CROWDFUNDING IN INDIA: A STUDY OF INDIAN ONLINE CROWDFUNDING SCENARIO

CROWDFUNDING IN INDIA: A STUDY OF INDIAN ONLINE CROWDFUNDING SCENARIO

                                                                                                                                    *ASEEM R.

Abstract

Lack of finance is the one of the important problems in the business. There are so many entrepreneurs who have fabulous ideas but lack of funds for commercialization of this idea. Here is the need of crowdfunding. It is a collective effort by people who network and contribute collectively for a business idea or a project. The funding is done with an objective of earning some return either monetary or tangible. In modern day crowdfunding is related with internet and the use of social media sites for fundraising. In India crowdfunding is still an infant stage even though the potential is very high.  The paper studies the opportunities and challenges faced by the Indian online crowdfunding platforms (CFPs) their fund raising strategies, area of focus and their revenue models. CFPs support business activities as well as social causes. Crowdfunding concept emerged in US and UK, is an alternative way of raising capital. It use internet or social networking sites such as linkedIn, Facebook, Twitter or some other websites. Crowdfunding is a process of one party financing a project by requesting and receiving small contribution from many parties. Crowdfunding linked investors with small business startups and projects through an online transaction sites that removes barriers to entry.

Key words: Crowdfunding, online platforms, opportunities and Challenges.

  

  *M.Phil Scholar, Dept. of Commerce, School of Business management and Legal Studies, University of  Kerala, Kariavattom, Kerala, India.

Introduction

Crowdfunding is a process of seeking funds from the general public to create project or support an idea or fund businesses.  It is an internet enabled way used by business or other organizations to raise money in the form of either donations or investments from various individuals. This is the new form of capital formation emerged in an organized way in the wake of the 2008 financial crisis largely because of the problems faced by entrepreneurs, artisans, and early stage enterprises in raising finance. Traditional banks less interested to provide finance to entrepreneurs started to look elsewhere for capital.

Crowd funding began as an online extension of traditional fi­nancing by friends and family: communities pool money for fund members with wise business ideas. In less than a decade, crowd funding has gained traction in a number of developed econo­mies, including Australia, The United Kingdom, the Nether­lands, Italy and the United States. This exciting phenomenon is spreading across the developed world and is now attracting considerable interest in the developing world as well.The modern day crowd funding is the modified, internet model of the same old concept. The Web has made the entireprocess of floating an idea and raising funds for the same much easier and faster. Apart from getting access to funds,another major advantage is to getting validation of the idea or concept.One of the first instances of using internet to raise funds occurred in 1997 when the British rock group Marillionraised $60,000 from its fans to fund its North American tour. ArtistShare was the first US-based company toestablish the crowdfunding website in 2001.

OBJECTIVES OF CROWDFUNDING

1.      Key factors that have facilitated crowd funding in devel­oped countries.

2.      Models of crowd funding.

3.      The legal issues and challenges in India.

4.      Risks in crowd funding and how to mitigate them

5.      Pros and cons of crowd funding

RESEARCH METHODOLOGY

This research is a descriptive study in nature. The secondary data was collected from various websites, journals and news papers.

LITERATURE REVIEW

Crowdfunding is a novel method for funding a variety of new ventures, allowing individual founders of for-profit, cultural, or social projects to request funding from many individuals, often in return for future products or equity. Crowdfunding projects can range greatly in both goal and magnitude, from small artistic projects to entrepreneurs seeking hundreds of thousands of dollars in seed capital as an alternative to traditional venture capital investment (Schwienbacher and Larralde, 2010). It is more of an informal form of financing projects – either commercial or non-commercial. Here, a large number of people (the crowd) fund small amounts of money to accumulate into an investment large enough to finance a project (or a start-up company).

Crowdfunding is a collective effort by people who network and pool their money together, usually via the internet, in order to invest in and support efforts initiated by other people or organizations (Ordanini, 2009). New ventures require resources to succeed, and one of the most critical of these is financing (Gompers and Lerner, 2004; Gorman and Sahlman, 1989; Kortum and Lerner, 2000). Over the past few years, crowdfunding has emerged as novel way for entrepreneurial ventures to secure funds without having to look for venture capital or other traditional sources of venture investment.

Schwienbacher and Larralde (2010) define crowdfunding as an open call, essentially through the Internet, for theprovision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes. Thus, the crowd generates financial support for already proposed initiatives.

The crowdfunding mechanism is also related to social networking, where consumers actively participate in onlinecommunities to share information, knowledge and suggestions about a new initiative and/or brand. However,crowdfunding goes beyond conventional social-network participation by incorporating more proactive roles for consumers, such as selecting new initiatives to support and providing financial backing for them.

