Crowdfunding is an internet-enabled procedure to raise capital for businesses through donations or equity participation by multiple investors. This method of raising capital came into play in 2008 after the economic meltdown when small businesses found it difficult to raise capital from banks and other lending institutions.
It initially began as a supplemental effort to bank financing through online participation by friends and relatives of a business entity seeking finance. It subsequently encompassed investors pooling in money individually to finance interesting startups. Within a matter of five to six years, it is now considered an accepted mode of financing in the developed world and is gradually gaining acceptance in developing economies like India, Brazil, China etc.
Crowdfunding has the potential to become a key method to provide flexible and innovative finance to startup companies that are in the process of developing energy that is clean as well as those in the climate business that would otherwise find it difficult to obtain finance from traditional channels. This financing procedure will enable such companies to introduce their products into new markets, and integrate their business into local economies rather than restricting their presence as an information development center in such locations. Crowdfunding also has the potential to provide funding option for mid-sized companies to expand their operations, either through a group of professional investors or through crowd sourcing without the burden of interest liability as applicable to loans from financial institutions.
Crowdfunding thus provides capital to a nascent-stage venture that is not relatively mainstream. It democratizes and expands capital access through crowd participation and determines funding necessities of entrepreneurial business that the public estimates to have the potential to succeed. Adapting technology to the procedure, crowdfunding’s potential is immense for job creation, new venture ideation and formation, and consequent economic growth of the area/region/nation in the larger context. Crowdfunding thus has the potential to extend geographic growth, merge entrepreneurial finance with the web through a social platform, disrupt the financing cycle of high growth potential enterprises by participation of a larger set of investors rather than depending on angel investors or lending institutions, encourage partnership and validation of products, and be a smart choice for investors with their ability to investigate their targeted business, its relative potential, and determine whether it fits into their risk profile and investment strategy.