See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/341960493

Crowdfunding

Article · April 2020

CITATIONS READS

0 606

2 authors, including:

Ramakrishnan Ramachandran
Vivin Consultants Chennai India
72 PUBLICATIONS 179 CITATIONS

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Human Resources View project

Higher Education View project

All content following this page was uploaded by Ramakrishnan Ramachandran on 06 June 2020.

The user has requested enhancement of the downloaded file.

Title of
submission Crowdfunding
Name of the
(1) R.Vijayakumar (2) Dr. R Ramakrishnan
authors
J108 S & P Living Spaces,
6A, Kamakotti Nagar TambaramSanatorium,
Mailing address Chennai 600047
Kamarajar Street,
Ayanambakkam Chennai 600095
E-mail newcollegeveekay@yahoo.com ramakrish54@gmail.com
Phone Mobile +91 9962290734 +919952669656

R.Vijayakumar working as Head of the Department for Department of

Business Administration, in The New College, Chennai

Dr Ramakrishnan, PhD in Stakeholder Management is diplomat turned

passionate research oriented teacher with wide and varied experience in
Indian Government /Private Enterprise. He has been associated with the
founding of 4 B schools. Author of six books ranging from TQM to
Environmental Science to Ethics, he has written close to 100 papers. His
research work (http://ssrn.com/author=646193) ranges from Mentoring to
Marketing as he tries to give shape to the future managers of India though
corporate training on CSR/TQM/ 5S etc as well as workshop to students for
making them employable

