Crowdfunding for Entrepreneurship Development: An Indian Context

In era of increasing role of social networking sites, crowdfunding is becoming a buzz word.  It is emerging as an alternative source for raising funds in several countries. People from various hues are using social networking sites to raise funds for various reasons. This write-up will shed light on crowdfunding focused on entrepreneurship development. Further it will unfold various models of crowdfunding  and regulatory mechanism in India.

Recently, International Organization of Securities Commissions (IOSCO) released report on risks and benefits related to crowdfunding.  Title of this working paper is Crowd-funding: An Infant Industry Growing Fast. India is also a member of IOSCO.

According to this paper of IOSCO, “Crowd-funding is an umbrella term describing the use of small amounts of money, obtained from a large number of individuals or organisations, to fund a project, a business or personal loan, and other needs through an online web-based platform.”

Types of crowd-funding:

Crowd-funding can be divided into four categories:

Social lending/donation crowd-funding,

Reward crowd-funding,

Peer-to-peer lending and Equity crowd-funding

(Note: Peer-to-peer lending and equity crowd-funding comes under Financial Return Crowd-funding.)

The working paper identifies the main benefits of Financial Return Crowd-funding

(FR crowd-funding) as the following:

• Provides a boost to economic growth through flows of credit to SMEs and other users in the real economy

• Fills a credit gap left by banks

• Offers lower cost of capital/high returns, leveraging off a lower cost basis

• Provides a new product for portfolio diversification

The main risks are:

• Risk of default

• Platform risk

• Risk of fraud

• Risk of illiquidity

• Risk of investor inexperience

(Source:Crowd-funding: An Infant Industry Growing Fast)

Crowd-funding should not be confused with micro-financing (for example, such as the Grameen Bank style of micro-lending). Microfinancing is predominately a bank based exercise, whereby the bank is the sole provider of the loan, is the originator of the loan and bears the risk of the loan. As such, it does not draw on the principles of many investors funding small parts of a required capital need.

In order to strengthen entrepreneurial ecosystem, Ruchi Dana from the Stanford Graduate School of Business started PikAVenture. It is India’s first crowd funding platform.  PikAVenture provides legal advice, consulting and incubator services to entrepreneurs.
Ruchi interacted with several leading personalities and change makers in India. Once Ruchi said to this writer, “There is no formal bridge between budding entrepreneurs and successful entrepreneurs who make not only students but all aspiring entrepreneurs miss out on active guidance and able mentorship. In addition, lack of active venture capital firms and weak network of angel investors makes budding entrepreneurs really struggle to get seed funding or any sort of early stage financial aid. Also, entrepreneurship comes with fair degree of risk and struggle.”

Similarly, Milaap is working in areas of education & training, energy, enterprise development sanitation and water. Milaap is a Hindi word for ‘unity’. It was started in June 2010, by three young entrepreneurs in an attempt to change people’s concept of giving. Generally they focus on students, small businesses, women and families who need a small amount of capital to for betterment.

Its investors include First Light Ventures, Jayesh Parekh, Jungle Ventures, Lionrock Capital, Rajiv Madhok, Toivo Annus, Unitus Seed Fund and Vijay Shekar Sharma.

India is not new to such initiatives and Indian history is replete with several attempts for noble cause where changemakers adopted it as solution to tackle common problems. One can say that earlier it was sporadic in nature, now it is becoming more apparent which requires a proper policy framework.
As of now, we don’t have elaborate guidelines on it. According to media reports, Indian regulatory bodies are working on it. Crowdfunding practices in India are at the nascent stage. Its full potential is yet to realise.

