Crowdfunding — the practice of raising small amounts of capital from a large number of people to fund new ventures — is finally gaining traction in India. The question is: Will it deliver like it has in other markets?
India has just overtaken the U.S. to become the No. 1 country for Facebook users: It has an audience of more than 241 million active users compared to 240 million in the U.S. The Facebook metric matters because in crowdfunding, “the single most predictive factor for the rate of emergence is social media penetration,” notes a World Bank report titled, “Crowdfunding’s Potential for the Developing World.”
A few years back, India also became the second-largest mobile phone subscriber base after China. That also matters because, in India, social media is predominantly mobile. According to a report titled, “Mobile Internet in India 2016,” there were 389 million mobile internet users in the country. The World Bank report observes that “crowdfunding has emerged as a multibillion-dollar global industry.” But a “constellation of trust,” incubated by social media, is necessary to promote its growth in developing nations.
“In India, crowdfunding has started only in the past couple of years. So, in terms of volume, it is not comparable with the West,” says Prantik Ray, professor of finance at XLRI. “The three big countries are the U.S., the U.K. and China. But the potential in India is good because, in terms of startups, we have seen several moves recently. There is not really a boom in crowdfunding yet. But five years down the line, India will be one of the major players.”
“Crowdfunding is democratized funding,” says Jonah Berger, Wharton professor of marketing and the author of Invisible Influence: The Hidden Forces That Shape Behavior. “For the internet economy as a whole, crowdfunding is just a small portion. But … it’s a big opportunity for folks trying to raise small amounts of money who can’t get funded by traditional means, either because of their credit score or the high interest rates. The amounts they are interested in may be too small for traditional lenders. Crowdfunding is a great way to get a small project through.”
“When we started a couple of years back, there was a certain amount of resistance,” says Varun Sheth, founder and CEO of Indian crowdfunding platform Ketto. “But over the years, I have seen the mindset change.” (Ketto won the $30,000 grand prize at the Wharton School India Startup Competition in 2016.)
“For the Internet economy as a whole, crowdfunding is just a small portion. But in terms of individuals, it’s a big opportunity.” –Jonah Berger
“It is estimated that there are up to 344 million households in the developing world able to make small crowd-fund investments in community businesses,” according to the World Bank report. “These households have an income of at least $10,000 a year. Together, they have the ability to deploy up to $96 billion a year by 2025 in crowdfunding investments.”
As of 2013, the U.S. had 344 crowdfunding platforms, the U.K. 87 and India only 10, the World Bank notes. According to Venture Capital, which tracks private company financials, transactions (private equity, venture capital and M&A) and their valuations in India, crowdfunding platform Impact Guru has received $500,000 from RB Investments, Fundnel (a Southeast Asia-based private investment platform) and others. Ketto has received $700,000 from Intellecap Impact Investment Network. And various angel networks — Calcutta, Chennai, Singapore — have funded other platforms.
Types of Crowdfunding
Serial entrepreneur Meena Ganesh (TutorVista, GrowthStory), who is an advisor to Indian crowdfunding site Milaap, says that crowdfunding can be divided into donation-based (charity/personal causes), debt-based (peer to peer) and equity-based. “The current status of the first category is around $4 billion per annum with online constituting less than 2% ($80 million). Other types are in a nascent stage.”
A report by global professional services firm PwC recognizes the following categories:
- Seed crowdfunding: The use of “rewards-based” crowdfunding platforms to fund the creation, launch or development of new businesses, products and services where backers pay upfront for a product, service or project.
- Equity crowdfunding: Enables small and large investors (sometimes called mini-angel investors) to purchase small parcels of shares. This gets a lot of press attention – but makes up only a small percentage of overall crowdfunding.
- Crowdlending: Peer-to-peer lending. (Dhirubhai Ambani’s Reliance Textiles and Karsanbhai Patel’s Nirma – both in the state of Gujarat — are known as among the world’s largest crowdlending projects.)
- Donations-based crowdfunding: Used to help community initiatives.
Says Piyush Jain, co-founder and CEO of Impact Guru: “Crowdfunding is still in a nascent stage in India. However, its market potential is huge. The industry is growing exponentially with a CAGR (compound annual growth rate) of more than 100%. Evidence from the past four years of growth in crowdfunding in China suggests that donation crowdfunding in India can grow 16 times resulting in annual funds raised by crowdfunding platforms exceeding Rs. 1,600 crore ($250 million) by 2021.”
