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:

Indiegogo
Wishberry
Ketto
Fundlined
Catapoolt

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Frequently Asked Questions

Common questions about Crowdfunding in India.

Crowdfunding is a way to raise funds for a business idea or project by collecting small amounts of money from a large number of people, typically through online platforms. Unlike traditional financing methods like bank loans or private equity, crowdfunding does not require the entrepreneur to give up equity, provide collateral, or have a repayment plan. Instead, it allows entrepreneurs to pitch their idea directly to a wide audience and receive funding in exchange for goods, services, or rewards.

Some key advantages of crowdfunding for Indian entrepreneurs include the freedom to innovate without giving up equity, no requirement for repayment or interest payments, the ability to attract a diverse range of investors, and the opportunity to use the crowdfunding campaign as a marketing channel. Additionally, crowdfunding has no minimum fundraising requirement and allows entrepreneurs to easily track the progress of their campaign.

The article outlines several challenges for crowdfunding in India, such as the lack of trust in online transactions, the general mindset that investments should yield high returns, legal uncertainties around equity-based crowdfunding models, and the potential for negative publicity if a campaign is not presented effectively.

The article mentions several crowdfunding platforms that are popular in India, including Indiegogo, Wishberry, Ketto, Fundlined, Catapoolt, and Generate.

Unlike bank loans, which require repayment and collateral security, crowdfunding does not require entrepreneurs to repay the funds or provide collateral. Additionally, crowdfunding can be used to fund innovative business models or ideas without a proven track record, which may not qualify for traditional bank loans.

The primary difference between crowdfunding and private equity is that crowdfunding does not require entrepreneurs to give up equity in their business, whereas private equity investors typically acquire equity stakes in exchange for their investment. Crowdfunding also allows entrepreneurs to pitch their idea to a larger audience, while private equity involves pitching to a limited set of investors or high-net-worth individuals.

Yes, the article mentions that crowdfunding campaigns can serve as a marketing channel for entrepreneurs, allowing them to generate interest and awareness around their business idea or product among a wide audience of potential customers or supporters.

The video in the article showcases successful crowdfunding campaigns for products like Coin, Flic, and Sphericam, setting a great example for entrepreneurs on how to effectively run a crowdfunding campaign and generate interest among potential backers.

According to the article, one of the advantages of crowdfunding is the ability to easily track the progress of a funding campaign online, allowing entrepreneurs to monitor the amount of funds raised and the level of interest in their project.

The article mentions that, as per SEBI (Securities and Exchange Board of India) guidelines, equity-based online crowdfunding is not currently allowed in India, creating legal uncertainties around this crowdfunding model.