INDIAN SCENARIO

India is a huge, developing country and enormous economy. With a population of over 1.2 Billion, and a middle class that is expanding dramatically, one would expect the capital for­mation power of crowd funding would be taking hold in this dynamic country. Equity crowd funding is not live yet in India, but it is expected to hit the country at some point in the near future. In the next six months or so, many crowd funding platforms are expected to be in India. Worldwide, nearly a thousand such plat­forms will be launched. Recently, platforms such as Wishberry and Ignite Intent have been launched in the country. Most of them are in the rewards and donation space, as there aren’t too many regulatory issues around this model.

There have been attempts at crowd funding for events like the Goa Project and campaigns like Teach for India. Crowd funding is slowly becoming an alternative funding channel for the film industry. Film Director Pawan Kumar from Kar­nataka recently raised Rs 51 lakh using Face book and other platforms.

CROWD FUNDING: DRIVERS

As India being the one biggest country for Non Government Or­ganizations (NGOs), crowd funding stands a big chance. “Lot of new platforms are going to come in the next few days”. Many colleges and even individuals will push students to list causes on crowd funding platforms.

The new companies act, which mandates all companies to spend 2% of their profits on corporate social responsibility, will also help them crowd funding gain traction.

The Crowdfunding Operations

MODELS OF CROWDFUNDING

Massolution (http://www.massolution.com), a leading firm in crowdsourcing solutions, defines 4 categories of

crowdfunding platforms (CFPs). A CFP is an operator that facilitates monetary exchange between funders and

fundraisers.

India’s top peer-to-peer lending platforms

Co-founders: Smita Ram and Ram N. K

Founded in Bengaluru in 2008, RangDe.org is an internet-based peer-to-peer micro-lending platform that facilitates micro or low-cost loans to rural entrepreneurs across India with the help of funders. A remarkable aspect is that over 93% of borrowers have been women.

This not-for-profit crowdfunding portal has attracted 9,699 social investors and helped disburse 50,008 loans for a section of Indian population who are usually overlooked by banks and financial institutions. So far they have raised social investments of approximately USD 7 million while repaying very close to USD 5 million. Borrowers pay interest rates ranging between 4.5% and 10% p.a. for collateral free loans. Rang De gets a nominal cut of 2% on all the loans repaid by borrowers.

Rang De has been funded by the World Bank through Development Marketplace (DM) and is a recipient of several social change-related awards including South Asian International Fund Raising Group’s Fund raising Campaign of the year Award and 2013 Millennium Alliance Award.

The organization has a network of 25 field partners in 16 states of India who physically take the money to the borrowers and can contact them if they fall in to arrears.

Co-founders: Rajat Gandhi, Vinay Matthews, Nitin Gupta

Located at Gurgaon, Faircent is a peer-to-peer lending platform and a virtual marketplace where borrowers and lenders can interact directly, without the involvement of banks. In practice the platform allows lenders and borrowers to negotiate directly the terms of loans including interest rates and the duration of the loan.

Faircent is thus able to eliminate high margins on loans and keep institutional charges low. It charges a one-time listing fee of around USD 23 plus an administration fee depending on the size of the loan and interest amount, but doesn’t earn from interest that is paid.

Faircent has more than 6,000 potential lenders and 26,000 want-to-be borrowers on its platform and has disbursed total loans worth almost USD 973,000 in the last 24 months.

Top donations crowdfunding platforms

Co-founders: Kunal Kapoor, Varun Sheth and Zaheer Adenwala

Founded in 2012, Mumbai-based Ketto supports fundraisers in three main categories:

1.         Community/social projects (NGOs/Non-Profits/Charities),

2.         Creative arts (Movies/Music/Theatre/Fashion/Technology)

3.         Personal development (Health/Education/Travel).

They also encourage corporates to search for projects to support as a way of demonstrating Corporate Social Responsibility, and allow NGOs to use Ketto as an e-commerce sales channel.

Ketto offers fundraisers a unique cash pick-up facility and charges 5-8% of the funds raised or USD 30 (whichever is higher in case of individuals and corporates) along with payment gateway charges.

Project creators keep all the money that is raised even if they fall below the target they set for their project.

The platform has so far raised USD 5,990,400 through more than 100,000 backers to support over 10,000 projects (averaging just under USD 600 per project).

Co-founders: Priyanka Agarwal, Anshulika Dubey

Wishberry is a donations-for-rewards crowdfunding platform founded in 2010 in Mumbai and is exclusively dedicated to funding creative projects – music, stand-up comedy, film production, art, dance, design, photography, publishing, theatre.

