Finding a Venture Capitalist will no longer be a concern for the budding entrepreneurs as there is now a new age fund raising platform called “CrowdFunding” which is slowly but steadily finding its foothold in India. The crowdfunding model is fueled by three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organization (the “platform”) that brings the parties together to launch the idea.
Entrepreneurs far from the reaches of India’s venture capital network now have an option to raise initial cash to develop products: “CrowdFunding”. Although online platforms that help source funds from individuals are not new in India, players such as Wishberry, Ignite Intent and Milaap are focused mainly on creative projects and personal or social causes. They are now coming up with initiatives to fund start-ups as well.
The Crowdfunding Centre’s May 2014 report identified the existence of two primary types of crowdfunding:
- Rewards Crowdfunding: entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares.
- Equity Crowdfunding: the backer receives shares of a company, usually in its early stages, in exchange for the money pledged. The company’s success is determined by how successfully it can demonstrate its viability
Reward-based crowdfunding has been used for a wide range of purposes, including motion picture promotion, free software development, inventions development, scientific research, and civic projects
For a joint study between Toronto, Canada’s York University and Universite Lille Nord de France, in Lille, France, published on June 2, 2014, two types of reward-based crowdfunding were identified: “‘Keep-it-All’ (KIA) where the entrepreneurial firm sets a fundraising goal and keeps the entire amount raised regardless of whether or not they meet their goal, and ‘All-or-Nothing’ (AON) where the entrepreneurial firm sets a fundraising goal and keeps nothing unless the goal is achieved.” The study’s researchers analyzed 22,875 crowdfunding campaigns, with targets of between US$5,000 and US$200,000, and concluded: “Overall, [all-or-nothing] fundraising campaigns involved substantially larger capital goals, and were much more likely to be successful at achieving their goals.” In its review of the study outcomes, the Inc.com publication explained that potential investors are more inclined to support “all-or-nothing strategy” initiatives, whereby a substandard product will not be released if the funding goal is not achieved. The Inc.com review concluded that “AON” campaign typically provide more detailed information on the campaign.
Equity Crowdfunding is the collective effort of individuals to support efforts initiated by other people or organizations through the provision of finance in the form of equity. In the United States, legislation that is mentioned in the 2012 JOBS Act will allow for a wider pool of small investors with fewer restrictions following the implementation of the act.
In the U.S., debt-based crowdfunding from non-banks became more prominent as a form of crowdfunding in 2012, with the launch of the Lending Club, which had advanced more than US$9,255 million in loans via its website by March 2015. Prospective borrowers of the Lending Club first submit their requirements, and are then matched with pools of investors who are willing to accept the credit terms. Platforms such as the Lending Club gained popularity, as banks increased interest rates or reduced their level of lending activity. Another credit-based platform, Prosper.com, was established in 2006 and had funded nearly US$325 million in personal loans by April 2012
Litigation crowdfunding allows individuals to invest in legal disputes, globally, allowing those in need of litigation funding anywhere in the world to obtain it from their peers. Individuals are given a stake in the claim they have funded, which allows individual funders to multiply their investment in justice many times over if a case succeeds.
Charity crowdfunding is the collective effort of individuals to help charitable causes.
The inputs of the individuals in the crowd trigger the crowdfunding process and influence the ultimate value of the offerings or outcomes of the process. Each individual acts as an agent of the offering, selecting and promoting the projects in which they believe.
“For startups that are working on tangible products, they need to know whether this is something people would like or not before building an entire company,” said Anshulika Dubey, co-founder and COO of Wishberry, which raised $650,000 (Rs 4.05 crore) in seed funds earlier this year. “Crowdfunding allows thinkers to create a prototype and then reach out to the investor community with a proven concept.” Wishberry was the platform behind three startups so far, including educational guide Menstrupedia, and is starting to focus on tech product companies. Dubey plans to host pitch Saturdays at the office and hopes to fund 200 startups by the end of 2016. One startup that is raising funds on Wishberry is Greenopia, which offers a gardening kit that allows you to track plant growth on smartphones.
Its campaign runs on a rewards-based model, where funders will receive benefits such as smart pot kits, webinars with gardening experts and partner recognition. “Crowdfunding connects you directly to people who don’t just buy your product, but become co-innovators early on,” said Greenopia co-founder Mayukhini Pande. While crowd funding for startups is popular in the US, it is uncertain if it will work in India. “There isn’t a large enough early-adopter community here of individual consumers consumers who are willing to buy a product in advance,” said Sharad Sharma, a lead investor in Wishberry. “I don’t see it taking off imminently and wouldn’t advocate for startups to seek it.”According to research firm Massolution, $16.2 billion was raised through crowdfunding globally in 2014.
So, if you have a long stalled venture and you are not sure about how to fund your dream project, the best option to look for would be Crowdfunding using any of the available online Platforms.