Crowdfunding in India

Crowdfunding is a concept that has existed for a while in western countries and is relatively new in India. Crowdfunding is a means to raise a smaller amount of funds from a larger number of peoples mainly via the internet. In this article, we look at the basics of crowdfunding and its growth in India.

Crowdfunding vs Private Equity vs Bank Loan

Crowdfunding vs Private Equity

In crowdfunding, the entrepreneur gets a single platform to showcase a business idea or business, share the pitch to a large online audience and generate funds either through pre-order of products or through sale of items at a discount. Crowdfunding makes it easier for an entrepreneur to reach a wide range of audience interested in contributing small amounts of funding mostly in return for goods or services.

To obtain private equity, on the other hand, the Entrepreneur must showcase his/her business idea to a limited set of investors or High Net Worth Individuals (HNIs), in the hopes of having one of them invest in the business in return for equity. One of the major difference between crowdfunding and private equity is that in private equity, the Entrepreneur must provide equity in return for capital. On the other hand, crowdfunding doesn't require the Entrepreneur to give up any equity thereby being a much more attractive option for innovative startups and startups with huge growth potential.

Also, crowdfunding in most cases serves as seed fund to get the business started. Whereas, private equity is usually provided after the business has generated certain tractions.

Crowdfunding vs Bank Loan

Crowdfunding and bank loan are again very different forms of financing. Bank loan usually requires repayment and collateral security, whereas crowdfunding doesn't need either. Also, with crowdfunding, even a business that has no track record or an innovative business model can get funded. Bank loan mostly requires a proven track record and/or proven business model for financing.

Crowdfunding advantages

Crowdfunding has numerous advantages when compared to private equity or bank loan as follows:

Entrepreneurs have the freedom to innovate naturally in a domain of their choice.
Crowdfunding can be done successfully if the promoters have a good social media presence and a well large network of friends.
No requirement to give up any equity.
No requirement to have a repayment plan and/or interest payments.
Ability to attract a wide range of investors.
Also, serves as a marketing channel.
No minimum fundraise requirement.
Progress of a funding campaign can be easily tracked only.

In the following video, Coin, Flic and Sphericam are crowdfunded and set a great example for successfully running a crowdfunding campaign and generating interest.

https://www.youtube.com/watch?v=hlLF9Dox9Sg

Challenges with crowdfunding in India

Even though crowdfunding seems an easy and beneficial way to obtain funds, it still remains in a nascent stage due to the following challenges:

Lack of trust over online transactions

The e-commerce industry has definitely seen success with credit cards/debit cards / mobile wallet in recent years. However, that has been possible because of the choices offered such as cash on delivery. Even today cash on delivery orders are a significant portion in Indian ecommerce, as lack of trust over online transactions still exists.

Zero or low rate of interest

The general mindset of people or investor is that if money is invested then the returns should be there. And if returns are there they should be with high rates of interest. For an online donation or purchase based model, the rate of interest is definitely low attracting only a limited number of funders in India.

Legal repercussion mainly for equity-based model

As per SEBI guidelines, equity-based online crowdfunding is not allowed. Currently, even micro-financing model of crowdfunding is also being questioned, creating uncertainty over the crowdfunding business model.

Negative publicity

Since crowdfunding campaign is intended to attract masses, in case the presentation is not up to the mark, then it could create a negative impact on a large scale too. Thus the damage could be equally large as one would expect the success to be.

Crowdfunding platforms in India

The concept of crowdfunding in India is definitely new and has its own setbacks mainly – “trust issues”. Despite the setback, crowdfunding is witnessing gradual success and awareness in India. Some of the crowdfunding platforms that exist and are popular in India are: