Considering raising funds for your business through crowdfunding? While crowdfunding for startups and businesses is relatively new to India, it is rapidly gaining momentum. If you need help knowing where to begin, this article will show you the ropes.
We will cover everything from what crowdfunding is to the various types, its advantages and disadvantages, and how it works in India. Additionally, we will explore how you can run a successful crowdfunding campaign and the factors you should take care of. Let's dive right in!
What is crowdfunding?
The word "crowdfunding" combines "crowd" and "funding", which tells you exactly what it does- a group of people pool together their funds for your business. While loans and venture capitalists' investments are traditional capital-raising methods, crowdfunding happens through the general public, who are interested in your business. This means that hundreds of people may invest in your business through amounts of their choice, allowing you to meet your capital requirements.
Through crowdfunding, you can skip the eligibility requirements and long processing times at banks and avoid dependence on big investors. Crowdfunding works for businesses at any stage of their journey, be it a new startup that needs funding to begin its operations or an established company that needs funds to expand. Your ability to generate interest in your brand determines your crowdfunding campaign's success.
Types of crowdfunding
There are four types of crowdfunding based on what the investors receive for their investment.
#1 Donation-based
Donation-based crowdfunding works by collecting funds from individuals willing to contribute without expecting any reward from your business. This type of crowdfunding works for businesses that focus on causes that people believe in and wish to contribute towards.
#2 Reward-based
A reward-based crowdfunding system promises the investors something in return after a successful campaign. Such rewards may be in the form of discounts, gift cards, products, services or experiences. The concept used here is pre-selling, where the business offers early access to its supporters.
#3 Debt-based
Debt-based crowdfunding is also called peer-to-peer lending, where businesses can avail loans from individual lenders. These loans are meant to be repaid after a pre-announced period with interest with the RBI acting as a regulator.
Debt-based crowdfunding works best for businesses that find it difficult to source loans from traditional financial institutions. In this crowdfunding type, businesses must be cautious about repaying their debt timely to maintain credibility.
#4 Equity-based
Equity-based crowdfunding raises funds by offering shares in the business to investors. This allows businesses to raise capital through an early pool of investors who will also become shareholders. However, with this type of crowdfunding, there are legal contingencies to consider in India along with the resulting ownership dilution. As of 2023, SEBI has declared that online equity-based crowdfunding platforms are illegal. This ban on equity-based crowdfunding is to protect investors from associated risks.
Online crowdfunding in India
Many emerging online platforms in India allow startups to procure funds by leveraging crowdfunding. Each platform caters to a specific type of business and crowdfunding strategy. They also provide all the technical support you need to run your campaign. Right now, is the perfect time to consider online crowdfunding for your business in India, as it is predicted that this year the crowdfunding market in India will grow to Rs. 42 crores, followed by a steady increase in the coming years.
How to run a successful crowdfunding campaign?
A successful crowdfunding campaign lets you connect with your audience and tell them why your business deserves funding. For individuals to pitch in and support your business, your brand story, values and goals must resonate with them. To do so, you must put considerable effort into planning, creating and running your campaign. Here is how to ensure your crowdfunding efforts are successful.
#1 Plan
Careful planning is vital to any successful crowdfunding campaign. Start by determining the amount of funds your business needs and the target audience you wish to reach with your campaign. At this stage, you must also consider the costs of creating the campaign.
#2 Create an impactful narrative
Create a campaign that narrates your brand story, unique value and why someone should invest. Tell your audience what problem you seek to solve and experiment with various formats to find the one that suits your audience.
#3 Choose the right platform
Find a platform that aligns with your campaign goals and budget to host your campaign. Make sure that this platform will allow you to reach the audience you wish to communicate with.
#4 Create a marketing strategy
Think about channels to promote your campaign on, highlight the perks you offer to those who invest and create compelling messages for each channel.
#5 Build trust
Build trust and credibility by regularly updating your audience about the status of your campaign. Be clear about how you will use the funds and provide transparent answers to any questions raised.
#6 Deliver
Once the campaign succeeds, work diligently to deliver what you promised, whether rewards or debt repayment. Delivering on promises protects your brand image and credibility.
The pros and cons of crowdfunding
Crowdfunding allows you to generate attention and create interest in your business. It expands your visibility and reach, promising you more customers, and helps build a community of loyal customers highly interested in your brand and what it offers. It is a quicker alternative to traditional financing options as it reduces the amount of paperwork and verification.
However, if your crowdfunding campaign does not go as planned, it can hurt your brand reputation. Since campaigns require you to share your business idea in depth, intellectual property theft is also likely.
An alternative to crowdfunding
While crowdfunding is a promising, quick way to raise funds, it may not work for every business. An alternative that offers many of the same benefits is a business loan from a reputed lender such as Tata Capital.
Tata Capital’s business loans are multi-purpose, have a relaxed eligibility criteria, offer competitive business loan interest rates, and have flexible repayment options. We also make the application process quick and easy by allowing you to apply online in 5 simple steps. Are you seeking funds for your startup? Visit the Tata Capital website to learn more and apply today!
05 February 2024
6 mins read
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