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 smaller amount of funds from larger number of peoples mainly via 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 serve 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 a 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 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 good social media presence and a well large network of friends.
- No requirement to give up any equity.
- No requirement to have repayment plan and/or interest payments.
- Ability to attract a wide range of investors.
- Also, serves as a marketing channel.
- No minimum fund raise requirement.
- Progress of a funding campaign can be easily tracked.
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 the recent years. However, that has been possible because of the choices offered such as cash on delivery. Even today cash on deliver orders are a significant portion in Indian e-commerce, 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 crowd funding is not allowed. Currently even micro-financing model of crowdfunding is also being questioned, creating uncertainty over the crowdfunding business model.
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 crowd funding in India is definitely new and has its own setbacks mainly – “trust issues”. Despite the setback crowd funding is witnessing gradual success and awareness in India. Some of the crowd funding platforms that exist and are popular in the India are:
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