Blog Details

Author: Associate Debasmita Patra

Crowdfunding is an emerging way of raising capital by making use of social media network or basically through the internet – Facebook, Twitter, LinkedIn, etc. This method of raising capital because a hit when the ex-president of the USA, Mr. Barack Obama used crowdfunding to arrange funds for the elections. Crowdfunding is an alternative to conventional small business financing that has transformed many promising ideas into profitable realities, without having to pay back a penny. In India, though traditional fundraising still seems to be prevalent, crowdfunding has also been paving its way into the Indian economy by aiding several startups.

Among all its types, reward-based or seed crowdfunding is the most popular and promising one. This type of crowdfunding has been a great source of funding for small businesses. Reward-based crowdfunding is popular among startups and small businesses that provide the product itself or service in return for funding to start a business on the specified platforms. International company, Kickstarter launched the Pebble watch in 2015, a stellar example of how the idea of reward-based crowdfunding successfully launched a product in the market.

Depending upon the amount of money one donates, rewards can be divided into 3 categories – 

Pre-order

One of the most effective ways of handing out rewards, pre-order rewards give the receivers early access to the ends of the business. For instance, makers or developers of a video game choose to crowdfund the game. Thus the viewers start evaluating the game and put in more ideas to tailor the end result to suit the needs of the people.

Services

In case the concerned business or startup isn't able to give out pre-order rewards owing to the kind of services it provides, such a company can offer its services instead. Developers often offer to write codes for backers, and restaurant owners cook meals for them.

Acknowledgment

As a perfect entry-level gift, a business can provide the backers with a sort of acknowledgment by recognizing their contribution and respecting them. For instance, backers or patrons who backed the project by paying more than Rs. 1000, can have their names displayed on the website supplied to them related to the campaign concerned.

HOW DOES IT WORK?

To start with the process of crowdfunding, a business owner has to have a plan hatched up regarding the cost of the products or services to be offered. Then the rewards have to be fixed. While some project owners prefer to set a single contribution amount for their products, others provide a range of rewards for that purpose. After fixing the rewards, the campaigner must write a solid pitch for his story, giving out precise details as to the kinds of rewards and when they will be delivered.

The next step is to target the core community depending upon the nature of the products or services that are being dealt with. Exclusive promotional videos are produced to help get the backers interested in the project. The owners or founders of such projects have the crowdfunding opportunity with their family and friends.

People who find the idea exciting or the business promising donate to them and share their activities over social media. In return for the donations that they have made, backers receive rewards based on the amount of contribution they commit.

Once the business meets its rewards deadline, it has to give out the rewards, typically within a few months following a successfully funded project. The rewards, in this case, can be:

·      Goodies or merchandise related to the campaign

·      Free invites to any exhibition or premier of a movie

·      Meet and greet as in case of most NGOs, of the donors with celebrities and other famous people.

·      Thank you notes, personalized or customized to fit the purpose

·      Social media shootouts, trending nowadays, have also helped many young startup owners to establish their business.

Though rewards-based crowdfunding is one of the simplest and cheapest ways to raise capital without any collateral or credit check, there are several downsides to it. In case of business seeking significant funds, such method of crowdfunding can't be helpful as the company can't rely on individual donations to fulfill its financial requirements.

Moreover, if the goal of a crowdfunded project is not met within the set deadline, any amount thus raised may have to be forfeited. Also, reward-based crowdfunding makes the project ideas vulnerable. Since the process makes use of social media to promote the project or business, the ideas are open to potential donors and competitors as well. This increases the chances of their ideas being stolen, which makes patenting such ideas at the earliest inevitable.

Changing laws are now making it easier to crowdfund business ideas. With the wind at their backs, crowdfunding platforms are expanding their product offerings and are more aggressively courting new users of all types.