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Crowdfunding set to grow
Crowdfunding activity in India is driven increasingly by mobile applications and payments. This trend is likely to witness exponential growth
India, a young nation, is at a juncture of exciting times and is changing in a number of ways. With more than 241 million active users, India has overtaken US as the leading country for Facebook users and with more than 389 million mobile internet users in the country, the way India communicates is changing. This increasing social media penetration is also fuelling the growth of crowd funding, an alternative entrepreneurial finance that helps raise small amounts of capital from a large number of people through online platforms. Standing at approximately Rs 300 crore, the Indian crowdfunding industry is at a nascent stage compared to the global standards with the total amount of money raised via crowdfunding in 2016 at USD 738.9 million.
According to India Philanthropy Report 2017 developed by Bain and Co, funding by private individuals in India was Rs 36,000 crore in 2016. With 3.3 million NGOs, the highest number in the world and over 350 million people who donate to various religious and social causes every year, there is a huge opportunity that a part of these funds are gradually shifted online. With the increasing mobile penetration and a bulging middle class, the question arises if Indian crowdfunding industry will deliver as it has in other markets?
Crowdfunding is an innovation in alternate source of finance for the “rest of the entrepreneurs”, which emerged in an organized way in the wake of the 2008 financial crisis largely because of the difficulties faced by artisans, entrepreneurs and early-stage enterprises in raising funds for seed finance, product development and social causes. It started as an online extension of communities pooling money to fund business ideas of entrepreneurs who are not serviced by traditional sources of finance, either due to their size or their type of business, can have an access to funds, thereby, creating focus and action in cities and towns of all sizes, to form entrepreneurial ecosystems that can ignite innovation, create jobs and grow economies, in the process, diminishing the limitations of physical locations. In the past, because of the high cost of technology development, lack of mobile/web infrastructure and restrictive financial regulations, entrepreneurs had to travel to places like San Francisco or Boston to find the technologies and investors to build their companies. For most, this was cost prohibitive and logistically impossible. Entrepreneurs had a more challenging time executing their plans and potential investors were scarce. All these can be history with the growth of crowdfunding in India and can encourage entrepreneurial ecosystem, thereby boosting India’s growth.
In less than a decade, crowdfunding has gained traction in a number of developed economies, including Australia, the United Kingdom, the Netherlands, Italy, and the United States. This exciting phenomenon is spreading across the developed world and is now attracting considerable interest in the developing world as well. According to Technavio’s latest report, the global crowdfunding market is expected to grow at a CAGR of around 17 percent from 2017 to 2021.
Under the umbrella term, there are four different types like crowdfunding which are unlike each other.
In rewards-basedcrowdfunding, backers contribute typically small amounts of money in exchange for a reward, such as a watch, an album or a film. Interestingly enough, the Statue of Liberty is often touted as the first rewards-based crowdfunding campaign where Joseph Pulitzer came up with the idea to ask people to donate money for construction of the pedestal in exchange for printing their name on the front page of his newspaper, The World, to raise USD 250,000. Kickstarter is one the popular rewards-based crowdfunding platforms designed to help artists, musicians, filmmakers and designers to get funding for everything from films, music and art to games, technology and design. Since 2009, more than 11 million people have pledged more than USD 2.5 billion to over 100,000 projects. Donation-based crowdfunding is typically used to raise money for a non-profit or a cause, like drilling a well or building a school or for a personal campaign like an individual’s treatment or medical bills. GoFundMe and Crowdrise are two popular donation-based crowdfunding platforms. Equity crowdfunding is typically used to raise money to fund the launch or growth of a company, not just initiate a creative project or cause and investors become part-owners of the company. Online platforms such as Crowdfunder, Crowdcube and Seedrs have helped a plethora of entrepreneurs in US, UK and Europe, although this form of crowdfunding is not legal in India. In addition to the above three, debt crowdfunding websites like Prosper, Funding Circle and LendingClub, provide a platform to make loan with the expectation to get paid back the principal with interest. Although they are different in nature, they still open new possibilities for funding more entrepreneurs in more places around the world.
Various crowdfunding models can provide a variety of economic and social benefits like, overcoming systemic biases such as geography and gender in financial services; speed, convenience and lower cost in receiving capital in more efficient manner; potentially higher, risk-adjusted returns for investors compared to traditional finance; wider set of options for investors, thereby, providing portfolio diversification and so on. However, every coin has two sides and crowd funding is not devoid of its challenges. It is a well-known fact that crowdfunding investors typically have access to less information than banks. The fundraiser quality and the funder inexperience, with a large number of new, additional retail funders entering the market has always been a question mark. With over 4000 platforms globally and many shutting down annually, platform failure is a painful reality. Other potential risks include cyber risks, lack of liquidity, default and business failures.
Notwithstanding the challenges, India is poised for a growth in crowdfunding activity driven increasingly by mobile applications and payments. With an increasing number of crowdfunding websites in India like Milaap, Impact Guru, Ketto, BitGiving and Wishberry, the Securities & Exchange Board of India (SEBI) needs to act fast to put some regulations in place, the current private placement norm under the Companies Act, being the bone of contention, that does not allow any entity to raise investments from more than 200 investors without a public issue of the securities. Some countries, like the US have solved these issues with regulation like JOBS (Jumpstart our Business Startups) Act. China, which has the largest crowdfunding market in the world is largely unregulated. For a proper growth, keeping in mind the safety of the investors, SEBI has to propose a framework that ensures client protection, a grievance-addressing mechanism (for both lenders and borrowers), but at the same time should make it less onerous so that the sector can grow to its potential.
Under proper regulatory environment, crowdfunding has the potential to help catalyse existing efforts to create entrepreneurial cultures and ecosystems in developing nations.
It has a tremendous capability to support “the rest of the entrepreneurs” and will play a key role in sparking economic growth, innovation, and jobs. Although, crowdfunding is not a panacea and there are still risks and unanswered questions remaining but Government support and a positive regulatory environment can enable innovative developing economies to leverage the explosion of social media to leapfrog forward to build a network of vibrant entrepreneurial ecosystems.
(The writer is Assistant Professor, Amity University).
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