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,
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.