How does Crowdfunding Work to Raise Money for Startup

The concept of crowdfunding has just started to gain momentum in India. Crowdfunding is defined as 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 largely because of reasons ranging from non-scalable businesses to the lack of exits. The rest 98% still need to raise fund to take their startup to the next level.

The entrepreneur community in India needs a successful and widely accepted Indian version of crowdfunding platforms like Kickstarter, Indiegogo which not only help Startups or individuals to launch a product but to 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 crowdfunding websites work and how it can benefit you.

Business models of Crowdfunding websites
Advantages of Crowdfunding for Startups
How to raise funds from Crowdfunding

Business models of Crowdfunding websites

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 loan money to the project with the expectation of being repaid under the terms and conditions agreed.

Reward Based Crowdfunding

In the 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, investor receives an equity stake in the project.

Crowdfunding is becoming a lifeline for new entrepreneurs as it helps them in many ways without losing much equity. Let's see how crowdfunding helps startup.

Also read: Merits and demerits of startup funding

Advantages of Crowdfunding for Startups

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 the life of it.

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 s absolutely free. You will mainly only charges a minimal fee when you raise funds.

Also read: Common mistakes some seed funded startups do

How to raise funds from Crowdfunding

Choose the right crowdfunding portal

This is the major glitch where most of the crowdfunding projects fails in India and the project creator never realizes it. As crowdfunding is very niche stage in India, it is very important for portals to help project creator in creating projects and help them to shape their project for Indian audience. Choose your crowdfunding portal wisely. Every crowdfunding portal in India takes different approach for projects. Do little research on all the portals. Talk with some portals, regarding your project and find out which portal fits perfectly for you.

Pitch video

This is the most important factor which most of the people in India forgets. Most of the people sees Kickstarter and creates crowdfunding project, 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 plays a vital role in raising funds from them. Most of the people judges a crowdfunding project by just seeing the video. Make your crowdfunding video short and simple. Don't add fancy 3D imaging graphics or VFX in the video. Neither add too much animation in 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.

Top 5 kickstarter campaigns with their videos

Project Description

Write detailed description but add attractive graphics along with it. In an observation, it was found that most of the people in India write 2-3 lines or 1-2 paragraph without graphic 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 large amount of money to a stranger will surely want to read everything. Create a graphic picture which 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 middle class. Nobody will be willing to give their more than 5% of 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 provide them emotional value. For example, you can give them your product with a celebrity's signature or better, help them meet the celebrity.

PR

Most of the people in India are unaware of crowdfunding. So, it is very important for project creator to get the right reach of 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 for 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 portals in India helps with that too. PR or Public relations are crucial factor of any business. You need to have credibility in written to prove your genuineness and potential in your PR. News articles will help you to achieve this and act as 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 writes 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 a good reach and engagement.

Also read: Tips to motivate volunteers for a fundraising event

Social Media and Follow-up

Build a social media strategy and create some unique campaign surrounding your project. Social Media will help you to get that boost for making your project a success. 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 blog. 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 asking for money from you.

Also read: ImpactGuru- Making Healthcare accessible with Crowdfunding

Conclusion

Crowdfunding is a good option for the startups these with people and investors getting aware of it. It is a platform to show your product to investors if you do not have much contacts in the business world. The main advantage of crowdfunding is that you do not necessarily have to lose equity while raising funds. However, 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 majority of the funds from professional investors who will demand equity in your company. Its your job to choose the right crowdfunding option.

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