What exactly is Crowdfunding?
In layman language, crowdfunding is a concept where a lot of people commit money to a venture or a project to raise a target amount of money in a stipulated time frame. i.e. rather than relying on one person to fund the project we get a lot of people (crowd) come together to fund the idea/project.
The concept is simple. For ex, you need 3,00,000 INR to start a venture or Startup. You have few people who are willing to fund you with money ranging from 3,000 to 10,000 INR. You go and ask all of them to fund your project rather than ask a single person to fund the project.
Now if you had to ask a single person for 3,00,000 INR It might take some time and a lot of convincing. Also, the risk comes completely on a single person.
This is where crowdfunding works. Firstly, the risk gets divided among a lot of people. Secondly, you have a lot of people backing your project. Thereby, giving you an option to get first promotion done by a lot of stakeholders.
How Crowdfunding works in India
Is Crowdfunding Legal in India? yes, It is.
Before explaining you how does crowdfunding work in India lets first understand pros and cons of crowdfunding with reference to India.
The most significant Pro of crowdfunding is the ease of raising money by dividing risk among smaller entities and since India is a country with a huge population – you have a lot of people to help you crowdfund.
The biggest con is the headache, you as an entrepreneur must take in dealing with many small level investors.
Imagine a world where you are accountable to 100+ people. Life does not get any easy when you should report to so many people.
Another problem with crowdfunding in India is the lack of legal structure in India for crowdfunding. The laws are a little vague and haven’t exactly evolved with the concept.
So, if you are an entrepreneur who is planning to raise funds using crowdfunding please add the above two challenges to the list of challenges entrepreneurs face when starting a startup.
Crowdfunding is a hit in countries like USA. In last few years websites like kickstarter, Indiegogo, crowdfunder have made a name for themselves by helping a lot of people raise funds through crowdfunding.
Crowdfunding for startups in India is relatively a new concept.
How has crowdfunding evolved over the years?
In good old days, we had a person go door to door asking good Samaritans for contribution to a worthy cause.
History shows, crowdfunding is a very old concept.
Today, crowdfunding like most of our life’s things is an automated process relying more on technology. i.e., we have web based platforms for crowdfunding.
The business/person in need of crowdfunding goes and posts their project on the crowdfunding websites. The usual parameters defined while setting up the project are:
- Name of project
- Description of project
- Amount of money the project is trying to raise
- What project owner promises in return in lieu of the fund contributed:
- It could be gifts
- Initial free copy of the product/service
- Free service
- Time duration till the campaign will the run
The web portal keeps a % of the amount raised by the project as a facilitation fees. The web portal also keeps a check on the promises made by project owner through a legal binding agreement.
Since we are discussing crowdfunding in India, let’s start with the list of famous crowd funding portals in India.
Ketto, Wishberry, fuel a dream and some new start-ups which are some of the known portals in this space.
And then there are few more which are still finding their feet in this market.
How successful is Crowdfunding for startups in India?
Most of the startups trying to raise funds through crowdfunding rely on the portals i mentioned above.
The progress these portals have made in the last few years has been slow.
“The global crowdfunding industry generated about $34.4 billion in capital last year. No reliable numbers are available for India though it is estimated it accounts for a small fraction of this. “
Ketto, one of the famous names in crowdfunding platforms in India has so far raised USD 5,990,400 through more than 100,000 backers to support over 10,000 projects (averaging just under USD 600 per project). (source: http://crowdsourcingweek.com/blog/indias-top-ten-crowdfunding-platforms/)). The article was published on 26th August 2016.
Crowdfunding, the idea to help entrepreneurs raise funds in India does not find a lot of backers in the country with the second largest population in the world and do you know why?
Why Crowdfunding fails in India?
Before you decide to stone me to death for speaking the unspeakable truth about us being misers and Cynics – let me ask you a simple question “How many projects have you crowdfunded till date?”
Crowdfunding includes the word “funding”. Hence, do not confuse it with crowd-sourcing.
Crowdfunding is a type of crowd sourcing. So if you have sourced resources from a crowd which did not include funds, it is not crowdfunding.
And please do not include the religious functions, temples you have funded from your pocket. By crowdfunding projects, I clearly refer to ventures, projects of NGOs or some noble cause.
Obviously, religion is a noble thing but then we are a religious country and it is the only thing which gets crowdfunded.
As a matter of fact, all religion bodies get over-funded with crowdfunding.
They are flushed with money flowing through crowdfunding. The concept is such a hit with them that the poorest of the poor, who barely make enough to meet ends end up funding them as a part of the crowd – washing their sins by contributing to temples.
And what the temples give us in return of the crowdfunding we do is something, I find in bad taste.
Their obsession with gold, a ticket for our rendezvous with god’s idols, charging us money from prasad, cast divide, discrimination against women…..I will stop. I am heading in the wrong direction.
Getting back to crowdfunding.
The question again is “why crowdfunding does not work in India?”
The biggest problem with crowdfunding is that we have to trust an unknown person to fund their dream? Hmmm….I am thinking out aloud like an average Indian “how can I trust someone else’s dream when I know it has nothing to do with my dream?”
Hello? We are in India Sir/Ma’am. Since childhood, we are taught to be wary of strangers.
God knows what sinister motive this business on a crowdfunding website has in raising money from unknown persons. Why did their family not fund him?
How do we trust them?
What if they disappear with the money? There is no law to get hold of this person.
Bottom line. I cannot trust the unknown person asking me for money on internet.
Again, I am thinking like an average guy in this country.
Moving forward. Thinking more in terms of return on investments.
This person asking for money is not even offering a lucrative interest. The moneylender around our house tells me “he gets 3 to 5 % per month interest on the money he invests in businesses. I am not as greedy as he is but at least I should get 2% / month”.
But then this unknown entity is asking me money for free and what are they offering me in return?
T-shirts, caps, first VIP access to his product/service.
I can anytime go to any ecommerce website and get a truck full of all this stuff with the money they are asking me to invest.
What if this startup fails? Forget T-shirt, i won’t even get money back to buy an underwear 😉
Lastly, the business is not even asking for money in the name of god.
At least, with god, I have the chance of getting some good karmas in return. (remember, how we bargain with God asking the eternal one for all the good things in life in lieu of the offerings we present to the great one)
I don’t blame the average Indian for their apprehensions, fears or whatever you may call it. We are wired differently.
We have no law to save us (if things go south). We work in an environment where cheating happens and the protectors turns in to perpetrators (read : police).
I crowdfunded a religious project some years back only to be duped by the temple priest. (when I was the god-fearing, religious guy). I still am the same god-fearing, religious guy but I don’t fund religious projects anymore.
No wonder, Crowdfunding in India is a concept which hasn’t really kicked off.
We are far away from the days when some unknown person puts an attractive project on the internet, hoping to raise funds from the crowd which is asked to invest faith, money in a project.
The campaigns in USA might raise millions and get thousands of backers but in India, we don’t trust strangers easily. We know our system won’t protect us. Then why unnecessarily invest money in something where we know we might not get the promised returns.
For us, weighing pros and cons of crowdfunding always tilts the weighing scale more in favour of cons. Hence, the apprehension about investing in crowdfunding.
And if it’s only about gaining good karmas by helping crowdfund someone else’s Startup dream, we would rather invest in religion backed crowdfunding projects than the ones on internet.
Always remember “For Good Karmas, we only Trust in God!”.