A Wishberry adviser, a ‘Campaign Coach’, is appointed to each project to help the project creators write an effective pitch, make a good video (a video is compulsory) and handle the logistics of choosing, sourcing and distributing the rewards. This helps them achieve a very high 70% success rate.

It has so far completed 325 projects raising almost USD 1.3 million from more than 11,000 backers in around 60 countries. This is an average of nearly USD 4,000 per project. The contributors are rewarded with non-monetary incentives such as invites to film premiers, limited edition merchandise, experience in the making of the project, a named credit and so on.

It charges a one-time non-refundable fee of USD 52.37 plus 10% commission of the funds raised – charged only if the funding goal is reached. For a monthly fee they also provide digital marketing and PR services.

Wishberry works on an ‘All Or Nothing’ policy (which they also claim pushes up the success rate) and allows fundraisers a maximum of 60 days to reach their target.

Founder: Ranganath Thota

Bengaluru-based FuelADream launched in April 2016 with 14 projects. It is a rewards-based crowdfunding platform and focuses on creative arts projects, social causes and charities.

It gives its fund raisers the choice of either AON (All or Nothing) or KWYG (Keep What You Get) campaigns. When an AON campaign doesn’t reach its goal, all the money collected is returned to funders.

The company has its own content and marketing team that will help put together the online pitch and help design a rewards system for each project. They charge 9% (2% gateway +7% contract charges) of the total amount collected during the campaign whether an AON or a KWYG model. On the 9% there is a govt levy of 14.5% Service tax. This works out to a total charge of 10.3 % of the money raised.

FuelADream seems to be going for quality rather than quantity and will restrict itself to hosting a maximum of 20 new projects per month. Notable campaigns so far include a battery powered e-bike and a canal to irrigate a village’s arid farmland .

They also intend to make campaigns available in multiple languages.

Founder: Satish Kataria

From startups to Parallel Cinema and from DJS Racing Car to India’s leading political party AAP, Catapooolt has helped fund raisers bring to life creative, sports, and political projects, social enterprises and business startups.

Founded in July 2013, the crowdfunding platform has helped fund over 40 projects to raise almost USD 150,000 from over 2,000 contributors. 53 active projects are currently listed 9at 17 August 2016).

Catapoolt offers three unique tier rewards to its contributors, and claims to be the only crowdfunding platform that gives fundraisers access to distribution in 300,000 retail outlets with exposure to their walk-in customers across India. It charges around USD 23 as a project submission fee along with 10-15% of the total funding raised.

Founder and CEO: Ishita Anand

Founded in 2013 with headquarters in New Delhi, BitGiving is a crowdfunding platform that enables artists, engineers, and creators of all kinds to come together in a bid to share their stories and raise funds online for entrepreneurial, creative and social projects. Almost 15 per cent of campaigns are focused on raising funds for medical treatment.

BitGiving has so far completed over 650 projects and notable success stories include projects to help Nepal after their earthquakes, sending an Indian athlete to the Olympic games, a project to help farm widows in Marathwada, and funding two months hospital treatment for a teenager with a rare disease.

BitGiving charges 6-10% commission on the amount funded, depending on whether the seekers are non-profits, individuals, organizations or corporates.

BitGiving rewards its contributors through non-monetary incentives such as social media call-outs, personalized cards, pre-orders or discounts on products, VIP passes or tickets to workshops etc.

Co-founders: Chet Jain, Chaitanya Atreya, Rich Mastuura

Founded in October 2014 in Palo Alto, California by two Indians and an American, Crowdera is a completely free global crowdfunding platform that launched for Indian fund raisers recently in April 2016.

Until this period, the crowdfunding platform had raised over USD 537,000 helping several prestigious nonprofits, individuals, and organizations.

The platform is currently funded by some friends and their third co-founder Rich Mastuura. The team intends to start monetizing in 2017 from the CSR activities of enterprises and foundations across the world.

Crowdera doesn’t charge any commission at all and has a motto: Doing good must not be penalized.

Top hybrid donations and loans platforms

Co-founders: Mayukh Choudhury and Anoj Vishwanathan

Based in Bengaluru and founded in 2011, Milaap began as a crowdfunding platform for micro-loans for people in rural India, helping low-income borrowers with projects such as education, energy and water and sanitation.

Milaap added donations on its portfolio in 2014 and now allows donations and micro-lending for emergencies, neighbourhood projects, medical conditions, natural calamities and micro business projects.

Milaap has donors and lenders from over 120 countries for close to 50,000 projects, and has raised over USD $12.7 million.

