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How Crowdfunding Is Changing The Way Start-Ups Raise Money?

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30th May, 2016
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How Crowdfunding Is Changing The Way Start-Ups Raise Money?

Crowdfunding as the name suggests is all about raising money from a large number of people to bring an idea or company to life. For start-ups, this is a boon as it’s a great alternative to approaching a venture capitalist or an angel investor. Start-up funding through crowdsourcing also broadens your avenues and increases your chances of launching your company/product sooner through well-defined financial goals.
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While crowd-funding as a concept might sound awe-inspiring, the process it demands to actually raise the money can be daunting. Today, there are two most popular crowdfunding sources available to every entrepreneur out there– reward-based crowdfunding and equity-based crowdfunding. Both have different approaches and objectives for the funders as well as the proposers of the start-up idea.
Also Read – : What are the top 5 questions young entrepreneurs should be asking themselves?

Reward-based crowdfunding

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A reward-based crowdfunding is a system where funders back up or support a project financially in return for great perks or incentives in the form of the final product itself. Kickstarter is a prime example of reward-based crowdfunding and Pebble watch is one of the companies which notably raised funds using this method. This kind of crowd-funding is the way to go if you have a great innovative idea and are looking at building a community of like-minded innovators & early backers to pre-sell your product while raising the money.
Reward-based crowdfunding companies/websites are free and flexible and most importantly, have fewer rules and restrictions. This gives a free reign to create a great crowdfunding campaign for your idea. Basis that, if your idea/ product succeeds in raising the required money, it clearly means that your idea is incredible. This makes it easier for you to raise money even through traditional means as if a venture capitalist is considering two ideas to invest in and yours is backed by crowdfunding, the chances of him investing in your project are higher.

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Also Read – : What skills do venture capitalists look for in early stage entrepreneurs?
If you choose to go this way to raise money for your start-up, be wary of delivering what you promise. As an entrepreneur, if your product is not as great as you had projected it to be, you don’t just lose the money but also your reputation in the community which could be a larger setback in the long term.

Equity-based crowdfunding

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Equity crowdfunding requires you to create a fundraising strategy for your company basis which investors can invest money in the form of securities (equity). While this is a more complicated process, the biggest advantage here is that all the money that comes in through the investors is considered as one single pool and no particular investor has the power to influence the company in future. Of course, this is governed by a known set of rules which allows the founders to run the company smoothly. Some of the most renowned financing platforms like FundersClub have been running on this protocol. Enviu, a sustainable business development company from Netherlands is a legendary example which raised 100,000 Euros through Symbid.
Although equity-based crowdfunding platforms are well-versed in simplifying the fundraising process, the investors on these sites are as rigorous as the VCs and expect to see complete clarity and credibility in your start-up. So if you are planning to take this route to raise money, make sure you leave no stone unturned in letting them know why your start-up deserves their funding.

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Anirudh Challa

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