How does Crowdfunding Work to Raise Money for Startup | How Crowdfunding Works in India?

The concept of crowdfunding has just started to gain momentum in India. 'Funding' is the first problem new people, entering the world of business for the first time, find it difficult.

Startups have to turn to institutions and angel investors because there is a lack of funds for bootstrapping or a lack of help from friends or family. But banks tend to refuse business loans for first-time entrepreneurs and often ask for huge collateral. Sometimes, it's difficult to convince investors also. That crowdfunding platforms can play a key role in helping entrepreneurs make the most of their ideas.

Crowdfunding is defined as a pooling of resources by a group of people for a common goal. In this concept, common mass is approached to raise funds for your idea execution, project, startup, or cause.

According to a survey conducted, less than 2% of the companies end up raising funds from professional investors. This is large because of reasons ranging from non-scalable businesses to the lack of exits. The rest 98% still need to raise funds to take their startup to the next level.

Some of the popular crowdfunding sites in India are Kickstarter, Wishberry, Indiegogo, FuelADream, Fundable, Ketto, Catapooolt, and Milaap which not only help Startups or individuals to launch a product but also test the acceptance of the product in the market.

If we compare the crowdfunding market in India to that of the United States, we are still considerably smaller. However, if estimates are to be believed, this can soon change.

Let's see how does crowdfunding works in India for businesses and startups and its benefits.

How Does Crowdfunding Work?
How to Build a Crowdfunding Website or Platform in India?
Benefits of Crowdfunding
How to Raise Funds from Crowdfunding in India?

How Does Crowdfunding Work?

Donation Model

In the donation model, individuals make a financial contribution to a project without any expectations of financial benefits.

Lending Model

In this model, individuals will lend money to the project with the expectation of being repaid under the terms and conditions agreed.

Reward-Based Crowdfunding

In reward-based crowdfunding, people contribute to your campaign and you give them a reward in return. The reward could be a DVD of the Film, The Gadget, etc. Equity cannot be given as a Reward.

Investment Model

In the Investment model of crowdfunding, the investor receives an equity stake in the project. Equity-based crowdfunding is not so common in India. Crowdfunding is becoming a lifeline for new entrepreneurs and small businesses as it helps them in many ways without losing much equity. Let's see how crowdfunding helps startups and businesses in India.

How to Build a Crowdfunding Website or Platform in India?

Easy Steps to Create a Crowdfunding website or platform:

Find a Crowdfunding Niche

Choosing a niche helps to classify your site from others, and can also provide value to your campaign creators and sponsors. Every new crowdfunding website or platform is dedicated to a niche. That means that the website will host crowdfunding campaigns for one particular matter or kind of product.

This is due to the big platforms that are available to crowdfunding creators. There is no use in trying to compete with the bigger crowdfunding platforms on the internet because you will likely lose.

Use Crowdfunding Technology

Search for the right technology that you want to use for your Crowdfunding website. Not all technology is paid, but when it comes to running a successful Crowdfunding platform, you want to be sure that there are no faults so users have a great experience on your website.

You get what you pay for, if you use free Crowdfunding software, do not be surprised when something goes wrong with your website. Choosing a SaaS (Software as a Service) product can provide you with real-time support. This way you can get your site up and running fast, with as few issues as possible. And if there is a problem on the site, you are not left to your own to fix the issue.

Connect The Payment Gateway

It is usually best to open up a new bank account for the Crowdfunding platform if you are serious about taking a transaction fee on the donations to the website. If you were not already known, most Crowdfunding websites are taking a transaction fee on each donation to the campaigns on the site.

This is a great way to generate an income on the side, by utilizing Crowdfunding. Depending on the usage of the platform, a bank account can be set up and connected to the payment gateway to receive a transaction fee.

Add The Content

Once you are finished choosing the niche, platform, and connecting your payment solution to your bank account, next, is the most time-consuming step, adding the content to your platform. You should have access to the front-end source code, to manipulate the User Interface (UI) to your standards.

You will be restricted by the default UI and features from the product if you do not have access to the front-end source code. It is best practice to create all of the content, and have all of the images/videos ready before adding the content to the site. This can save a lot of time by simply copying and pasting the content onto the site.

Launch The Platform

Once the platform is all set up, the next step is to launch the platform. Before launching the platform, however, it is recommended to have Crowdfunding campaigns ready to host their campaign on your platform before launching.