Entrepreneurial Spirit in Gujarat

Recently I visited Ahmedabad to attend a Faculty Development Programme (FDP) in Entrepreneurship Development Institute of India (EDII).  During a discussion in the class, one teacher shared roaring success stories of Ahmedabad-based micro-entrepreneurs. How they started their venture and their ways to tackle tough situations or their business tricks? Such stories of courage compel us to meet and interact them. Story of reaching the door steps of those entrepreneurs is also interesting.
First of all we (I and Krishan) decided to visit shop of Jasu Ben Shah. We as outside reach a shop which claims that its original shop. They gave menu and we found that name at the menu is different from what they have written on the board. Suddenly we asked clearly…where shop of Jasu Ben Shah Pizza is. Then they shared detail about this shop. We visited their and talked to attendants. They shared various things with us happily. We ate Pizza which was very tasty. I never ate such kind of Pizza which was completely Indianised. There was a Jugaad stove which was running on Kerosene oil (I think) and it was about five feet long. I never saw such kind of stoves earlier.
Then we visited well known Panwala – Ashok Pan House. It is located in the middle of city. Entire family owns and run various shops in this city. They have a chain of shops. These shops are neat and clean. He said that we reduced some items in the recent past. We make some of products when people place order for them. Taste of his Paan was very nice.
Finally we visited to shop of Indu Ben KhakharawalaIt’s located in other part of city. Shop was packed with customers. They were demanding various kinds of homemade stuffs. Majority of buyers were women. To sum up, truly Gujarat is replete with numerous micro entrepreneurs. Their entrepreneurial spirit is commendable in India. They think positively even during a crisis. Such charterers depicts grace and guts of Gujarati culture.
Writing an introduction in a book – “Dhandha: How Gujaratis Do Business”  well-known Bollywood actor Amitabh Bachchan rightly said, “Business acumen is something that Gujaratis seem to inherit rather than acquire.”

Billions of Micro Entrepreneurs

Chaadni Chowk and adjoining areas in Delhi is well-known for its ecosystem. Here roads and streets are narrow but business activities are extremely intense. Entrepreneurs do businesses in a range of segments like spices, grains, garments, books, sweets and many more.

Few months back, I ventured into this area and I reaslised that a revolution is taking shape in this Walled City, unfortunately that is ignored by many. Entire business activities are revolving around the pushcarts (Dhakka). This frugal innovation or Jugaad innovation is lifeline for entire area. Labourers supply goods and products at their door steps. Further they make food and tea. They sit at their carts or discuss various things in spare time and sleep in night.  Roughly, there are about one lakh pushcarts in these areas. One pushcart engaged three people. However, there is no estimation or data on people involve in this trade.

In these areas, there are numerous wage workers who migrated from various states due to a lack of gainful employment. Expanding such pushcart business in the walled city is attracting such unskilled labourers. Further it meets a local demand.  

It is a single wooden carrier for goods which is appropriate for narrow streets. These pushcarts are prepared by local carpenters. Almost all pushcarts are distributed from nearby Singhara Chawk for commercial purposes. There are various dedicated shops for repairing these pushcarts.

There is a hierarchy among owners of pushcarts. Some owners have 10 pushcarts, some of them have 100 pushcarts and even big owners have 1,000 pushcarts. They provide services to shopkeepers.

One pushcart has carried about 10 to 15 quintile Nag (just like carton) and involves three to four people. Each labourer receives a 350 to 450 per day. It can carry an array of items like salt, flowers, spices, frozen fruits and bundles of cloth etc.

Labroures carry salt in the early morning, and then they carry transport goods at the night, they categories themselves accordingly products like salt, spices, flowers etc.

Some well-off labroures have their own pushcarts in Singhra Chawk. But increasing inflation is putting enormous pressure on them. They survive by hustling on the streets and on the mercy of authorities. Anyone can easily understand the absence of social safety nets and lack of unionism among this heterogeneous and vulnerable workforce.   

Using frugal innovation or Jugaad innovation, the Dhakka business is gaining momentum in these enclaves. Its strengths are low capital requirement, higher employment generation and ecofriendly nature of transportation in narrow streets. However, in existing setup, it is an absolute domain for male labourer. 

Entrepreneurial Ecosystem in India: Challenges Ahead

Sam White is co-founder of Promethean Power Systems. It is a thermal battery technology start-up that enables cold-storage of perishable foods where power supply is erratic such as villages in India. This revolutionary battery eliminates the need for a diesel generator when chilling milk at the village level. In communication with Solution Innovation Review (SIR) Sam says that hiring is our biggest challenge.

This is not an isolated case and entrepreneurs in India are facing several challenges. In this backdrop, Solution Innovation Review (SIR) identified challenges after talking to several entrepreneurs and experts. Some of them are funding, hiring, legal issues and lack of infrastructure.
Starting a company is simultaneously the most thrilling, motivating and rewarding thing one could do as well as the most exhausting, stressful and painful thing. On can say that the rewards are many and the challenges are many.

