CROWD FUNDING:

Crowd funding is a way to raise money by asking many individuals to contribute

funds, often in small amounts, to a specific business venture or cause. The
contributions can be in small amounts, say $1, or large amounts such as in the
thousands of dollars or even millions.
Crowd funding can also refer to the funding of a specific company by selling small
amounts of equity to investors. It's also been used to raise money for charities, disaster
relief, and political campaigns and by artists and musicians to raise money for their
projects.
The term crowd funding was reportedly coined in 2006 by a man named Michael
Sullivan, who started a fundraising effort to build a video blogging community.
Usually, crowd funding takes place through the Internet. Those asking for the
funds create an online profile to explain their fundraising goals and then share their
project with the pubic as well as their friends, family and social networks.
Crowd funding makes use of the easy accessibility of vast networks of friends, family
and colleagues through social media websites like Facebook, Twitter and LinkedIn to
get the word out about a new business and attract investors. Crowd funding has the
potential to increase entrepreneurship by expanding the pool of investors from
whom funds can be raised beyond the traditional circle of owners, relatives and
venture capitalists.
History
Crowd funding has a long history with more than one root. Books have been crowd
funded for centuries: Authors and publishers would advertise book projects in
praenumeration or subscription schemes. The book would be written and
published if enough subscribers signalled their readiness to buy the book once it
was out. The subscription business model is not exactly crowd funding since the
actual flow of money will only begin with the arrival of the product. The list of
subscribers has, on the other hand, the power to create the necessary confidence
among investors that is needed to risk the publication.
War bonds are theoretically a form of crowd funding military conflicts. London's
mercantile community saved the Bank of England in the 1730s when customers
demanded their pounds to be converted into gold - they supported the currency
until confidence in the pound was restored and thus crowd funded their own money.
Modern crowd funding is a new phenomenon mostly with its use of social medias.
It first gained popular and mainstream use here in arts and music communities.

The first instance of crowd funding was in 1997, when fans underwrote an entire
U.S. tour for the British rock group Marillion, raising US$60,000 in donations by
means of a fan-based Internet campaign. The idea was conceived and managed by
fans without any involvement from the band although Marillion themselves used this
method successfully to fund the recording and marketing of their 2001 album
Anoraknophobia, the first crowd funded recording. They continued to do so with
subsequent albums Marbles (2004), Happiness is the Road (2008), and Sounds That
Can't Be Made (2012).
In the film industry, independent writer/director Mark Tapio Kines designed a
website in 1997 for his then-unfinished first feature film Foreign Correspondents.
By early 1999, he had raised more than US$125,000 on the Internet from at least 25
fans, providing him with the funds to complete his film.
Crowd funding gained traction after the launch of ArtistShare, in 2003.Following
ArtistShare, more crowd funding sites started to appear on the web such as
IndieGoGo (2008), Kickstarter (2009) and Microventures (2010).
Research suggests that this can be contributed to creators and funders, who perceive
the platform to be more valuable when there are more members. Later, Kickstarter
gained popularity for its wide-ranging focus.
TYPES OF CROWD FUNDING:
The Crowd funding Centre's May 2014 report identified two primary types of crowd
funding:
Rewards Crowd funding
Equity based crowd funding
1. Rewards-based
Reward-based crowd funding has been used for a wide range of purposes,
including motion picture promotion, free software development, inventions
development, scientific research, and civic projects. For a joint study between
York University, Toronto, Ontario, and Universite Lille Nord de France, in Lille,
France, published on June 2, 2014, two types of reward-based crowd funding
were identified:
Keep-it-All' (KIA) where the entrepreneurial firm sets a fundraising goal and
keeps the entire amount raised regardless of whether or not they meet their goal,
and 'All-or-Nothing' (AON) where the entrepreneurial firm sets a fundraising
goal and keeps nothing unless the goal is achieved. There are many
characteristics of rewards-based crowd funding, also called non-equity crowd
funding, identified by research studies.

