CrowdfundingNew way to fund your ideas

In our materialistic world, having a dream to start a business of our own is quite expensive. A person needs great deal of money to take off.If you have a perfect idea for a business, but lack capital to make it come to life, then crowdfunding could be just what you need. It is another booming industry which facilitates funds to other projects or ventures to start off.

What is Crowdfunding?

Crowdfunding is a way of raising finance for a project or venture by asking a large number of people each for a small amount of money. It is a collective effort by people who network and pool their money together, usually via the Internet, in order to invest in and support efforts initiated by other people or organizations.

Crowdfunding is a place where everyone can come together to fund a creator’s dream project. It switches the idea of asking a few people for large sum of money. Internet has being used as an effective tool over here to talk to thousands of potential funders. It gives entrepreneur an ability to raise money from a collective group of people who are connected through the internet and want to support your project.

How it works?

The crowdfunding model is fueled by three types of people: the project initiator who proposes the idea or project to be funded; individuals or groups who support the idea; and a moderating organization (the "platform") that brings the parties together to launch the idea. Those seeking funds will set up a profile of their project on a website and then campaign is run by the crowdfunding sites.Project creator can approach colleagues, peers, family, friends and even strangers through a campaign.

1

Different Types of Crowdfunding:

1. Rewards Crowdfunding

Rewards-based crowdfunding plays an important role in supporting and funding ideas, creative concepts, and newer businesses or projects. It’s a great way to get an idea off the ground and build a brand and community. People invest simply because they believe in the project. Rewards can be offered such as acknowledgements on an album cover, tickets to an event, regular news updates, free gifts and so on. Returns are considered intangible. This is where people can pre-purchase products, buy experiences, or simply donate. While this funding may in some cases go towards helping a business, funders are not allowed to invest and become shareholders.

Famous reward based Crowdfunding websites are:

2Kickstarter, IndieGoGo, Rockethub, Peerbacker, appbackr, Invested.in

OculusVR, a virtual reality headset maker, sold to Facebook in 2014 for $2 Billion. It used rewards-based crowd funding to pre-sale its virtual reality product. Before Facebook paid to buy Oculus VR, 9,500 people donated via Kickstarterto get Oculus off the ground. Those early donors got thank-you notes, T-shirts or prototype headsets. Donations through Kickstarter are just for reward purpose not investments.

Types of Strategy for Crowdfunding:

Rewards-based crowdfunding campaigns are commonly offered in one of two models.

KIA(Keep it all)

Here the entrepreneurial firm sets a fundraising goal and keeps the entire amount raised regardless of whether or not they meet their goal. Here there is a risk to the crowd that an underfunded project goes ahead.  Small scalable projects are more likely to be funded through the KIA scheme.

AON(All or Nothing)

The entrepreneurial firm sets a fundraising goal and keeps nothing unless the goal is achieved. Potential investors inclined towards AON, as substandard product are not released if the funding goal is not achieved. It also Provide detail information about the campaign. Large non-scalable projects are more likely to be funded through the AON scheme.

2. Equity Crowdfunding

People invest in an opportunity in exchange for equity. Money is exchanged for shares, or for a small stake in the business, project or venture. Equity crowdfunding allows people to become shareholders in a company.Equity crowdfunding became legal when President Obama signed the JOBS Act on April 5, 2012. It has opened up the opportunity for entrepreneurs to publicly advertise for investment, and for accredited investors to invest online via equity crowdfunding.

Famous Equity based Crowdfunding websites are:

Bitvore is a cloud corporate database. They provided an answer to the big data dilemma faced by businesses. This innovative project launched an equity crowdfunding campaign on Fundable. They closed a $4,500,000 round to further develop their product.

3. Debt Crowdfunding

In debt Crowdfunding, investors receive their money back with interest. Also called peer-to-peer (p2p) lending, it allows for the lending of money while bypassing traditional banks. Returns are financial, but investors also have the benefit of having contributed to the success of an idea they believe in. In the

3

Fundable, Crowdfunder, Micro Ventures, Angel List, Circle up, Grow Venture Community

case of microfinance, where very small sums of money are leant to the very poor, most often in developing countries, no interest is paid on the loan and the lender is rewarded by doing social good. These Platforms gained popularity, as banks increased interest rates or reduced their level of lending activity.

Famous Debt based Crowdfunding websites are:

4. Charity Crowdfunding

Charity crowdfunding is the collective effort of individuals to help charitable causes. Here donors have a social motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the cause.

Famous Charity based Crowdfunding websites are:

These crowdfunding website are spread across different genre too. There are some crowdfunding websites which are specially meant forspecific genre of business likeSellabandand PledgeMusicfor Music, Appbackrfor Apps etc.

Kickstarter and Indiegogo.com are well-known websites for crowdfunding across the world. Kickstarter is based on AON strategy of reward funding while Indiegogo is based on KIA strategy.

Famous Projects by Kickstarter:

Kickstarter charges 5% fee for every successful project. As Amazon Payment is used to receive the fund, Amazon will apply credit card processing fees, which are 3-5% of the raised project fund.

A dock made for the iPhone designed by Casey Hopkins became the first Kickstarter project to break a million dollars pledged. A few hours later, a project by computer game developers Double Fine Productions to fund a new adventure game reached the same figure and finished with over $3 million pledged.This was also the first time Kickstarter raised over a million dollars in pledges in a single day. On August 30, 2014, the "Coolest Cooler", an icebox created by Ryan Grepper, became the most funded Kickstarter project in history, with US$13.28 million in funding – breaking the record previously held by the Pebble smartwatch project.

4

Lending Club, Prosper, SoMolend, Endurance Leading Network

GoFundMe, Razoo, Crowdrise

Famous Projects by Indiegogo:

Indiegogo will get 4% from every raised fund, and 3% will be charged for credit card processing, plus $25 wire fee for non-U.S. campaigns. If a person applied for a Flexible Funding plan and a campaign failed to reach the goal, Indiegogo will charge 9% of the fund, but creators can take the remaining funds away.

The Canary Smart Home security system found crowdfunding success on the IndieGoGo platform in summer of 2013. Over $1.9 million was raised in 34 days for the device, which contains an HD video camera and multiple sensors that track everything from motion to temperature and air quality.

 Let's Build a Tesla Museum campaign to buy back Nikola Tesla’s (greatest Greek engineer and inventor) old laboratory, raised $1.3 million from 33,253 funders. Their goal was $850,000.

5

Ref:

http://www.nytimes.com/2014/03/30/opinion/sunday/how-to-harm-investors.html

http://www.maximumpc.com/three_kickstarter_alternatives_2014?page=0,2

http://www.ukcfa.org.uk/what-is-crowdfunding

http://www.hongkiat.com/blog/crowdfunding-sites/

http://www.shopify.com/blog/8071463-the-top-5-crowdfunding-sites-for-your-next-big-idea

http://didattica.unibocconi.it/mypage/upload/49036_20110414_125339_JOSM_CROWD_FINAL.PDF

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2447567

http://www.forbes.com/sites/chancebarnett/2014/05/01/2-billion-facebook-acquisition-raises-question-is-equity-crowdfunding-better/

http://www.forbes.com/sites/chancebarnett/2014/08/29/crowdfunding-sites-in-2014/

http://www.forbes.com/sites/wilschroter/2014/04/16/top-10-business-crowdfunding-campaigns-of-all-time/

6