Impact Guru has a tieup with GlobalGiving, the world’s largest nonprofit crowdfunding platform. (LetsVenture, one of India’s largest marketplaces for startup funding, has signed a strategic collaboration agreement with Israel-based OurCrowd, a global leader in equity crowdfunding.) “The Indian diaspora, especially in the U.S. and the U.K., will be key in helping crowdfunding in India grow,” adds Jain.
“There is not really a boom in crowdfunding yet. But five years down the line, India will be one of the major players.” –Prantik Ray
According to Bain and Company’s India Philanthropy Report 2017, funding by private individuals in India was Rs. 36,000 crore in 2016. “There is a large market opportunity to gradually move about 7% to 10% of this online,” Jain notes. “India has the largest number of NGOs (non-governmental organizations) in the world (3.3 million) and over 350 million people who give to various religious and social causes every year.”
Can India Leapfrog?
Will India be able to “leapfrog” over the West? Says Ganesh: “While the term ‘leapfrog’ may mean different things in different contexts, the primary shift that we are witnessing is that crowdfunding is being driven increasingly by mobile — particularly messenger applications [like] Whatsapp, Telegram — and enabled by mobile payments like Paytm. This is significantly different from the West, particularly the U.S., where it was driven primarily by a desktop — the web, social networks (Facebook, Twitter), and card-based payments. What this entails is that the product needs to suit the local ecosystem.”
Impact Guru bills itself as “primarily focused on donation-based crowdfunding. We also support rewards-based crowdfunding and have had a few fundraisers that offered rewards.” Explains Ketto’s Sheth: “We are both donation-based and reward-based, but preferably donation-based only.” Milaap is a platform for personal and social causes. BitGiving enables artists, engineers and creators of all kinds to come together. “Wishberry is a new way to bring creative and innovative ideas to life. It is a rewards-based crowdfunding website for creative entrepreneurs in India,” says co-founder Priyanka Agarwal.
What’s stopping these platforms from growing quickly? One answer is that the Securities & Exchange Board of India (SEBI) is trying to put some rules in place — but its pace is slow. And some feel that the sluggishness may hinder the fast-moving sector.
“Two years back, SEBI released a consultation paper which sought to regulate crowdfunding, which is not pool managed, but the investor directly invests into the startup,” says Sheth. “Again in 2016, SEBI issued a press release titled ‘SEBI Cautions Investors.’ It covers various matters pertaining to the stock markets.” One issue is that with more 200 investors, the platforms may start acting as stock exchanges.
“SEBI has been unable to come to a consensus,” says Ray. “They are presenting the same paper again and again.”
The market regulator has also written to social networking site LinkedIn — which has around 42 million users in India — to clarify whether it is acting as a fundraising platform by connecting funding groups and angel investors with startup opportunities. According to a report in business daily Mint: “The market regulator is concerned because it is possible that the number of investors funding such entrepreneurial activity on LinkedIn could cross 200. The current private placement norms under the Companies Act do not allow any entity to raise investments from more than 200 investors without a public issue of the securities offered in return for such investments and listing the securities with a listed exchange.”
But some countries have solved the problem. The U.S. has its JOBS (Jumpstart Our Business Startups) Act. Others are willing to live with the shortcomings and get the process started.
China has partly sacrificed regulation for growth. A European Commission study titled, “Assessing the Potential for Crowdfunding and Other Forms of Alternative Finance to Support Research and Innovation,” notes: “The Chinese crowdfunding market is the largest in the world. This is not surprising … the Chinese alternative finance market is largely unregulated.”
“Crowdfunding is still in a nascent stage in India. However, its market potential is huge.” –Piyush Jain
‘A Level Playing Field’
There is another side to the picture: There are those who believe the delay is justified. “SEBI’s committee focuses on lending and equity-based crowdfunding where retail investors are involved with return-of-investment expectations,” says Ganesh. “So it’s wise on SEBI’s part to propose a framework to ensure client protection, a grievance-addressing mechanism (for both lenders and borrowers), but [also] to make it less onerous so that the sector can grow.”
Some are sitting on the fence. “Equity crowdfunding online is not legal in the country as per SEBI regulations and thus we don’t do it,” says Jain.