2. Equity
Equity crowd funding is the collective effort of individuals to support efforts
initiated by other people or organizations through the provision of finance in the
form of equity.
Unlike non-equity crowd funding, equity crowd funding contains heightened
"information asymmetries." The creator must not only produce the product for
which they are raising capital but, also, create equity through the construction of
a company.
Research suggests that syndicates, which involve many investors following the
strategy of a single lead investor, can be effective in reducing information
asymmetry and in avoiding the outcome of market failure that is associated with
equity crowd funding.
3. Debt-based
Debt-based crowd funding (also known as "peer to peer", "P2P", "marketplace
lending", or "crowd lending") arose with the founding of Zopa in the UK in
2005 and in the US in 2006, with the launches of Lending
Club and Prosper.com.
Borrowers apply online, generally for free, and their application is reviewed and
verified by an automated system, which also determines the borrower's credit
risk and interest rate. Investors buy securities in a fund which makes the loans
to individual borrowers or bundles of borrowers. Investors make money from
interest on the unsecured loans; the system operators make money by taking a
percentage of the loan and a loan servicing fee.
4. Litigation
Litigation crowd funding allows plaintiffs or defendants to reach out to
hundreds of their peers simultaneously in a semi-private and confidential
manner in order to obtain funding, either seeking donations or providing a
reward in return for funding. It also allows investors to purchase a stake in a
claim they have funded, which may allow them to get back more than their
investment if the case succeeds (the reward is based on the compensation
received by the litigant at the end of his or her case, known as a contingent fee
in the United States, a success fee in the United Kingdom, or a partum de quota
litis in many civil law systems).
5. Donation-based
Charity donation-based crowd funding is the collective effort of individuals to
help charitable causes. A form of charity crowd funding is civic crowd funding,
in which funds are raised to enhance public life and space.

CROWD FUNDING PLATFORMS:

As of 2012, there were over 450 crowd funding platforms. Project creators need to
exercise their own due diligence in order to understand which platform is the best to
use depending on the type of project that they want to launch. There are fundamental
differences in the services provided by many crowd funding platforms.
For instance, CrowdCube and Seedrs are internet platforms which enable small
companies to issue shares over the internet and receive small investments from
registered users in return. While CrowdCube is meant for users to invest small
amounts and acquire shares directly in start-up companies, Seedrs on the other hand
pools the funds to invest in new businesses, as a nominated agent.
Curated crowd funding platforms serve as "network orchestrators" by curating the
offerings that are allowed on the platform. They create the necessary organizational
systems and conditions for resource integration among other players to take place.
Relational mediators act as an intermediary between supply and demand. They replace
traditional intermediaries (such as traditional record companies, venture capitalists).
These platforms link new artists, designers, project initiators with committed
supporters who believe in the persons behind the projects strongly enough to provide
monetary support.
Growth engines focus on the strong inclusion of investors. They dis-intermediate by
eliminating the activity of a service provider previously involved in the network. The
platforms that use crowd funding to seek stakes from a community of high-net-worth
private investors and match them directly with project initiators.

CROWD FUNDING IN INDIA:

Capital markets regulator Securities and Exchange Board of India (Sebi) is likely to
come out with norms to help start-ups raise capital and bring crowd funding under a
regulatory framework in the next few months.

Sebi, which had formed a committee called Alternate Investment Policy Advisory
Committee under N.R. Narayana Murthy for recommending norms to encourage
entrepreneurial activities in India, will submit its report in a month, said Sebi chairman
U.K. Sinha at the sidelines of a corporate governance summit organized by
Confederation of Indian Industries on Tuesday.
The report is likely to include ways to allow crowd funding in India under Sebis
norms. Sebi had put out a discussion paper on crowd funding in June 2014 but the
norms have not been formalized yet due to lack of ambiguities in certain clauses of the
new Companies Act.
Sebi recently allowed listing of start-ups; many new-age companies are still more
comfortable listing themselves abroad due to more attractive tax regimes in some
countries.
BENIFITS OF CROWD FUNDING:
Here are 10 great benefits that crowd funding offers an entrepreneur.

It provides access to capital.

At an early stage, an entrepreneur may think that outside of their own network
they can only raise capital from accredited investors, venture capitalists, and
banks. This isnt true.
Crowd funding is a great alternative way to fund a venture, and it can be done
without giving up equity or accumulating debt. Rewards-based crowd funding
platforms allow entrepreneurs to raise funds from the community in exchange
for simply giving their tangible products or other relative gifts.
It hedges risk.
Starting up a company is a very risky and challenging journey. Besides finding
sufficient funding, there are always expenses that are impossible to forecast,
challenges in market validation, and other people who want a piece of your
venture in order to help get it off the ground.
It serves as a marketing tool.
An active crowd funding campaign is a good way to introduce a ventures
overall mission and vision to the market, as it is a free and easy way to reach
numerous channels. Many crowd funding platforms incorporate social media
mechanisms, making it painless to get referral traffic to your website and other
social media pages.
Typically, this allows ventures to receive thousands of organic visits from
unique users and potential funders. These users are also important for viral

