Crowdfunding in India : Waiting for ONE Big Deal

If you have been the following papers, you’d think there is a crowd funding revolution coming your way. The reports are partly true, but blown way out of proportion. Even though nearly half a dozen crowd funding platforms will be launched in the coming year in India, crowd funding is in very early days. Lets put this in perspective.

Crowdfunding

A report by crowdsourcing.org, says that by the end of 2013, there will be $5.1 bn raised through crowd funding. That’s nearly twice as much of money that was raised in 2012. And thats more than thrice the amount raised in 2011. Fantastic!

Let’s take India now. Apparently, the numbers aren’t significant enough to report. Zoom out to Asia: only a paltry $33 mn was raised in Asia at the end of 2012. By the end of 2013, $100 mn is expected to be raised through crowdfunding in Asia. Technically, the growth is nearly 3x but remember, we are looking at a very small base.

The Crowdfunding Scene in India

In the next six months or so, nearly half a dozen crowd funding platforms will be launched in India. Worldwide, nearly a thousand such platforms will be launched. Recently, platforms such as Wishberry and Ignite Intent have been launched in the country. Most of them are in the rewards and donations space as they aren’t too many regulatory issues around this model.

There have been attempts at crowd funding for events like the Goa project and campaigns like Teach for India. Crowd funding is slowly becoming an alternative funding channel for the film industry. Film director Pawan Kumar from Karnataka recently raised Rs 51 lakh using Facebook and a blog from over 100 investors. Artists and creative professionals have also begun using Facebook and other platforms to raise money.

However, most of these projects involve a large offline, word of mouth campaign. True blue Kickstarter like online crowd funding has still not taken off in the country and is a long way ahead.

Crowdfunding can be of three types.

1. Donation and reward based: The platform accepts a donation from many backers for projects. In most cases, the return involves finished goods like the “pebble watch” or a signed DVD of the movie backed by the crowd. Sites like Ketto do this kind of crowdsourcing in India.

2. Lending based: These crowd funds take money from different people and facilitate loans or microfinance to the needy. Microfinance platform Milaap is an example of such crowd sourcing in India.

3. Equity based crowdfunding: This mode of crowdfunding, where donors take a share of equity in the project or startup, is not legal in India yet.

“There have been small successes in the crowdfunding space. But for the industry to really take off, it needs one big win and the momentum will carry the industry,” says Varun Seth, the Founder & CEO of Ketto, a crowdfunding platform based in Mumbai.

Crowdfunding: Drivers

Why is there hope for crowdfunding in India? Seth feels that India being the one biggest countries for Non Government Organisations (NGOs), crowdfunding stands a big chance. “Lot of new platforms are going to come in the next few days,” he says.

Many colleges and even individuals will push students to list causes on crowdfunding platforms, he says.

The new companies act, which mandates all companies to spend 2% of their profits on corporate social responsibility, will also help them crowdfunding gain traction.

Challenges

The idea of crowd funding is really not new in India. Temples and mosques, for example, are built overnight using a large number of donations. Massive festivals are put together in a matter of days with donations from thousands of devotees. However, the concept of online crowdfunding is new to the country.

Industry watchers say that there isn’t enough buzz around online crowdfunding in India. “Marketing these campaigns and attaining the viral effect is a challenge,” says Seth.

The industry is also not very investor friendly, he feels. There haven’t been any angel investments in the space. Neither are there any valuation benchmarks yet. “It will be better for the growth if outside investors come in,” he adds.

But outside investors are a shy bunch when it comes backing crowdfunding platforms. For them, the market isn’t big enough (yet). There haven’t been any exits to benchmark investments either. That perspective might be changing but it all requires that one big campaign to win and show the way like it happened with Kickstarter in the United States.

“How many people know about Rang De? They are one of the biggest crowd sourcing players in the country,” asks Deepak Srinath of Allegro Corporate Finance Advisors Private Limited. “Maybe in 2-3 years when there is more volumes and protection framework or regulatory maturity venture capitalists will warm up to the idea,” he added. Srinath echos Seth’s views on lack of benchmarks and exits in the space as a deterrent. However, angel investors might be interested in funding such platforms, he says. “Their motivations are completely different. An angel might invest just because he likes the idea,” he said.

Low trust levels of doing things online is also a challenge. India’s e-commerce space needs to really mature before anything substantial can happen in this space. People need to be spending more and more online for them to even start thinking about backing projects online.

The Legalities of Crowdfunding Platforms in India

Then there are legal issues around crowdfunding in India. Equity based online crowdfunding is not legal in India yet.  It was made legal in the United States recently when the Jumpstart Our Business Startups Act (JOBS) act was passed in April last year.

Of the three crowdfunding models, donation based crowdfunding is the most pragmatic approach as of now. Lending based microfinance platforms like Kiva need approvals from the central bank. The Reserve Bank of India in 2011 approved Milaap, a non-profit microfinance institution to crowd source funds from overseas. The approval, a first in the industry, was seen as a major boost to crowd funding.

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