1Crowd is one of the few sites that calls itself an “equity crowd funding platform.” Says co-founder Anup Kuruvilla: “SEBI will eventually establish some crowdfunding regulations and we will likely be covered under them. Such rules are necessary to create a level playing field. Equity crowdfunding is an alternative to membership in big angel networks, which cater to ultra high net worth individuals.”
“I feel that equity crowdfunding, in general, can be risky if it is unrestricted,” says Wishberry’s Agarwal. “There are several platforms that exist today that enable people to invest in startups by just reading positive press around the same. People can get starry-eyed and want to put their money on the most ‘glamorous’ venture. They don’t take into account that only one out of 100 startups succeed. Thus, SEBI regulations are needed to ensure that new-age ultra high net worth individuals are cautious and well informed before they risk assets. Restricting participation is important. Wishberry wants to grow within the ecosystem the Indian regulatory bodies develop.”
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Anumakonda Jagadeesh
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Crowdfunding is being explored as a potential funding mechanism for creative work such as blogging and journalism, music, independent film and for funding startup companies. Community music labels are usually for-profit organizations where “fans assume the traditional financier role of a record label for artists they believe in by funding the recording process”. Since pioneering crowdfunding in the film industry, Spanner Films has published a “how to” guide. A Financialist article published in mid-September 2013 stated that “the niche for crowdfunding exists in financing films with budgets in the [US]$1 to $10 million range” and crowdfunding campaigns are “much more likely to be successful if they tap into a significant pre-existing fan base and fulfill an existing gap in the market.” Innovative new platforms, such as RocketHub, have emerged that combine traditional funding for creative work with branded crowdsourcing—helping artists and entrepreneurs unite with brands “without the need for a middle man.”
Food and agriculture
Several crowdfunding platforms have emerged that allow people to donate or invest in food- and agriculture-related opportunities. AgFunder is one global platform that gives both individual and institutional investors access to venture capital investments, both in agriculture technology and food technology companies.[ Cropital has developed a platform to allow investors to invest in small-holder farmers, and rewards-based platforms like Barnraiser allow users to support farmers and food startups.
The crowdfunding platform PieShell was launched in 2016 to focus exclusively on food and beverage campaigns.
Philanthropy and civic projects
A variety of crowdfunding platforms have emerged to allow ordinary web users to support specific philanthropic projects without the need for large amounts of money.
Real estate
Real estate crowdfunding is the online pooling of capital from investors to fund mortgages secured by real estate, such as “fix and flip” redevelopment of distressed or abandoned properties, and equity for commercial and residential projects, acquisition of pools of distressed mortgages, home buyer down payments and similar real estate related outlets. Investment, via specialised online platforms in the US, is generally completed under Title II of the JOBS Act and is limited to accredited investors. The platforms offer low minimum investments, often $100 – $10,000.[90][91] There are over 75 real estate crowdfunding platforms in the United States. The growth of real estate crowdfunding is a global tendency. During 2014 and 2015, more than 150 platforms have been created throughout the world, such as in China, the Middle East, or France. In Europe, some compare this growing industry to that of e-commerce ten years ago.
In Europe the requirements towards investors are not as high as in the United States, lowering the entry barrier into the real estate investments in general.
Intellectual property exposure
One of the challenges of posting new ideas on crowdfunding sites is there may be little or no intellectual property (IP) protection provided by the sites themselves. Once an idea is posted, it can be copied. As Slava Rubin, founder of IndieGoGo, said: “We get asked that all the time, ‘How do you protect me from someone stealing my idea?’ We’re not liable for any of that stuff.” Inventor advocates, such as Simon Brown, founder of the UK-based United Innovation Association, counsel that ideas can be protected on crowdfunding sites through early filing of patent applications, use of copyright and trademark protection as well as a new form of idea protection supported by the World Intellectual Property Organization called Creative Barcode.
