What is crowdfunding and how does it benefit startups

An entrepreneur in India or abroad has many options to seed money to start a new business. Generally for funding, they approach banks to take a loan or offer equity shares in return of investments from angel investors or venture capital investors.

When these options are not available, entrepreneurs have option to use crownfunding. Crowdfunding by definition is a practice of funding a startup or venture by raising many small amount of money from a large number of investors.

We have three different types of crowdfunding i.e. equity, debt and donation.


In equity Crowdfunding, a small amount of capital asked from a large number of individuals to finance a startup or new business venture, typically via the internet. In return, these investors receive shares of the new company or startup. This means, people invest in an opportunity in exchange of equity shares.

New entrepreneurs asks friends, family and colleagues for investments or uses internet and social networking sites like twitter, facebook and linkedin to attract investors by asking them to invest small amount with the business.

Startup companies may seek this sort of financing when traditional borrowing is not available to them or too costly to get.

Similarly, in crownfunded debt financing, the backer became a creditor to get regular interest payments instead of holding equity shares of the company. In such cases, financier gets interest until the loan amount is paid back in full.

In the third and last type of crowdfunding (donation) people invests for a cause. Donors pay if they feel good about helping a philanthropic project or for a free software development or scientific research for a social cause. Theses investors do not expect anything in return from the project initiator or company. This type of funding is also called reward crowdfunding.

We have many crowdfunding platforms to ask for or donate money such as Kickstarter, Indiegogo, rockethub, gofundme, razoo, pledgemusic, sellaband, appbacker, crowdfunder, crowdrise, Quirky and Onevest. Anyone can create a small video and introduction of their project to get started.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.