Crowd-Funding: A great opportunity for start-ups

By Deepa Krishnan

India is abuzz with innovation and entrepreneurs seeking funds to float new ideas. Typically, entrepreneurs raise money for their fledgling start-ups from angel investors, venture capitalists and even banks.

But getting cash from these sources is a tedious affair, and many small start-ups are not equipped to handle the paperwork. Crowd-funding is thus a great alternative to raising funds with minimum risk involved. The concept is already very popular in the US through portals like  kickstarter.com, and  indiegogo.com but it is only just picking up in India.

As a yardstick of its success globally, check out these figures: In 2012, crowd-funding portals helped companies and individuals worldwide raise $2.7 billion from members of the public, an 81-per cent increase over the previous year.

What exactly is crowd funding?
Crowd-funding is an alternative method of raising finance for a business, project or idea through an online campaign and funding target. The idea is to effectively communicate the concept to like-minded individuals to seek funds. Unlike angel investment, where one person typically takes a larger stake in a small business, a crowd-funded project attracts a large number of investors.

This is a great way to raise money to fund a prototype or beta version of their service and to even make some cash before seeking formal funding by offering an equity stake. It also helps entrepreneurs establish their brand, get some free PR and make initial sales before their product is actually ready.

Crowd-funding vs Crowd Financing
But wait up. There are different types of crowd-funding. There’s donations-based funding and rewards-based funding, where tangible gifts are offered in return for funding, like movie tickets or customised T-shirts.

Then, there’s equity-based crowd-funding and debt-based funding (using debt instruments like microfinance). Equity-based crowd-funding, also known as ‘crowd-financing’, is a model where start-ups are promoted via a platform that also has investors listed with it. The platform or portal thus links start-ups with potential investors, who may pick up a small stake in the fledgling venture. 

As amazing as this model seems – and it’s working really well in the West – it faces several obstacles in India. First, India is a tiny, tiny market for angel investments. A look at the numbers reveals that the US witnesses over 60,000 angel deals in the $300,000 range, which adds up to a $20-billion market a year. In comparison, India witnesses around 150 deals in the Rs 2-crore range, resulting in a $50-million market a year. The lack of quality deals is one of the key reasons for the small market.

Furthermore – and here’s the biggest catch – the law currently bars crowd-financing in India. Priyanka Agarwal, CEO of Wishberry.in, one of the first few crowd-funding portals set up in India, elaborates, "An entrepreneur today cannot publicly advertise a specific investment prospectus to more than 50 people. If they hit the 51-persons mark, they qualify as an IPO and have to register with SEBI, which is an expensive and lengthy process, which stunts the business model.”

Also, unlike in the US, India does not have a system of investor accreditation. So there is no way the government can differentiate between seasoned and amateur investors and, hence, has no way to protect novice entrepreneurs against fraud. It took the US 18 months of lobbying for the JOBS Act and it’s been a year since it was passed, and the legislation has still not taken effect. The process will take much longer in India, Agarwal points out.

Is crowd-funding right for your start-up?
Budding entrepreneurs in creative fields (filmmakers, musicians, artists, theatre groups etc), social entrepreneurs, innovative product and service entrepreneurs, and student entrepreneurs usually raise funds to kickstart their ventures from friends, family, as well as fans and supporters online.

Ruchi Dana, an alumnus of Stanford University, and founder of PikaVenture, is trying to bring the Silicon Valley ecosystem of entrepreneurship and innovation to India. Says Dana, “India could potentially be a big market for crowd-funding. People in India genuinely believe in doing good for others and crowd-funding is a mechanism by which wealthy and even middle-class individuals can play their part to foster innovation and entrepreneurship in India.”

How do you go about crowd-funding your project?
Crowd-funding is still at a nascent stage in India but there are a few sites already operational like  razoo.com, seedrs.com, kickstarter.com and  fundingcircle.com. In December 2012, PikaVenture rigorously vetted 30 start-ups and chose 12 to refine their pitches and iterate on their concepts.

Typically a crowd-funding platform charges a commission for hosting and helping you achieve your target. For instance, Wishberry charges a small upfront fee of Rs 5,000 per campaign for its consulting efforts and subsequently deducts 10 per cent of all funds raised through the platform.

A project with a well-defined set of goals and targets must first be registered on an online platform. "The key to a successful crowd-funding project is a great campaign that attracts investors," explains Agarwal. If the target is not achieved within the specified period, the campaign can be renewed. If it has been achieved, investors will be asked to confirm their pledges and the final amount will be transfered to the owners of the project. Next, the owners are given the details of their investors, so the entrepreneur can liaise with them directly and begin processing their rewards.  

Finally, crowd-funding presents an excellent opportunity for small businesses but they must have a streamlined strategy if they want to take this route. Essentially, the process can be compared to managing a Facebook fan page or a LinkedIn business page. You have to tend to it daily, make your offers exciting, evaluate and target the right donors or investors, create a buzz around your product and chop and change strategy if the need arises.

No one said you would get money for free!

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