MANAGEMENT INNOVATOR
A peer reviewed research journal
Published by Researcher’s Forum, Institute of Management in Kerala University of Kerala -
695581
Crowdfunding
Abstract
Crowdfunding has come to the rescue of entrepreneurs, artists etc to realize their
dreams as an alternate sources of finance in recent times. Inspired by the ideas of micro
finance and crowd sourcing, crowdfunding uses the internet to raise the new form of capital.
Crowdfunding uses the power of the crowd in social network platforms. This paper explains
about the different types and models of crowdfunding, their advantages and disadvantages
and lists the top crowdfunding platforms and crowdfunding websites in India.
Key words: Crowdfunding, Crowdsourcing, Internet, Entrepreneur, Financing
 Crowdfunding
Financing is one of the most critical resources that new ventures require to succeed.
Most start-ups may not be in a position to meet the eligibility requirements for raising finance
through an initial public offer (“IPO”) in the early years of their operations. Venture capital
investors (“VCs”) are also usually not approachable by them. Bank loans also may not be
available at all times. Further small companies are vulnerable to liquidity and cash crunches
which don’t give them even a chance to survive.
Alternative sources of finance need to be put in place to prevent widespread liquidity
crunch when the traditional channels dry up. Crowdfunding has come to the rescue of
entrepreneurs in recent times.
Crowdfunding uses the internet to raise the new form of capital in the form of either
donations or investments from the crowd consisting of many individuals. It had its origins due
to the difficulties faced by small business men and artisans due to financial crisis in 2008.
Crowdfunding has been used for marketing purposes, creating interest in new projects
in the early stages of development. It has also been used to getting funds from traditional
sources also by demonstrating demand for a proposed product.
Inspired by the ideas of micro finance and crowdsourcing, crowdfunding started as an
extension of traditional financing, using internet, by family and friends for helping members
who have business ideas. It developed its unique way of fundraising through the use of
number of dedicated internet sites for the same.
Crowdsourcing was coined by Je Howe and Mark Robinson in the June 2006 issue of
Wired Magazine and is defined as a way to harness the creative solutions of a distributed
network of individuals. Crowd consists of many individuals who visit the particular website.
Crowdsourcing develops corporate activities by using the ideas, feedback and solution of the
crowd.
Crowdfunding uses the power of the crowd in social network platforms like Twitter,
MySpace, or LinkedIn and Facebook or their own platforms to fund small ventures and
projects that are unlikely to get fund from traditional agencies. Crowdfunding platforms
provide a platform for creators and funders to realize their vision.
Crowdfunding thus refers to funding from small contributions from a very large number
of persons using the internet without the usual financial intermediaries to fund the business
ideas of entrepreneurial individuals and groups. Crowdfunding platforms thus depend on an
online social community.
The business of crowdfunding consists of Project Campaigner or Entrepreneur,
Crowd or Investor or Backer and Website Plat former, who connects the other two. Web
technologies and online payment systems are used for the transaction. Website plat formers
like RocketHub, Kickstarter, and IndieGoGo, allow anyone (Entrepreneurs) with Internet
access to pitch an idea to their social network and beyond to reach the crowd (Investors) to
realize their funding
Soliciting money from the crowd is quite different from traditional fundraising from
banks, venture capitalists, and foundations. Instead of a small group of soliciting investors,
the entrepreneur gets the external financing from a crowd where each individual gives a very
small amount.
Entrepreneurs or Project campaigners create their profile on a crowdfunding platform
and pitch their ideas by explaining their monetary goals, planned use of the funds, and
timeline for reaching their goals.
Any individual who gets attracted with a particular project or cause disseminates
information in their social media and online communities trigger the crowdfunding process
acting as an agent of the offering. This generates further support and influence the ultimate
value of the offerings of the process.
Crowdfunding can be divided into four categories under two heads
Community Crowdfunding
 Social Lending/Donation Crowdfunding
 Reward Crowdfunding
Financial Return Crowdfunding
 Peer-to-Peer Lending
 Equity Crowdfunding
Donation Crowdfunding– Donation crowdfunding refers to the raising of funds for
social, artistic, philanthropic or other purpose, by way of donation and not in exchange for
anything of tangible value. Here Individuals donate small sums to a project. One feature of
crowdfunding is that these donors are rewarded for their support ranging from a mere
thank-you mail, autograph of an artist or mention of the funder's name on the cover of a
music CD or film DVD or etc. It can be also in the form of some small gifts like T-shirts or
other low value mementos that advertises the project. In India this form of model is basically
a NGO type model where the donor for a charitable or benevolent purpose and in return the
donor receives hardly incentives.
Large number of individuals contributing small amounts of money has a rich history in
many domains The Statue of Liberty in New York for example is built like this.
Community crowdfunding in India is not new. We can relate this sort of funding in
India to projects related with temple renovation as well as with many festivals of temple at
various places etc. which can be dated even before the term crowdfunding was used.
Crowdfunding for a commercial project in India is the funding of the textile business of
Dhirubai Ambani by communities of Gujarat.
 The motivation for the investors in this, is not material rewards, but a range of intrinsic
motives like
 Identifying oneself with the project's subject and its goals,