marketing, as they have the ability to share and spread the word to their
connections.
It gives proof of concept.
Showing investors and convincing yourself that your venture has received
sufficient market validation at an early stage is hard. However, crowd funding
makes this possible.
The first question that any angel or institutional investor will ask will often be
along the lines of proof of concept, and a good way to gain some respect and
credibility is be able to show them that your venture had a successful crowd
funding campaign.
It allows crowd sourcing of brainstorming.
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 crowd funding campaign, the entrepreneur has the ability to engage the crowd
and receive comments, feedback, and ideas.
This feedback is extremely valuable, as it can help understand some aspects of
their business that were previously un-thought of. It could also potentially
inspire some other ideas!
It introduces prospective loyal customers.
A crowd funding campaign not only allows an entrepreneur to present a
business and product, it gives them the ability to share the message and the
purpose behind it.
People who view the entrepreneurs 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 ventures brand and message, and are likely to be
loyal customers throughout the life of it.
Its 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.
Thankfully, the application process for crowd funding is a walk in the park
compared to these traditional methods. In order to get started on the crowd
funding path to funding and exposure, an entrepreneur only needs to contact the
chosen crowd funding platform that best suits their campaign theme and

purpose, share their ventures powerful message, make a video, and establish
some attractive rewards.
Its free PR.
The momentum created by successful crowd funding 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. Crowd funding is a unique and hot industry these days, and countless
entrepreneurs who have been successful with it have seen larger success and
exposure as a result.
It provides the opportunity of pre-selling.
Launching a crowd funding campaign gives an entrepreneur the ability to presell
a product or concept that they havent 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.
It is free!
On all or nothing crowd funding platforms (meaning that you only get the funds
raised if you reach 100% or more of your funding goal) there are so many
benefits, and no fee to participate. If an entrepreneur sets a goal and doesnt
reach it, there is no penalty. All the funds are returned to each contributor, the
entrepreneur doesnt get anything and neither does the platform. On the other
hand, if the fundraising project is successful, everyone wins and gets to be a part
of a successful crowd funding project. When successful, the average
commission for the platforms is around 5% of total funds raised.
In essence, crowd funding is an excellent way for entrepreneurs to receive the
financing and exposure they need in order to verify, execute, and help their
ventures grow. What started out as a social experiment several years ago has
been validated as a viable tool for thousands of people? Crowd funding has
risen over $1.5 billion to give birth and growth ventures of all stages. With the
industry still evolving and becoming more efficient, there is no better time than
now to take advantage of the associated benefits!

RISK INVOLVED IN CROWD FUNDING:

Crowd funding also comes with a number of potential risks or barriers. For the creator,
as well as the investor, studies show that crowd funding contains "high levels of risk,
uncertainty, and information asymmetry.
Reputation failure to meet campaign goals or to generate interest results in a
public failure. Reaching financial goals and successfully gathering substantial
public support but being unable to deliver on a project for some reason can
severely negatively impact one's reputation.
IP protection many Interactive Digital Media developers and content producers
are reluctant to publicly announce the details of a project before production due to
concerns about idea theft and protecting their IP from plagiarism. Creators who
engage in crowd funding are required to release their product to the public in early
stages of funding and development, exposing themselves to the risk of copy by
competitors.
Donor exhaustion there is a risk that if the same network of supporters is reached
out to multiple times, that network will eventually cease to supply necessary
support.
Public fear of abuse concern among supporters that without a regulatory
framework, the likelihood of a scam or an abuse of funds is high. The concern may
become a barrier to public engagement.
Cumbersome process - it will not necessarily be an easier process to go through
compared to the more traditional ways of raising finance not all projects that
apply to crowd funding platforms get onto them.
When you are on your chosen platform, you need to do a lot of work in building up
interest before the project launches significant resources (money and/or time)
may be required.
If you dont reach your funding target, any finance that has been pledged will
usually be returned to your investors and you will receive nothing.
Failed projects risk damage to the reputation of your business and people who
have pledged money to you.
Getting the rewards or returns wrong can mean giving away too much of the
business to investors.

REFERENCES:

Crowd funding and Civic Society in Europe: A Profitable Partnership? Open

Citizenship, vol. 4, no. 1. (2013).

Dynamics of Crowd funding: Determinants of Success and Failure by Ethan

Mollick, examines what causes individual projects to succeed or fail.

The Geography of Crowd funding, NET Institute Working Paper No. 10-08, Oct
2010.

https://en.wikipedia.org/wiki/Crowdfunding.

http://www.investopedia.com/terms/c/crowdfunding.asp.

http://www.cnbc.com/2013/10/23/crowdfunding-definition-from-cnbc.html.

http://www.forbes.com/sites/tanyaprive/2012/10/12/top-10-benefitsofcrowdfunding-2/3/.

https://www.nibusinessinfo.co.uk/content/advantages-anddisadvantagescrowdfunding.