:
Lava Mae was an innovative concept with socio-economic ramifications. It entailed the use of mobile showers for the homeless. They decided to see the reaction and build demand and opted for crowdfunding. Before long, they were flooded with calls from many cities asking for the mobile shower. This was a unique way to advertise.
Lava Mae was an innovative concept with socio-economic ramifications. It entailed the use of mobile showers for the homeless. They decided to see the reaction and build demand and opted for crowdfunding. Before long, they were flooded with calls from many cities asking for the mobile shower. This was a unique way to advertise.

5. Solar Roadways:
The inventors, from Idaho, had a vision; they wanted to help save the earth by making roads- all across the world- solar powered. This has the potential to reduce emissions by 85%. They used crowdfunding to build awareness and become more credible among the media, people and various stakeholders.

6. Kuli Kuli:
The entrepreneurs had developed snack food bars and were looking for early adaptor segments. Using crowd funding, they discovered early adopters segments which were yoga moms.

7. Jivo:
This was featured as the first family robot and crowdfunding raised about $2 million. But what was amazing was when the founder launched the crowdfunding campaign; she also wanted to know who her customer base was and what their requirements for a robot were. She had planned the robot to be akin to a personal assistant to the whole family but while campaigning, she discovered that most of her audience was men who wanted to learn how to cook and wanted the robot to teach them via instructions. Hence, what started as a customer base check turned into a market research which took the product in a different direction!

8. Misfit Shine:
This is another example where the market reaction led the product to be radically different from what was originally intended. This campaign was launched to get funds and also product pricing feedback. This product was an activity tracker which was to be used for keeping a track of the user’s work out, calorie consumption, calories burnt etc. This was supposed to be an elegant solution as the tracker could be hidden easily within the folds of your clothes. Surprisingly, in the campaign he learnt that people wanted to fund the black version more than the silver version which was his favorite. And that was not all. He also discovered they wanted necklaces and bracelets rather than a hidden gadget. This ultimately unlocked a completely new revenue stream and accessory line that he never knew existed. All with the help of a few weeks of campaigning.
From the above case studies, it is worthwhile to mention that some of the inventors/ companies did not even need the money but campaigned just to create a market, research, build awareness, look at the feedback, and refine their product among other things.

All of these case studies show how both the market and execution risks were lowered and the ideas were proven to be worth coming to life.

So to summarize the benefits of Crowdfunding:

1. Raising money
2. Reduction in market risk: do the people care enough about the stuff you’re making.
3. Execution risk: you are trying to solve a demand supply gap and doing it the right way but are you getting the correct market fit, pricing, features etc.
4. Intense yet flexible, open, quick, easy and fun way to learn all this in a matter of weeks.
5. Less risk
6. Image promotion.
7. More investment interest: give a better impression to the Venture capitalist and banks. Example: Lava Mae received $100,000 from the Google Impact Challenge after campaigning.
8. To close the capital: Some Venture capital firms and banks look at a pre requisite before investing in a project. Example: Tinker Bots- made in Germany, tinker bots are robots for kids. It was able to close a venture round deal of $1 million as they had included the crowdfundung platform IndieGogo in their roadmap
9. Capital is invested more wisely: Example- Misfit Shine example above shows how a campaign led to a completely different and new accessory line. Another example is Kinoma Create, where the campaign revealed more insights about the product features and pricing needed to launch it successfully. Ultimately, it can be safely said that the capital is spent in a wiser and more informed manner.
10. Independence: If the campaigning goes well, there are high chances of wholesalers and retailers getting in touch with the inventors to launch their products directly! This is what happened in the case of Knix Underwear which was picked up for distribution by Hudson’s Bay while Kuli Kuli was picked up for wholesale distribution. Similar was the case with Skybell, where Apple itself came calling to the inventor, wanting to directly launch the product.

All in all, crowdfunding is changing the finance world permanently and for the better. It is also making finance more sustainable by reducing risk and allowing more innovation by aiding ideas to bubble up to the top!

 

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