How Crowdfunding Can Help You Scale Up
What is Crowdfunding
You’ve drafted a business plan, sourced products, sorted out your operations and even received your first few orders. But as a struggling startup, where do you find the funds to scale up when an Angel Investor isn’t next door.
Crowdfunding (or crowdsourcing) is a way of funding a project by raising small amounts of money from a large group of people. You can use this capital to help you stay afloat or scale your business. You pitch your projects to the online community, who donate a small amount to your project, in return for some goodies or equity in your project.
Who uses Crowdfunding?
Crowdfunding can be used by absolutely anyone – NGO’s, artists, manufacturers, designers, and even governments. Some popular crowdfunding campaigns that have raised several thousands of dollars include:
- Star Citizen Video Game: The Largest Crowdfunded Project In History.
- Elio Motors – Aiming To Build The Smart Car Of The Future.
- Flow Hive – Bringing Fresh Honey To The World
Why should you use it
Crowdfunding (just like building a Zepo website) allows you to tap into the vast online market, with three major benefits:
- Get initial customers
- Market your idea at little cost.
- Lay groundwork for formal funding.
How does it work
You display your project on an online platform that charges you a small fee in return for displaying your project. The main fees that you would be responsible for would be:
|Listing Fees||5% – 15% of the total amount raised|
|Transaction Processing Fees (for credit cards or paypal transaction)||Depends on the platform|
|Currency Conversion Charges||Applicable for foreign donations or from foreign platforms.|
The three main models of crowdfunding that you can use are:
- Donation model – A financial contribution to a project without any economic benefit to the donor.
- Debt model – A loan where the donor will be repaid based on agreed terms and conditions.
- Equity model – Investor receives an equity stake in the project.
Some common goodies that you can offer to people who donate include:
- A personalized Thank You card.
- A free sample.
- Early access to new products.
- Custom made or limited edition products.
How should you get started
Before creating your profile on crowdfunding websites, sit down and write your story. Crowdsourcing depends on how interesting your product is. At the same time, you need to engage the anonymous internet reader into donating towards it. Once you have your story, you can set up an account on any popular crowdfunding website.Here’s a list of some popular online fundraising websites in India:
- Fundmypitch (all investors are verified and pre-approved)
- Kiva (crowdfunded micro-finance loans for rural entrepreneurs)
- Bitgiving (focus on social issues)
- Letsventure (equity based funding)
Legal implications in India
There are no strict regulations governing crowdfunding in India.
You can build a profile even on foreign crowdfunding platforms, but it is suggested to work with Indian platforms. This way, there are fewer taxation issues when you withdraw your money. Companies in India cannot issue shares to more than 200 potential investors in a financial year. They are also prohibited from allotting shares to 50 or more shareholders, without undertaking a public offer. (Companies Act, 2013 as well as SEBI Regulations 2009). Hence, crowdfunding in return for equity (like Dhirubhai Ambani and Reliance) might not be viable for you starting out.
Crowdfunding involves three different parties – donor, platform and the project creator. The three parties may live in different localities with different tax regulations. These regulations need to be kept in mind before you begin your crowdfunding journey.
Overall, crowdfunding can be a viable option to help you raise short term funds. It will need at least three months of planning and lots of traffic on social media to make it successful. Crowdfunding works best when you have a good story to go along with your product. Make sure your goodies are appealing so you can entice people to donate towards your project. Finally, remember to check all fees and transaction charges before setting up your page.
Once you start raising funds, you will need an online store to sell your products.
Give Zepo a try and start your online store in the next 5 mins!