It charges 5-8% of the funds raised from campaign owners.

Co-founders: Khushboo Jain and Piyush Jain

Beginning as a crowdfunding platform for non-profit organisations in 2014, Impact Guru is a Harvard iLab incubated fintech platform based in Mumbai.

It helps individuals, non-profits, social enterprises, startups, corporates for their fundraising needs. It engages in donations, rewards crowdfunding and investment fundraising.

In April this year, it had raised a seed round of USD 500,000 from Singapore-based venture capital fund RB Investments and private investment platform Fundnel. In the last year, the total funds raised by Fundnel and Impact Guru add up to $8.5 million.

More than 100 causes and organizations from six countries have been benefited by ImpactGuru’s campaigns. While it is free to launch a campaign on Impact Guru, the platform charges a 5% fee along with transaction costs if a fund raiser chooses a ‘Default’ package on the portal.

Given that the pace of change only ever moves faster, we shall have to see how India either adapts to encourage and enable innovation or remains cautious and holds the lid down on entrepreneurial opportunities.

CHALLENGES IN INDIA

1. The idea of crowd funding is not new in India. Places of wor­ship, for example, are built overnight using a large number of donations. However, the concept of online crowd funding is new to the country.

2. The industry is also not very investor-friendly. It seems peo­ple are still not ready for this concept.

3. Low trust levels of doing the things online are also a chal­lenge. India’s ecommerce space needs to really mature before anything substantial can happen in this space. People need to be spending more and more online for them to even start thinking about backing online projects online.

4. Ecommerce in India only got a boost when they initiated the concept of cash on delivery. Similarly, crowd funding will have to look at building an offline base to finally induce mass awareness and encouraging larger participation.

LEGAL ISSUES

There are legal issues around crowd funding in India, since equity-based online crowd funding is not legalized in India yet. It was made legal in the US recently when the Jumpstart Our Business Startups Act (JOBS) act was passed. Some of the key points of this Act are:

• The JOBS Act has put much restriction on the amount that can be borrowed via crowd funding.

• The Act has put an audit compulsion by certified public ac­countant in some cases of crowd funding. Disclosures need to be made by the company raising funds and utilizing it.

• The company needs to explain everything about its project for which it is raising funds. The fund utilization plan needs to be disclosed.

Here in India, the concept is catching up fast and is posing a danger at the same time, as very soon these funds could scale up. Many money laundering schemes might run in the name of crowd funding via social media, pushing SEBI to set up a regula­tory framework if it is found that such platforms involve large amounts of money or issuance of securities.

A discussion is on to find a nodal agency for such activities fol­lowing a talk with various stakeholders like banking regulator RBI, Finance Ministry and Corporate Affairs Ministry. An offi­cial from SEBI stated that apart from setting up new rules after discussions with the stakeholders, any crowd funding involving sale of securities can be either regulated under SEBI’s existing norms for Collective Investment Schemes or Alternative Invest­ment funds.

THE RISKS IN CROWD FUNDING AND HOW TO MITIGATE THEM

Crowd funding comes with risk to the investor. CFI is not unique in this regard, but it does have characteristics that require regulatory protection and robust investor education for crowd funding to contribute meaningfully and successfully to a coun­try’s economy. Crowd funding markets have been operating in many countries for several years with few reported instances of fraud. However, as the market expands, there will inevitably be attempts to circumvent regulations and defraud investors. Despite this, the biggest concerns regarding risk are business failure and execution or fulfillment challenges. Failure may re­sult from poor management decisions, lack of funds, or miscal­culations of market demand. Execution or fulfillment challenges may occur in some successful crowd funding campaigns when a company is not ready with, for instance, the necessary logistics and manufacturing capacity to meet the demand generated by their campaign. These risks may be mitigated through regula­tion, technology, social and cultural approaches:

• Regulation

• Technology

• Social

• Cultural

ADVANTAGES OF CROWD FUNDING

It is a new concept in India and many of us are unaware about its advantages. Crowd funding has proved to be very advantageous.

1. Lack of money becomes a hurdle in the way of talented peo­ple. Crowd funding helps to cross that hurdle and fulfill dreams.

2. It is open to anyone with potential and a dream. Artists, mu­sicians, painters, dancers, singers, photographers, writers, sci­entists, event managers anyone can benefit from crowd funding.

3. It helps collect funds for the project quickly and easily. Don’t have to invest lifetime savings or wait for years to save money to make ones dream come true.

4. Crowd funding minimizes the tedious fundraising process (and its associated time and cost) so entrepreneurs spend more time where it counts, on the business. Scrappy entrepreneurs from humble means are no longer disadvantaged when trying to launch companies from scratch.

