A common problem that every entrepreneur faces at the very beginning of his or her entrepreneurial venture is to raise the capital.
Although there are number of traditional funding channels such as banks, government backed financial institutions and VCs, however their processes are always time consuming, intricate, highly bureaucratic and unfriendly. Every year sizeable number entrepreneurs give up their dream of entrepreneurship and stick to unproductive jobs, only due to lack of finance, complicated paper work, and official apathy. These situations led small entrepreneurs to rely on the Internet to seek funds directly from the general public (the "crowd") and the strategy is now known as "crowd funding. In simpler words crowd funding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet.
Apart from raising funds, entrepreneurs sometimes launch crowd funding campaigns to test their products and solicit customer feedback. Perhaps there are more than 1050 web based active crowd funding platforms across the globe running millions of campaigns and helping thousands of aspiring entrepreneurs to turn their dreams into reality.
Models of crowd funding:
From last couple of years more and more savvy entrepreneurs are switching to crowd funding rather than relying on traditional lending sector, however it is important to understand the types of models in crowd funding and their legal status in India. As crowd funding is continuously evolving and creating sophisticated business models, till date there are only four major accepted models.
1) Donation based: In this model, individuals make a financial contribution to a project without any expectations of financial benefits.
2) Rewards based: In this type of model, capital is raised by entrepreneurs by pre-selling a product or service to launch their venture. Here people fund these ventures because they are getting a product or a service of their interest.
3) Equity: This model resembles a standard equity investment, where an individual receives equity in an entity in return for his / her contribution.
4) Lending: This crowd funding model is similar to any typical lending scenario, where individuals lend money to a project or company with the expectation that it will be repaid with profits.
Legal Status in India:
As of now 'Rewards and donation' based models do not have too many regulatory issues in India and many of them are already functioning, but equity and lending based models are not yet legalised, although Securities exchange board of India (SEBI) is actively working on legal framework pertaining to equity based model however till date it is still in WIP stage (work in progress). Entrepreneurs hope that India may soon bring in the requisite laws to support this in a big way, as efficient crowd funding system can really play the role of catalyst in bringing the new ideas into reality.
Market Size of crowd funding:
The annual growth rate of crowd funding is more than 98%, in 2011 around 1.5 billion US dollars were raised globally and in 2014 the figure exploded to 14.3 billion US dollars. There were approximately 1.1 million successful campaigns in 2012 mostly from North America and Europe. Asia has almost 220 crowd funding platforms while Europe exceeds 600. In total there are more than 1050 web based platforms where thousands of ideas are showcased every day.
Lending based model was most active in 2014 and represented 67.5% of all funds raised globally. Experts say that if India replicates the legal frame work from USA then CAGR will be anything between 100-125% per annum.
Benefits to Entrepreneurs:
Apart from financial liberty crowd funding provides numerous benefits to entrepreneurs, some of the important ones are as following:
1) Simple and paperless process: An entrepreneur does not have to go for a complex paper work, no collaterals and no illogical process, just make a profile on any trusted platform fill the required details and flash the idea. That is all.
2) Reputation: If the profile of entrepreneur is solid and compelling it automatically provides a big boost to his / her reputation as the crowd aggressively floats the profile across a huge network.
3) Customer engagement: Once campaign is online, platform creates a discussion panel or forum, here entrepreneurs can directly interact with customers, take necessary inputs or recommendations, run marketing activities as well as take feedback from the audience.
4) Going to next level: As C-SAT (customer satisfaction) surveys are like freebies to entrepreneurs on crowd funding platforms, it is very easy for them to create more efficient products or services. In some cases if the main funding campaign fails, still the knowledge obtained from surveys help entrepreneurs to move ahead and refine their ideas. It simply helps them to 'think different and think big'.
Risks for Entrepreneurs:
Every strategy or technique has its pros and cons and crowd funding is no exception to this rule. Here are some risks associated with crowd funding.
1) Failure: A crowd funding campaign can fail to generate the required amount of funding and once campaign fails there are little chances for that idea to get response for other channels or angel investors.
2) Intellectual property (IP) protection: There are a number of entrepreneurs who operate in digital space and are reluctant to flash their ideas publically as they have concerns about idea theft and protection of their IP.
3) Limited Donor Power: If same set of audience gets bombarded with huge numbers of new ideas, then there are chances that the donors or crowd will cease to support the ideas as the same set of people cannot support every campaign. This is also called as donor exhaustion.
Takeaways for Entrepreneurs: Crowd funding for sure eliminates the need of financial intermediaries and makes the whole process logical and user friendly however the scale of fundraising is relatively small. Entrepreneurs must realise that their idea should be strong enough to generate the required capital. If the idea is green (new & environment friendly) and it adds value to humankind or helps to solve a complicated problem in society, then no one can perhaps stop that idea, and for sure success is guaranteed.
Data and info graphics:
1) Graph showing Amount raised through crowd funding in last four years.
2) Accepted models of Crowd funding:
(Hamid Qureshi IS Head -Talent Management & Business Operations.
ADC, USA & India. Feedback at firstname.lastname@example.org)