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Crowdfunding

Paisa from the public

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Crowdfunding is gathering momentum in India with a shift towards funding of creative projects. Yet, given our ecosystem, making the leap from fad to finance may be difficult.

Crowdfunding, a trend that allows people to connect online with the public for cash to fund their business ideas, is fast catching on in India. Effectively tapping into the power of the crowd are individuals or groups who want to raise money for social or charitable causes and, more recently, artists pursuing their dreams.

Recently, Fresh & Local, a movement to facilitate urban farming in Mumbai used Kickstarter, a website that has led the way in raising funding from the small donations of web users, and collected contributions of $6, 510 (against a target goal of $5, 500) for facilitating phase 1 of their project. They aim to transform 5, 000 sq ft of the terrace of a low-income housing society, situated in a congested area, into an urban farm thriving with organic herbs, vegetables and fruits. Rewards for the contributors (funders) depended on the cash they stumped up. Those who gave one dollar got a mention on the project's Facebook page.
The two supporters who contributed in the band of US$500 to US$999 got their name inscribed on the farm's tool shed.

Filmmaker Anirban Dhar, better known as Onir, put crowdfunding on the map when he raised Rs 1 crore for the movie I am, and the success stories have only multiplied since then. Srinivas Sunderrajan, a 28-year-old Mumbai-based film producer, successfully used the more India-centric Wishberry. in platform and found 85 supporters for his film Greater Elephant. He collected Rs 5. 28 lakh (against a target of Rs 6 lakh). The 37 supporters who contributed Rs 500 or less got a "thank you" mention on the film's official website plus regular email updates. The two supporters who paid Rs 1. 50 lakh or more got a mention as co-producers in the opening title.

Kickstarter, like most global platforms, adopts an all or nothing approach - the payment is collected after the campaign deadline only if the fundraising goal is reached. Since crowdfunding is in its infancy in India, Wishberry. in has slightly more relaxed policies. "We require people to raise 20 per cent of their monetary goal in 30 per cent of their chosen time period (which can be 30, 60 or 90 days) and once this milestone is achieved they can keep whatever amount is raised. If this threshold is not achieved, the money is refunded to contributors, " explains Anshulika Dubey, vice president, Wishberry. in.

Crowdfunding, as a mechanism, is unique. The contributor is not making a donation (unless it is for a charitable cause), nor giving a loan nor investing in securities - at least not yet in India (this is now possible in UK and will be a reality in the US). However, people (who may not even know the fund raiser) contribute, sometimes generously, because they want to participate in something they excites them. A mention of their name as co-producer of a film or on the tool-shed of an urban farm is an added incentive.

"In India, wishlists such as gift registry for weddings made available to family and friends, was the first step towards soliciting contributions using an internet platform. Social crowdfunding - raising funds for good causes, emerged in early 2010. Today, crowd funding is actively used for creative pursuits, such as films, " explains Priyanka Agarwal, CEO, Wishberry. in. She foresees a move towards presales, where the contributors actually get a prototype of the product they have funded (say a software application).

The question being asked today is: Can India adopt the crowdfunding route to enable entrepreneurs to raise capital against issue of securities? Equity crowdfunding, a new model being eyed by startups in the UK and US, allows people to invest small amounts online to fund early startups.

The first stumbling block in India appears to be The Companies Act, 1956. Any offer of shares or debentures made to 50 persons or more is considered a public offering, which requires listing of these securities on a recognised stock exchange in India. The Supreme Court affirmed this in a recent judgment. Rishi Bhatnagar, corporate lawyer, suggests amendments to the Companies Act, allowing a special category of companies. "A special class of participatory equity can be created. Companies and their investors can convert to regular equity structures once they attain a specified turnover and even choose to list on conventional stock exchanges, " he says.

Sandeep Singhal, co-founder of Nexus Venture Partners, points out that India is a little far from reaching this stage. "The entire ecosystem needs to be aligned to this new concept of issue of securities to crowds - right from a greater risk appetite on part of the investors (one of three new entrepreneurial ventures are likely to fail) especially since no easy exit option is available, proper checks and balances for investor protection, ease in doing business including quick settlement of bankruptcy claims to name a few, " adds Singhal.

Investor protection appears to be the crux of the debate. "Given that crowdfunding models could essentially leave potential investors to make their own independent assessment of the initial opportunity and the later monitoring of their investment, we have to be careful of the many spurious operations which may surface. So, some element of screening and due-diligence prior to their posting for a potential investment would help avoid abuse, " says Sridar Iyengar, Chairman, India Advisory Board, Bessemer Ventures.

Rahul Chandra, MD, Helion Advisors, is equally wary. "A crowdsourced capital pool would not be a good assessor of risk as there is no lead investor who can justify the investment diligence. "
From the entrepreneurs' perspective, crowdfunding could provide quicker ways of raising money, but there are drawbacks. "Early stage ventures do have the potential to fail, hence money invested can get lost.

VCs would have the risk-bearing capability with a view to achieve long term value propositions, " explains Anjana Vivek, director, Venture Bean Consulting
An added dimension is that crowdfunding will not provide expertise or benefit of networks. "The 'smart' part of 'smart money' from qualified Angels and VCs is often critical to the success of early stage enterprises. That is seldom available in the crowd funding model, " adds Iyengar.

Chartered accountant turned entrepreneur Gaurav Taneja, founder of Fabulloso. com that is an online curated store that sells lifestyle products, says the last thing that entrepreneurs like him would want is complex legislation around small amounts of funding. "However, entrepreneurs will be grateful for funds from known sources, where they do not have to bandy their business plans to lots of unknown people - angels and other investors. So a good middleof-the-path approach could be a simple legislation to enable raising of funds from a select few. If possible, existing legislation could be amended and simplified, to take care of funding below a certain limit, " he says.

Looking at global trends, perhaps it is time for Indian legislators to turn to the drawing board.

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