Crowdfunding Guide For Startups: State Of Crowdfunding In Indian Market

What’s common between devices and platforms such as Pebble smartwatch, the Ouya gaming, The Dash audio accessories, VR headset Oculus Rift, AI company Bitvore and high-res music platform PonoMusic? These are some of the most successful crowdfunded businesses of all time.

What started out as a trend in the Western markets has now become a mainstream source of funding for new startups, ideas and businesses. Crowdfunding has also made its mark in India, but mostly in social impact businesses, for medical expenses and some charitable causes. Following the global trends, crowdfunding for business is now slowly gaining a foothold as a method of financing startups at the seed or idea stage.

With entrepreneurs entering the world of business for the first time, startups often face difficulties in arranging funds. Lack of funds for bootstrapping or lack of help from friends or family, means startups have to turn to institutions and angel investors. But banks tend to refuse business loans for first-time entrepreneurs and often ask for huge collateral. And when investors are also hard to convince, crowdfunding platforms can play a key role here in helping entrepreneurs make the most of their ideas.

A very tiny percentage of businesses in India have chosen crowdfunding so far — just around 1%, according to a 2016 report of Alternative Board Tab Small Business Survey. But, there has been a positive response in the feedback of small business owners or startup founders, who have opted for crowdfunding to add capital to their ventures. The trend of crowdfunding startup is gaining momentum gradually, and showing definite signs of growth in the startup ecosystem of India.

With several platforms in the market to start crowdfunding campaigns, entrepreneurs and founders first needs to know how crowdfunding varies from platform to platform, the different types and the processes of each of these categories.

Based on their requirements, strategies, market analysis and understanding of the business, startups would then be able to pick their choice of crowdfunding platform from the options available. Moreover, to make the right choice in crowdfunding for business, the entrepreneur also needs to do market research of the crowdfunding platform options properly, to avoid unnecessary hassles.

What Is Crowdfunding?

Let us first start with the definition of crowdfunding and how it works, before going to the different types and their respective benefits or disadvantages.

Crowdfunding refers to the act of raising funds from multiple individual investors or donors for a product or service by sharing some details as well as a development roadmap on a crowdfunding platform. To start off with crowdfunding, there are various fora and platforms available in Indian and global startups from the likes of Kickstarter to Indiegogo to Indian platforms such as Ketto.

Each such platform allows entrepreneurs and founders to share basic details of their product, venture or service for the crowdfunders to peruse through. Usually, businesses give details such as product features, the development progress and the roadmap for the future along with various tiers of investments. The interested investors and donors then get in touch with the founder or startup and can start funding the project through the platform

Different Models Of Crowdfunding

There are different models or types of crowdfunding for businesses that entrepreneurs need to choose from, after careful consideration.

Reward-based Crowdfunding

In this model, the entrepreneur needs to offer their upcoming product or services or certain benefits as rewards to investors or donors, to keep them interested in funding the business. This sort of crowdfunding is particularly helpful in case of creative ventures such as apparel designing, fashion accessories such as jewellery or bags, beauty products, lifestyle products and personalised stationery. More so, when founders kick off crowdfunding before launch, this gives them customer feedback on the products or services, which can be used to fine-tune the same before they hit the market. Crowdfunding in this way helps entrepreneurs strategise, improve or upscale accordingly.

Equity-based Crowdfunding

Here, instead of rewards or freebies, entrepreneurs and founders offer equity or company shares to potential investors so that they can earn bigger returns in the future, based on the growth of the startup. This kind of crowdfunding for business takes place mostly in case of complex products or services such as tech-driven systems or devices and app-based services since here the degree of risk is higher, and therefore investors need to have thorough domain knowledge or expertise. Here, the entrepreneur has to bear the risk of outsiders getting to know their future business decisions as well as the technology that powers the operation in detail.