 Satisfaction of contributing to a socially important mission,
 Satisfaction of being part the community with similar ideas and priorities,
 Satisfaction of being part of the success of the project funded,
 Enjoying the interaction and engagement with the project's team,
 Being part of the pioneers of a innovative or new technology or business
 Opportunity to expand one’s own personal network, or
 Attracting funders in for one's own crowdfunding project.
Reward crowdfunding offers investors some existing or future tangible rewards as
consideration for the investment and are of two types.
 Crowd sponsoring: Here the project initiator offers the sponsor a defined reward like
keeping the banner in the venue of an event in return for some financial donations or
sponsoring the prize for the winners etc of certain events.
 Crowd pre-selling: The investment takes the form of an advance of pre-selling or pre-
ordering. The amount is collected for example to produce something (a book, a film,
a music album, etc.) , then the promised return is the delivery of the product or
service for a special price or on priority by a specified date etc
Peer to Peer Lending Crowdfunding–Investor loan money to the project with the
expectation of being repaid with certain interests as agreed upon. These borrowers take
money for short term and facilitate loans or microfinance to the needy. Milaap is an
example of such crowdfunding
Equity/Investment crowdfunding– Investor is approached by the entrepreneur for
investment against an equity shares in the project through Website Platformers. This is not
legalized in India yet.
Models of Crowdfunding
The Threshold pledge model or the all-or-nothing principle is widely used. The
main characteristics of this model are the threshold amount and pledging period. Threshold
amount is the targeted amount of money that must be reached via the contributions of the
funders (crowd) within the Pledging period agreed/ (usually between two weeks and several
months).
Funders or Backers only promise to pay a specified amount only when the threshold
is reached within the pledging period. In some cases, the money from the backers are
transferred to and parked with an escrow account managed by the platform or a partner
bank. The platform then manages a website for each project showing the status of the
incoming pledges.
 When the threshold is reached or exceeded, then the platform administers the pledge
and the pledges are converted to financial transactions and the amount is transferred to the
Project account from the escrow account. In case the threshold is not reached, the fund
raising activity is considered as not successful and the money is transferred back to the
funders. Some of the platforms tend to combine this model with lending or investment
models also
Micro-lending models: These involve small credits from individual to individual
without the (direct) involvement of a bank on a peer-to-peer (P2P) basis, by some platforms.
Holding model: This model similar to threshold-pledge model defines the threshold as
and pledge. But the difference is that Project initiators take this threshold amount as the
Target amount which is then divvied into thousands of equal slices. These are then offered
via the platform as equity shares (or stocks) to the crowd at fixed prices. Pledging then
begins similar to threshold-pledge model and when the threshold reached investment phase
begins
The Club model: This is a highly regulated and restricted model. The public offering of
investment opportunities (securities) requires the publication of a sales prospectus that is
cleared by a regulator in many countries, which are complicated, time-consuming and costly.
For qualified investors, these regulatory provisions are less strict as they need less legal
protection. So some platforms recruit potential funders from the crowd as members of a
closed circle or investment club to by-pass the regulations and processes.
Advantages of Crowdfunding can be summarized as
 Crowdfunding helps talented people to raise the funds required
 It gives opportunity for anyone with potential to realize their dream
 It minimizes the process of fund raising and helps collect funds for the project
quickly and easily.
 Helps all those interested and has a little capital to spare to participate in making
someone to realize their dream
 Great chance of getting funds for Complex, difficult, and niche ideas.
Disadvantages
 Entrepreneurs may not get the full understanding of the value of money.
 Compared to the diligence information Venture capitalist and Angel Investors
information is highly asymmetric by Crowdfunding.
 Crazy ideas may get funded. More ideas may get funded than can possibly return
capital thus reducing percentage of successes. Many of these investments will
never make money and investors will be losers.
Some of the top crowdfunding platforms are
 Kickstarter  Indiegogo
  Crowdfunder  Appbackr
 RocketHub  AngelList
 Crowdrise  Invested.in
 Somolend  Quirky
Some of the Crowdfunding websites based in India are
 Ignite Intent  WeFunder
 PikAVenture.com  Ketto
 start51.com  LetsVenture
 YourSeva  WishBerry
 RangDe  Catapooolt
Crowd funding not only helps in raising fund, but also helps in engaging the donors in
the attainment of the goal for which fund is being raised. The involvement of the masses is
the strength of community funding and the burden of payment does not come on any one
individual. This seems to be the best way to engage citizens proactively involved in the
process of development.
*********************
Selected Bibliography
Agrawal, A. K., Catalini, C., & Goldfarb, A. (2011). The geography of crowdfunding (No. w16820). National
bureau of economic research. Dresner, S. (2014). Crowdfunding: a guide to raising capital on the Internet. John
Wiley & Sons Greengard, S. (2011). Following the crowd. Communications of the ACM, 54(2), 20-22.

Howe, J. (2006). The rise of crowdsourcing. Wired magazine, 14(6), 1-4.

Howe, J. (2008). Crowdsourcing: How the power of the crowd is driving the future of business. Random House.

Morduch, J. (1999). The microfinance promise. Journal of economic literature, 37(4), 1569-1614.

*********************

View publication stats