Science
A number of platforms have also emerged that specialize in the crowdfunding of scientific projects, such as experiment.com and The Open Source Science Project. In the scientific community, these new options for research funding are seen ambivalently. Advocates of crowdfunding for science emphasize that it allows early-career scientists to apply for their own projects early on, that it forces scientists to communicate clearly and comprehensively to a broader public, that it may alleviate problems of the established funding systems which are seen to fund conventional, mainstream projects, and that it gives the public a say in science funding. In turn, critics are worried about quality control on crowdfunding platforms. If non-scientists were allowed to make funding decisions, it would be more likely that “panda bear science” is funded, i.e. research with broad appeal but lacking scientific substance. Initial studies found that crowdfunding is used within science, mostly by young researchers to fund small parts of their projects, and with high success rates. At the same time, funding success seems to be strongly influenced by non-scientific factors like humor, visualizations, or the ease and security of payment.
Journalism
In order to fund online and print publications, journalists are enlisting the help of crowdfunding. Crowdfunding allows for small start-ups and individual journalists to fund their work without the institutional help of major public broadcasters. Stories are publicly pitched using crowdfunding platforms such as Kickstarter, Indiegogo, or Spot.us. The funds collected from crowdsourcing may be put toward travel expenses or purchasing equipment. Crowdfunding in journalism may also be viewed as a way to allow audiences to participate in news production and in creating a participatory culture.[ Though deciding which stories are published is a role that traditionally belongs to editors at more established publications, crowdfunding can give the public an opportunity to provide input in deciding which stories are reported. This is done by funding certain reporters and their pitches. Donating can be seen as an act that “bonds” reporters and their readers. This is because readers are expressing interest for their work, which can be “personally motivating” or “gratifying” for reporters.
Spot.us, which was closed in February 2015, was a crowdfunding platform that was specifically meant for journalism. The website allowed for readers, individual donors, registered Spot.us reporters, or news organizations to fund or donate talent toward a pitch of their choosing. While funders are not normally involved in editorial control, Spot.us allowed for donors or “community members” to become involved with the co-creation of a story. This gave them the ability to edit articles, submit photographs, or share leads and information. According to an analysis by Public Insight Network, Spot.us was not sustainable for various reasons. Many contributors were not returning donors and often, projects were funded by family and friends. The overall market for crowdfunding journalism may also be a factor; donations for journalism projects accounted for .13 percent of the $2.8 billion that was raised in 2013.
Larger crowdfunding platforms such as Indiegogo or Kickstarter, both of which are not journalism-specific, may garner more success for projects. This is because these large-scale platforms can allow journalists to reach new audiences. In 2017, 2.3 million out of Kickstarter’s 7.9 million users had donated toward more than one project
Traditionally, journalists are not involved in advertising and marketing. Crowdfunding means that journalists are attracting funders while trying to remain independent, which may pose a conflict. Therefore, being directly involved with financial aspects can calljournalistic integrity and journalistic objectivity into question. This is also due to the fact that journalists may feel some pressure or “a sense of responsibility” toward funders who support a particular project. Crowdfunding can also allow for a blurred line between professional and non-professional journalism because if enough interest is generated, anyone may have their work published.
International Development
There is some hope that crowdfunding has potential as a tool open for use by groups of people traditionally more marginalized. The World Bank published a report titled “Crowdfunding’s potential for the Developing World” which states that “While crowdfunding is still largely a developed world phenomenon, with the support of governments and development organizations it could become a useful tool in the developing world as well. Substantial reservoirs of entrepreneurial talent, activity, and capital lay dormant in many emerging economies…Crowdfunding and crowdfund investing have several important roles to play in the developing world’s entrepreneurial and venture finance ecosystem.
(Wikipedia)
Models
1. Donation model – In this model, individuals make a financial contribution to a project without any expectations of financial benefits.
2. Lending model – In this, the investor will loan money to the project with the expectation of being repaid under the terms and conditions agreed.
3. Investment model – The investor receives an equity stake in the project.
1. The idea of crowdfunding is not new in India. Places of worship, for example, are built overnight using a large number of donations. However, the concept of online crowdfunding 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 is 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. As long as the crowdfunding platforms are not making any financial promises to the contributors, they should be theoretically safe to operate. However to build a credible case for the industry to grow in India, it would do help if these platforms proactively approach the regulators and work with them to processes so as to build long-term credibility and transparency.
5. Ecommerce in India only got a boost when they initiated the concept of cash on delivery. Similarly, crowdfunding will have to look at building an offline base to finally induce mass awareness and encouraging larger participation.
There is no doubt that crowdfunding 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 crowdfunding system can really play the role of catalyst in bringing the startup ideas into reality.
Dr.A.Jagadeesh Nellore(AP),India