Lending-based Crowdfunding

In this case, too, the investors get equity in the business against funding, but at a fixed rate of return such as interest payment. This differs from equity crowdfunding as the latter enables investors to earn returns at a higher rate with the profits growing as the business grows, which is a riskier bet. Since investors get access to insider information of the business, it’s necessary not to share sensitive information and data with them.

Pre-order Crowdfunding

This takes place when investors fund the business against pre-orders of the product or service, with delivery set for once the business starts rolling. Here, this priority access acts as a benefit for the investor, and may also include perks or rewards. For example, an investor can contribute to funding business of organic beauty products, with promises of getting the first batch of products for market testing or reviews.

Donations Or Social Crowdfunding

Here the crowdfunding platform seeks investors to accumulate funds for a social cause such as helping patients, setting up utility services in far-flung or calamity-affected areas, conservation issues, reforming policy and healthcare or even for class-action lawsuits. The investors contribute to the cause without any motive of getting a return, interest, etc.

Why India Lacks Equity Crowdfunding

Amongst the categories listed above, equity crowdfunding involves a much higher amount of risk as the platforms generate unregulated investment. These platforms present the business plan and seek investors against company equities.

Lack of information regarding the business and face to face dealings, potential frauds or higher probability of business failure can land small investors in a soup. This is the reason, the Security and Exchange Board of India (SEBI) has classified equity crowdfunding as illegal in the Indian market. Obviously, this has dampened the interest in equity crowdfunding in India, driving startups and founders to other means such as reward-based crowdfunding or social crowdfunding.

Key Crowdfunding Players In India

While crowdfunding in India is yet to mature fully, it has gradually gained popularity over the past half-a-decade with the rise of the startup ecosystem. While this is giving a boost to the entrepreneurs in shaping up their ideas to business and nurturing them to get them ready for market, investors and donors are also finding it easy to track potential clients and strike deals to earn from investments. Crowdfunding websites and crowdfunding apps are hence in vogue, multiplying in number over the years.

In India, platforms such as Kickstarter, Wishberry, Ketto, Indiegogo, MesoTown, ImpactGuru, Catapooolt, FuelADream, Fundable and Dream Wallets are already operational and have proven themselves as good options for startups who have chosen the crowdfunding route. Among these, some are meant for creative products and services and operate on the reward-based model, others act as a marketplace where entrepreneurs and investors get to interact with each other and strike deals for lending-based or social crowdfunding.

Rang De, for example, is a leading based crowdfunding platform that provides microloans to rural entrepreneurs. Wishberry, on the other hand, is a reward-based platform for art and culture or creative projects while FuelADream and Catapooolt are similar kind of platforms that caters to political or charity projects and social causes as well.

Recently, e-commerce giant Amazon India launched Amazon Wings, a crowdfunding initiative for the sellers that operate on its marketplace. Wings lets sellers bring products to market through funding from Amazon’s user base in the country. Another Indian crowdfunding platform Ketto is focussed on helping early-stage sellers raise funds for their product development and upscaling, as well as on social causes and issues.

The Future Of Crowdfunding In India

Funding is an essential ingredient for all startups, and crowdfunding is becoming increasingly popular as it’s seen as a big validation for the product or service. It’s also the trend and is more democratic than other routes for new startups.

While it would be ideal, bootstrapping startups or getting funds from friends or relatives is a tad difficult. Thus, it’s mostly inevitable for entrepreneurs to source funds from outside. Here, crowdfunding presents an option, less complicated and hassle-free, to get funds for the business. This is the reason why Indian entrepreneurs and startups are increasingly taking resort to it.

For crowdfunding to act as solid support to startups in India, it is essential to have the investment process regulated. For this, proper regulatory norms are needed, that would ensure security for investors on the one hand and smooth fundraising process for entrepreneurs as well. Regulations such as lowering the cost of capital and increasing liquidity will minimise risks in investment and thus help in attracting investors to the business proposals in the crowdfunding platform. SEBI’s intervention, in particular, would be helpful here and would facilitate equity crowdfunding too, which can be extremely beneficial for startups.