Tips and Advice,

Three Kinds of Crowdfunding Explained Through a Lemonade Stand

When life gives you lemons, crowdfund to start a lemonade business. But how? Crowdfunding in India is still very new and even though it’s potential is higher here than anywhere else (with the second largest population count in the world, 84{fe4f725b1f38b4aacd2beeed47499c5b78277adc9852c656a6df1e044992f187} of which gives in one form or another) its value is highly underrated.

At this point, there are at least five major crowdfunding platforms that exist in India and while do their best to educate their customers, most of whom are first time campaigners or even donors, many are unaware of how the model functions. There are three major kinds of crowdfunding models.

  • Donation-based crowdfunding
  • Rewards-based crowdfunding
  • Equity-based crowdfunding

Crowdfunding in India uses only donation-based and rewards-based crowdfunding. Equity-based crowdfunding online is currently barred under SEBI regulations. But for the sake of understanding, let’s see how each of the above work and what suits best for the cause/project you want to raise funds for.

Lemonade stand: The lemonade stand is a widely accepted metaphor to explain and understand business models and strategies. Young children are persuaded to start a lemonade stand to understand how to start, sustain and run their own ventures.

To start a lemonade stand, we’ll need some initial investment to buy a stock of lemons, salt, sugar, potable water, ice, table, chair, glasses and spoons. Let’s estimate that all of these will cost around Rs. 50,000.

Donation-based crowdfunding – When lemons are paid for out of kindness

Donation-based crowdfunding is the most popular and the most effective. It is when a group of people, your friends, family and your outer network step in to help you achieve a target by donating a little amount to you out of generosity.

50 people might donate Rs. 1000 each to help you setup the stand. With no demand for a return of any kind.

Donation crowdfunding is almost always need-based. Donors might not donate just to the idea of you setting up a lemonade stand. However, if you were the only bread earner of your family and this stand was your only source of income, then donors would be more likely to donate, since their motivation would be to empower you.

Donation-based crowdfunding is highly effective for NGOs or any social cause, for patients or families who can’t pay for crucial medical treatment, students who can’t afford education or causes like disaster-relief.

Rewards-based crowdfunding – When they pay for the lemons and get lemonade in return!

This is the second most popular kind of crowdfunding in India. As the name suggest, this model works on a rewards system, where donors are rewarded in proportion to their contribution. It is also a popular method to do “pre-sales” i.e. sell your product before it is manufactured.

Let’s say, you set up three default amounts for contribution:

  • Anyone who contributes Rs. 100 gets a week’s supply of free lemonade
  • Anyone who contributes Rs. 1000 gets a month’s supply of free lemonade
  • Anyone who contributes Rs. 10,000 gets a year’s supply of free lemonade

This not only ensures that you get adequate funding for your venture but also makes sure that you build a customer base while crowdfunding that will help your venture sustain and grow.

Rewards-based crowdfunding is often used for social enterprises, start-ups and even creative and artistic projects like movies, books, etc.

Equity-based crowdfunding – When they buy a share in your stand and get part of your profit

Online trade of equity is prohibited in India but the model has picked up momentum in many western and south Asian countries. It is when you sell a part of your equity (or ownership) for the contribution made. When you actually start the business and make profits, they will get divided amongst everyone who holds a share of equity.

Let’s say, X received 1{fe4f725b1f38b4aacd2beeed47499c5b78277adc9852c656a6df1e044992f187} equity for contributing Rs.100 and Y received 10{fe4f725b1f38b4aacd2beeed47499c5b78277adc9852c656a6df1e044992f187} equity for contributing Rs. 5000. When your venture does work out, the returns will be distributed according to the equity each person holds in the venture.

You will also old a part of the ownership, of course. This model is obviously most popular amongst start-ups and social enterprises!

Go ahead, pick your model and start crowdfunding!


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