The first handful of campaigns on your new platform is likely going to be from friends and family. If those campaigns are not available, you need to start searching for campaigns by joining online communities in your niche, and in the Crowdfunding industry.

Market The Platform

The website is finally created and launched on the internet. The last step is to market the platform. The whole idea is to market the Crowdfunding platform successfully so that many campaign creators are approaching you to create a campaign on your platform. This way, you do not have to do any work to make money. This can be a great solution for those that want to generate monthly revenue by simply approving or disapproving Crowdfunding campaigns.

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Benefits of Crowdfunding

Crowdfunding Lowers Risk

Starting up a company is a very risky and challenging journey. Launching a crowdfunding campaign hedges these risks and serves as a valuable learning experience. Crowdfunding as it is today allows an entrepreneur to gain market validation and avoid giving up equity before going all out and taking a product concept to market.

Crowdfunding Saves Equity

Crowdfunding is a great alternative way to fund a venture and it can be done without giving up equity or accumulating debt.

Crowdfunding As Marketing Tool

An active crowdfunding campaign is a good way to introduce a venture’s overall mission and vision to the market, as it is a free and easy way to reach numerous channels.

Crowdfunding Proves The Concept

Showing investors and convincing yourself that your venture has received sufficient market validation at an early stage is hard. Crowdfunding makes this possible as people get to know about your product and show their response.

Crowdfunding Helps to Brainstorm Ideas

One of the biggest challenges for small businesses and entrepreneurs is to be able to cover all the holes that a venture might have at an early stage. By having a crowdfunding campaign, the entrepreneur has the ability to engage the crowd and receive comments, feedback, and ideas.

Crowdfunding Introduces Prospective Loyal Customers

People who view the entrepreneur’s campaign and decide to contribute are ones that believe in the success of the company in the long run. In essence, these people are early adopters. Early adopters are very important to every business, as they will help spread the initial word without asking for anything in return. Such people care about the venture’s brand and message and are likely to be loyal customers throughout their life.

Crowdfunding is Easier Than Traditional Applications

Applying for a loan or pursuing other capital investments are two of the most painful processes that every entrepreneur has to go through, especially during the early stages of the company.

Crowdfunding is Free PR

The momentum created by successful crowdfunding campaigns attracts potential investment from traditional channels and attention from media outlets. Success stories make for interesting reading, and reporters are always hungry for them.

Crowdfunding Provides The Opportunity of Pre-selling

Launching a crowdfunding campaign gives an entrepreneur the ability to pre-sell a product or concept that they haven’t yet taken to market. This is a good way to gauge user reaction and analyze the market in order to decide whether to pursue or pivot on a given concept.

Crowdfunding is Free to Launch

Launching a crowdfunding campaign on some of the platforms is absolutely free. You will be charged a minimal fee when you raise funds.

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How to Raise Funds from Crowdfunding in India?

Choose the Right Crowdfunding Platform

This is the major step where most of the crowdfunding projects fail in India and the project creator never realizes it. As crowdfunding is a very niche stage in India, it is very important for crowdfunding platforms to help project creators in creating projects and help them to shape their projects for an Indian audience. Choose your crowdfunding portal wisely.

Every crowdfunding platform in India takes a different approach to projects. Do little research on all the portals. Talk with some platforms, regarding your project and find out which crowdfunding platform fits perfectly for you.

Create the Perfect Pitch Video for your Crowdfunding Project

This is the most important factor which most of the people in India forget. Most people see Kickstarter and create crowdfunding projects, thinking that they'll get millions overnight, which is never true.

Entrepreneurs need to understand the mentality and psychology of Indians, compared to other nations. Indians love giving. We give millions and billions of rupees every year in temples and charity but when it comes to lending a hundred rupees to some person we think thousand times. That is where your crowdfunding video and description play a vital role in raising funds from them.

Most people judge a crowdfunding project by just looking at the video. Make your crowdfunding video short and simple. Don't add fancy 3D imaging graphics or VFX in the video. Nor add too much animation to it. Keep it to the point, make it clear.

Remember, your end result from this video is money, not entertainment. Show your product, show yourself, your team, your workspace, your past work, and tell why someone should fund you or what change your project is going to make in society. This helps to build trust for the contributor.

