What is Crowdfunding? – A Basic Guide

Crowdfunding explained

Crowd Funding as a concept!!!

Do you know something interesting about the Statue of Liberty?

It was crowd-funded!!!

When the City of New York was not able to garner adequate funds to build pavements for Statue of Liberty, Joseph Pulitzer, a renowned publisher, raised a crowd funding campaign where more than 160,000 donors contributed to the success of the campaign with more than three-quarters of the donations amounting to less than a dollar. The money thus collected from thousands of supporters was used in building the pavement at the iconic Status of Liberty.

So, what is crowdfunding?

Crowdfunding, by definition, is “the practice of funding a project or idea by raising many small amounts of money from a large number of people, typically via the Internet.” It’s the democratization of funding and giving power to the people. In other words, it is “Crowd Funding of the people, by the people, for the people”.

Oh, this sound likes some new concept? Actually, the answer is No!! This has been an age-old practice of raising funds for various causes including social, creative, recreational etc.

I am sure you do remember that, as a kid in school, some of us were given a form to collect contributions from our family, friends and relatives for an NGO supporting a noble cause or for a natural disaster.

You are right, you were crowdfunding even before you realized it!!

Will crowdfunding as a concept work in India?

Our social fabric, culture, and upbringing etc. are more suitable for a concept like crowd funding. To understand it in a simpler and more practical way, recollect how we helped our friends and relatives by contributing whatever small amount possible when they were in need of money, which could a medical emergency or may be a social function in the family!!!

In fact Crowd Funding, as a concept, has been there for a long time in India. About 50 years back in 1976, noted film-maker Shyam Benegal crowd funded his movie “Manthan” by collecting Rs. 2 each from 500,000 farmers in Gujarat. Probably, that was the first crowd-funded movie in India. Recently more than Rs. one crore has been raised for Nepal Earthquake relief fund through various crowdfunding platforms in India.

Crowd Funding is no more restricted to raising support for social causes only, creative people like Musicians, Movie Makers, Start-ups et all are using crowdfunding platforms to raise funds and garner support for their Ideas.

The next question that arises in the minds is ‘Why should anyone contribute’?

Many of us often feel the desire to do something to support people who are doing credible work around us. All we need is a credible and trustworthy platform or channel where we can find and support projects associated with our interest which could be social causes for someone; music, movie, travel, new tech products etc for others. We are a country of more than a billion people and if all of us start helping by making small contributions, together we can bring smiles on hundreds of faces to start with. Remember it’s said, “A hundred miles journey starts with a small step”.

I made a contribution. Do I get anything in return for making contributions to campaigns?

Yes, you do!! However, the nature of return would vary from the type of crowd funding platform you are using. In general, crowdfunding platform, as an offering and model, can be divided into 3 categories:

1. Equity Based Crowd Funding: The investor gets equity ownership, in the form of shares, in the company in exchange of his investments. Return could come from dividends or from capital gain on sale of those shares in the secondary market. This is, however, not legalized and practiced in India.

2. Debt Based Crowd Funding: The investor gets interest as return and principal on maturity for his investments. Again, It is still almost absent in India.

3. Reward/ Donation-based crowdfunding: The investor makes a contribution to the project without expecting any financial benefit. However, for most of the projects, the contributor gets a reward from the campaign owner for his contribution to the project.

Reward/ Donation-based crowdfunding is where the project owner creates a campaign for an idea and seeks support from the crowd to contribute small amounts of money to fund his concept. Unlike the Equity/ Debt-based crowdfunding platform, the contributors don’t get any financial return. However, the project owner rewards them with exciting and exclusive perks related to the project itself.

For e.g. A director of a movie may give premier show movie tickets as rewards , or invite the supporters to spend a day with the crew during making of the movie. This kind of crowdfunding platform can be used by a wide variety of people to seek support and help for their concept like NGOs/ Individuals for raising money for social causes, Start-ups for their product/ services, Artists for their work etc.