Speaking to SIR, Valerie R Wagoner Founder & CEO, ZipDial told, “The biggest challenge any entrepreneur has to growing a company to be a big success is in scaling and always staying ahead of the curve. Early on, we kind of worked on an incentive model for sales people, where in they could earn more of incentives and less of fixed pay. That did not work out. We now have sales people with good amount of fixed pay topped up with better incentives.”

ZipDial is a mobile engagement and analytics platform, especially embracing the needs and behaviors of emerging market consumers and advertisers.
“Second, we had a tough time in hiring our company secretary. Since we failed to do the due diligence, we ended up trying and testing many a firms, finally zeroing down on one. Even in basic compliance matters, one should always remember that you get what you pay for. Don’t be cheap because you’ll get cheap quality.”

“Regarding India specifically, there are challenges in any market, but there are not any unsurmountable hurdles in growing our business from India. In fact, we are proud that ZipDial is truly a “from India” start-up “going global”. India has been a fantastic market to prove out the model as we continue expanding in to Southeast Asia and eventually other regions. Overall, this is an exciting time to do business in India.”

Shedding light on entrepreneurial ecosystem in India, Amit Grover, founder of Nurture Talent Academy told SIR, “Right at the beginning, challenge for startups is to come up with correct product and on time. Knowing customer preferences in a country like India is very difficult – here people drive a BMW and eats Vada Pav on roadside!”

Grover said, “Besides, there are no advanced or reliable information, studies, and statistics available on various issues. So that entrepreneurs have to rely on gut feeling. Once a product is made, the next challenge arises in marketing it – TV and newspaper are having maximum reach but are out of reach for a startup. People do not like trying new things as customers and similarly dealers/channel partners, so it takes time to establish in market. After this comes funding challenge, where angel investors act like devils during negotiations! As the startup grows, talent and hiring becomes a challenge as candidates want more money without understanding startup’s business or culture.”

Grover further added, “Most MBA and engineering students are trained on ‘personality’, ‘interviewing skills’, ‘resume writing skills’ which is completely stupid way of training and distorts thinking process of young students towards jobs and placements. So, overall startup challenges keep changing from time to time as per stages of growth.”

Echoing a similar view, Digbijoy Shukla, an entrepreneurship evangelist told Solution Innovation Review (SIR), “There are several challenges for startups in India: Raising early stage financing – especially when you do not have a proof of concept or very early revenues. Also collateral free debt financing is a major challenge for companies in the scale up stage. Going to Market – getting customers in a competitive environment is very challenging. As a startup you have very limited budgets and hence it becomes challenging.  Hiring – Quality team is a challenge and to attract and retain talent as a start-up is a big issue since they can’t offer competitive salaries or have the brand.  Legal- Lot of ambiguity around taxation and licensing, a lot of startups in the food business, financial inclusion etc is more sensitive to regulatory issues.”

On being asked about challenges towards startups, Manika Premsingh Founder of Orbis Economics said, “In terms of my experience as an entrepreneur, the challenges have been thankfully small, partly because of the nature of the business and partly because of the business model itself.

Orbis Economics provides content and research to clients across countries, customised to their requirements. We have so far not felt the need to raise funding, and given the services oriented nature of the business, there are hardly any legal/regulatory issues. We typically hire on a project basis, though we are increasing the number of permanent hires too, thankfully, we do find good resources available. And, incidentally, good telecom/IT developments have helped us immensely.”

Manika added, “I think challenges to the entrepreneurial eco system are softer in nature – like having a community or hub of entrepreneurs who you can share and discuss with, or the place we are in in the business cycle, where demand is less than it would be during boom years, and hence entrepreneurs have to strive harder. My sense is that there are more issues faced around legal or infrastructure for small manufacturing companies.”

Riti M D founder of a corporate training firm – RMG Learning told Solution Innovation Review (SIR), “I have not looked for funding so far. Investing myself in what I believe in. There is enough and more skilled talent for us to hire. We don’t need infrastructure. We are a corporate training firm.”

To sum up, one can say that challenges towards entrepreneurs and startups are changing from one sector to another sector. In some sectors, entrepreneurs are unable to find an appropriate talent. But it’s not an issue of others. Similarly, funding is not an issue for all. Many entrepreneurs are starting their ventures from their own capital. But one can say that getting customers in a competitive environment is really a challenging task.