What You Need to Know About Business Crowdfunding in India

What You Need to Know About Business Crowdfunding in India

November 21, 2018 Off By Paul Petersen

Crowdfunding has opened up a whole new avenue of raising funds. It is used by individuals, nonprofits and even startups to accumulate capital for their causes and ventures. It is very likely that you as an aspiring entrepreneur have considered approaching banks and investors and friends and family to obtain loan to fund your new business.

But what if all the above-mentioned ways fail to procure money? Crowdfunding comes as a saviour for you. Funding businesses through crowdfunding platforms started in the West, specifically in the U.K and the U.S. But this model has been adopted across the world including India. Nowadays, fundraisers in India from almost all fields use crowdfunding as a source of getting money.

In the West, several successful business product campaigns took place through crowdfunding platforms like Kickstarter, Indiegogo and GoFundMe. In India, however, the development has been slower. A research survey in 2016 showed less that 1% of small businesses used crowdfunding as an option to initiate their venture.

However, more than 4 times the number of these groups mentioned that they would consider crowdfunding to raise additional capital in later stages. Crowdfunding being a growing practice in India, is used mostly for social, medical and creative causes. However, it is slowly entering the startup market.

A NASSCOM report shows that there are more than 4000 startups currently in India. In 2016, above 600 startups were funded. This calls for a proper equity and business crowdfunding setup in India. Unfortunately, these two have not been legalised by Securities and Exchange Board in India (SEBI) and forbids equity crowdfunding from taking place through independent sites.

There are three main models of crowdfunding that you can choose to fund your business venture.

  1. Equity-based crowdfunding: Here you must give out a percentage of equity to the investors in return for money. Therefore, it is important for you to know all the rules and regulations properly as a third party will be involved.
  2. Lending-based crowdfunding: This model is a great way to secure loan at a lower interest rate. Here, the investor takes a share of your business and expects a fixed return as has been discussed. The main difference between this model and equity crowdfunding is that, in the latter, the investors expect the value of return to increase with time.
  3. Reward-based crowdfunding: In this model, you offer early version of your product or branded swags as rewards in return for the money contributed by donors and investors alike. This is also a great way to test your product for market validation. You will be able to understand the success metric of your product from the feedback received from your backers.

Reward-based crowdfunding is the best way for creative businesses. If you are starting a business involving clothing or jewellery or even cool gadgets, you can choose reward-based crowdfunding. You will be able to show prototypes of your product and get an understanding of the market and what the consumer wants. This way, you can change or modify parts of your product before finalising on the complete design. Equity-based crowdfunding is ideal for businesses with complex product ideas or services.

Before launching a crowdfunding campaign, make sure you have a clear idea of who your target audience is. If you are a small business, try to involve people who are in the same or similar business as yours. For example, if you are a startup with an idea for a smartwatch, look for the investors who would be interested in your field.

Crowdfunding has made a solid impact on the social and creative fields. But it is yet to make an equal effect on the business front. The rules and regulations for equity crowdfunding by SEBI is not making it easy either. But with the rapid growth of startups in India, it is likely that crowdfunding will soon find a better place.