Project Description

Write a detailed description but add attractive graphics along with it. In observation, it was found that most of the people in India write 2-3 lines or 1-2 paragraphs without graphics in their description. Writing only 2-3 lines shows that you are not serious about your product.

A dedicated investor would never be investing in your project without knowing in detail about it. It is suggested to keep long description, as the one who is going to give a large amount of money to a stranger will surely want to read everything.

Create a graphic picture that shows your product, your rewards, your timeline when you'll deliver me rewards, and most importantly, your product specification.

Rewards

You need to understand that in India, most of the target audience is the middle class. Nobody will be willing to give more than 5% of their monthly salary unless you're giving them something cool in return.

Only rich people will give your project above Rs 5-10K and that if you're giving them a customized product or something special in return. You need to consider giving a special reward gift in return which provides them emotional value. For example, you can give them your product with a celebrity's signature or better, help them meet the celebrity.

PR (Public Relation)

Most of the people in India are unaware of crowdfunding. So, it is very important for the project creator to get the right reach of the right audience. Once your crowdfunding project is ready, you need to decide your communication strategy before making the project live.

Create a mailer list, from your school friends to current enemies. Tell them all about your project and ask them to fund it once the project is live. Don't be ashamed, be straightforward in asking to fund your project. If they don't fund it, at least ask them to share a word of mouth or a small post on their social media. It will help you to raise a little fund. Then, it’s time for PR.

Get in touch with all your press contacts and tell them about your crowdfunding project. If you don't have any contacts, hire a PR agency. If you can't hire a PR agency, ask your crowdfunding portal to do PR on your behalf.

Some of the crowdfunding platforms in India help with that too. PR or Public relations are a crucial factor in any business. You need to have credibility in writing to prove your genuineness and potential in your PR.

News articles will help you to achieve this and act as a backbone. It'll also help you to get strangers to know about your project and in some cases, raise funds from them.

Get in touch with bloggers who write articles regarding your project field. Let them know about your project and ask them to write an article on your project. Choose a blog with good reach and engagement.

Social Media and Follow-up

Build a social media strategy and create some unique campaigns surrounding your project. Social Media will help you to get that boost for making your project a success. A creative campaign will help your project go viral and even to reach the audience who'll fund it.

• Do Facebook posts thrice a day.
• Interact with strangers on Twitter by tweeting, hourly.
• Tell every possible person on the internet about your project.
• Send emails to all your contacts regarding your project, weekly.
• Take a follow-up via email or phone with the people who said they'll fund your project or showed their interest.  
• Connect with writers who wrote about your project in news articles or blogs. Ask them to update their articles about your new achievement.

Put yourself in the investor's shoes and see what you will want to see if someone asks for money from you.

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Conclusion

Crowdfunding is a good option for new startups with people and investors getting aware of it. It is a platform to show your product to investors if you do not have many contacts in the business world. The main advantage of crowdfunding is that you do not necessarily have to lose equity while raising funds. However, the Indian crowdfunding system does work in that way a lot.

There might be some people who will fund you without equity but you will get the majority of the funds from professional investors who will demand equity in your company. It's your job to choose the right crowdfunding option.

FAQs

What is crowdfunding and how does it work?

In its simplest form, crowdfunding is getting others to finance the creation of a product, project, business, or work of art. It’s extremely advantageous for entrepreneurs and eliminates the overbearing upfront costs that stop most startups before they begin. It uses a web-based platform or social networking sites to solicit funds for the fundraiser by showcasing the story to potential donors or investors.

What are some of the benefits of crowdfunding?

Crowdfunding can be a fast way to raise finance with no upfront fees in businesses. Pitching a project or business through the online platform can be a valuable form of marketing and result in media attention. By sharing your idea, you can often get feedback and expert guidance on how to improve it, etc.

What are some of the popular crowdfunding platforms in India?

Kickstarter, Wishberry, Indiegogo, FuelADream, Fundable, Ketto, Catapooolt, and Milaap are some of the popular crowdfunding sites in India.

What is an example of crowdfunding?

An example of a successful crowdfunding project is The Veronica Mars Movie Project. Fundraiser Rob Thomas used crowdfunding to fund the movie. The project was a great success surpassing their $2 million goals by an additional $3 million. The crowdfunding project also gained international reach.