Introduction

Crowdfunding has transformed how startups, nonprofits, and individuals raise capital today. It does not matter if you are raising funds to launch a new product, support a charity, or fund a community project; knowing the styles of crowdfunding will help you choose the right approach for your need. Today’s blog will outline the top 5 types of crowdfunding, whether crowdfunding is legal in India, and examine some of the top startup fundraising solutions and alternative funding methods.

What is crowdfunding?

At a basic level, crowdfunding is raising money for a project, startup, mission, or cause through the efforts of many people. Instead of solely relying on banks or institutional investors, crowdfunding allows an individual or organization to raise money by pooling together small amounts of money from many people, often through the internet. Crowdfunding represents a new way of funding that has disrupted the traditional financing process by democratizing access to capital and empowering entrepreneurs and organizations in new, creative ways.

The Top 5 Types of Crowdfunding

The five types of crowdfunding below are the most common crowdfunding models available today, with each having distinct advantages and specific uses.

1. Donation Crowdfunding

Donation crowdfunding is the most basic model of crowdfunding, where individuals donate funds to contribute toward a cause or project without compensation. This model is most commonly used by nonprofits and community organizations, including personal fundraisers.Fundraisers for a children’s foundation to support children with either education or healthcare will typically use a donation crowdfunding model. Examples of donation crowdfunding are GoFundMe or Ketto, with all donations going toward their respective causes.

Pros:-

No payback or loss of equity.
A great way to raise funds for a cause that has emotional appeal.
Builds a community of like-minded individuals that support a similar mission.

Cons:-

Usually ONLY for charity or a cause in the precursory purpose or related to charity.

You are only guaranteed funding if you reach your fundraising goal.

2. Reward-Based Crowdfunding

Reward-based crowdfunding is when backers get non-cash-related rewards in exchange for money. Rewards can include early products, personalized apparel, and special mentions.
Reward-based crowdfunding is popular among startups looking to launch some type of new product or new creative endeavor that offers rewards that are tangible to supporters. If you are looking for reward-based crowdfunding, take a look at reward-based crowdfunding platforms like Kickstarter and Indiegogo to get started.

Pros:

Reward-based crowdfunding encourages supporters to fund your campaign with a tangible reward.
– Reward-based crowdfunding validates the idea of launching a product before officially launching.
– Reward-based crowdfunding builds an early customer base before your official product launch.

Cons:

– Must fulfill the promised incentive or reward.
– Possible logistical challenges to be fulfilled.

3. Equity-Based Crowdfunding

Equity crowdfunding is a process in which investors can fund a business in return for either equity or shares in your business. Equity crowdfunding differs from donation- or reward-based crowdfunding in that the investor expects a return on their investment, and there is the potential for a financial return.
Equity crowdfunding would be appropriate for new companies and growing businesses that want to raise capital without traditional loans and are willing to share ownership with many investors. Equity crowdfunding is regulated to protect the investor and is growing in popularity in India and worldwide.

Pros:

Ability to raise larger amounts of capital from many investors.
Investors are incentivized to see the business succeed.
You will not have to repay investors like you might with a loan.

Cons:

Legal and regulatory requirements can be complicated.
Ownership and control of the company will be diluted.

4. Debt-Based Crowdfunding

Also referred to as peer-to-peer lending, debt crowdfunding entails raising funds from individuals, whereby the individuals lend their money to the organization or person they are deciding to lend it to, then agree to repayment with interest.
Debt crowdfunding can often provide more favorable terms than traditional loans for individuals or businesses that would be better suited for this type of alternative finance, especially startups or businesses that know how they would readjust.

Pros:

Have access to capital without giving away ownership.
A bit more flexible than a bank loan in some cases.
Investors receive income from interest.

Cons:

Have to repay with interest.
Applicants must demonstrate a reasonable level of creditworthiness.

5. Hybrid Crowdfunding

Some campaigns are conceived to offer a form of crowdfunding mixed with different types of crowdfunding to service the specific needs of the campaign itself. For example, a startup could offer equity shares, then offer some rewards for different contributions, or they could offer donations for enhanced rewards for donors to pool more campaign supporters.
Hybrid crowdfunding provides flexibility, but planning your terms and communicating what happens with backer contributions should be planned and communicated and made fully transparent to backers and contributors.

Is Crowdfunding Permitted in India?

A common question from startups and not-for-profits is, is crowdfunding permitted in India? The short answer is yes, but there are regulations in this space.
Equity crowdfunding for startups is also regulated by the Securities and Exchange Board of India (SEBI) to protect investors in accordance with compliance requirements. Donation- and reward-based crowdfunding is usually legal and has been on the upward trend, as long as it follows the offering rules and conditions associated with fundraising and does not involve fraud.
Crowdfunding has been gaining traction in India with the increasing government encouragement of startups and social enterprises. Many platforms, including Ketto, Milaap, and ImpactGuru, are legally providing sources of funding for a range of causes and businesses.

Means of Funding a Startup

Now that you’ve decided how to fund your startup, it’s time to assess the funding sources. Crowdfunding is just a single option, so in addition to crowdfunding, consider the following common means of financing a business:

Angel investors

Venture capital

Bank loans

Your savings

Family or friends

Crowdfunding can provide you financial investment, but it can also act as a means to show that there is traction to your idea. All in all, crowdfunding just risks a considerable amount of investment capital and involves a level of risk to your business compared to other funding sources.

Alternative Funding Sources

When you pursue crowdfunding, you could consider alternative funding sources that startups and organizations can use:

Government grants and subsidies

Incubator and accelerator programs

Corporate Sponsorships

Microfinance institution

The sources considered can be additional funding streams on top of a favorable fundraising campaign, or they can be resources that offer mentorship or networking in addition to funding.

Evaluating Available Startup Fundraising Options

The motivation for selecting available startup fundraising opportunities primarily lies with your business model, growth sequence, and available means.
If your project is community-focused or social venture-driven, consider using donation-crowdfunding as your approach to raise money with an emotional appeal.
If your aim is to pre-sell a product and gauge market interest, use reward-based crowdfunding.
If your startup fundraising needs are larger and you want to include potential investors, then consider going with equity crowdfunding.
If you want to continue to borrow money instead of giving up equity, you can also look into debt crowdfunding.
Each type of crowdfunding has its unique mix of risk, control, and potential.

Concluding Thoughts on Types of Crowdfunding

Knowing the types of crowdfunding involves understanding how they can help you choose which is the best type for your crowdfunding campaign. Whether you are building a nonprofit to ensure children’s care, developing a newer innovative “widget,” or financing a community project, crowdfunding offers a practical and exciting way to collect funds for all.

Make sure to keep legal compliance, clear communication, and realistic expectations in mind to leverage crowdfunding in a successful way. A combination of the right funding sources will expedite the impact and growth of your project.
If you’re interested, there are plenty of free online resources and other platforms that are specific to niche fundraising campaigns that can elaborate on how to leverage crowdfunding for startups and foundations.

Read More: https://cate.kpven.com/crowdfunding-for-education/