5. Anyone who is interested and has a little capital to spare can participate in financings. Ultimately, the industry shifts from “rich gets richer” to “smart gets richer.” Diversification of the investor base is good for management, who receives a wealth of points-of-view but is no longer beholden to a small number of parties.

6. Complex, difficult, and niche ideas get funded. Entrepre­neurs not constrained to 5-7 year payback windows can pursue models with high creativity, democratized invention, and posi­tive externalities in society. Unusual companies have the oppor­tunity to form, recruit sharp minds and push boundaries.

DISADVANTAGES

1. By putting less of their own skin in the game and no longer facing investors one-on-one, entrepreneurs lose out on the truly valuable step of convincing others

2. Crowd funding information is highly asymmetric with re­spect to what VCs and (to a lesser extent) angels obtain in dili­gence. Investors are susceptible to fraud or just plain incompe­tence.

3. Crazy ideas get funded. More ideas get funded today than can possibly return capital, but with crowd funding the percent­age of successes markedly decreases. A lion’s share of crowd funded investments will never make money and investors will be out-of-luck. While small, fragmented investments limit the catastrophic risk to any single investor, too many failures will give crowd funding a bad rap and prompt regulatory tightening.

CONCLUSION

There is no doubt that crowd funding is rapidly being looked upon as a serious way of raising funds for startups and new businesses. The US and European agencies have started imple­menting laws for this to function. There are serious concerns, which make it mandatory to bring this method under the laws of the land. India may soon bring in the requisite laws to support this in a big way, as efficient crowd funding system can really play the role of catalyst in bringing the startup ideas into reality.

BIBLIOGRAPHY

Books

1.       Howe, Jeff, 2008: Crowdsourcing: How the Power of the Crowd is Driving the Future of Business,

Random House Business Books

2.       Young, Thomas, 2013: The Everything Guide to Crowdfunding, Aadams Media

3.       Agrawal, Ajay, et. al., The geography of crowdfunding, NBER working paper series.

4.       Douglas Cumming, Sofia Johan, Demand Driven Securities Regulation: Evidence from Crowdfunding,

5.       Mollick, Ethan, The dynamics of crowdfunding: An exploratory study, Journal of Business Venturing

6.       Ordanini, Andrea, et. al., Crowdfunding: transforming customers into investors through innovative serviceplatforms,

Websites

1.      http://crowdsourcingweek.com/blog/indias-top-ten-crowdfunding-platforms/

2.      https://www.ketto.org

3.      http://crowdsourcingweek.com/blog/indias-top-ten-crowdfunding-platforms

4.      https://www.wishberry.in/#/home

5.      http://www.crowdfunding.nl/wp-content/uploads/2012/05/92834651-Massolution-abridged-Crowd-Funding-Industry-Report1.pdf

6.      http://crowdsourcingweek.com/blog/indias-top-ten-crowdfunding-platforms/

7.      http://crowdfunding.org/

8.      http://www.crowdsourcing.org/document/crowdfunding-industry-report-abridged-version-market-trendscomposition-and-crowdfunding-platforms/14277

9.      http://www.douwenkoren.nl/en/how-does-crowdfunding-work/

10.  http://www.forbes.com/sites/katetaylor/2013/08/06/6-top-crowdfunding-websites-which-one-is-right-foryour-project/

11.  http://www.inc.com/magazine/201111/comparison-of-crowdfunding-websites.html

12.  http://inc42.com/magazine/entrepreneurship/ketto-org-crowdfunding-platform-socialdomain/#ixzz2zDkBr1FP

13.  http://inc42.com/magazine/buzz/funding-roundup-silverpush-catapoolt-wittyparrot/#axzz2zDk7GaPL

14.  http://www.infodev.org/infodev-files/wb_crowdfundingreport-v12.pdf

15.  https://www.igniteintent.in

16.  http://indiacrowdfunding.wordpress.com/

17.  http://ketto.org/

18.  https://www.kickstarter.com/help/stats

19.  http://www.mid-day.com/articles/indian-entrepreneurs-are-following-the-crowd-to-makemoney/213055#sthash.KkiiwN7q.dpuf

20.  http://www.massolution.com

21.  http://ncfaindia.org/crowdfunding-in-india

22.  http://signup.pikaventure.com/

23.  http://tech.firstpost.com/news-analysis/meet-wishberry-a-made-for-india-kickstarter-like-crowdfundingplatform-217091.htmlhttps://www.wishberry.in/

24.  http://www.start51.com/