Will Crowdfunding Become a Big Deal in India?
Crowdfunding the practice of raising small amounts of capital from a large number of people to fund new ventures — is finally gaining traction in India. The question is: Will it deliver like it has in other markets?
India has just overtaken the U.S. to become the No. 1 country for Facebook users: It has an audience of more than 241 million active users compared to 240 million in the U.S. The Facebook metric matters because in crowdfunding, “the single most predictive factor for the rate of emergence is social media penetration,” notes a World Bank report titled, “Crowdfunding’s Potential for the Developing World.”
A few years back, India also became the second-largest mobile phone subscriber base after China. That also matters because, in India, social media is predominantly mobile. According to a report titled, “Mobile Internet in India 2016,” there were 389 million mobile internet users in the country. The World Bank report observes that “crowdfunding has emerged as a multibillion-dollar global industry.” But a “constellation of trust,” incubated by social media, is necessary to promote its growth in developing nations.
“In India, crowdfunding has started only in the past couple of years. So, in terms of volume, it is not comparable with the West,” says Prantik Ray, professor of finance at XLRI. “The three big countries are the U.S., the U.K. and China. But the potential in India is good because, in terms of startups, we have seen several moves recently. There is not really a boom in crowdfunding yet. But five years down the line, India will be one of the major players.”
“Crowdfunding is democratized funding,” says Jonah Berger, Wharton professor of marketing and the author of Invisible Influence: The Hidden Forces That Shape Behavior. “For the internet economy as a whole, crowdfunding is just a small portion. But … it’s a big opportunity for folks trying to raise small amounts of money who can’t get funded by traditional means, either because of their credit score or the high interest rates. The amounts they are interested in may be too small for traditional lenders. Crowdfunding is a great way to get a small project through.”
“When we started a couple of years back, there was a certain amount of resistance,”says Varun Sheth, founder and CEO of Indian crowdfunding platform Ketto. “But over the years, I have seen the mindset change.” (Ketto won the $30,000 grand prize at the Wharton School India Startup Competition in 2016.)
“It is estimated that there are up to 344 million households in the developing world able to make small crowd-fund investments in community businesses,” according to the World Bank report. “These households have an income of at least $10,000 a year. Together, they have the ability to deploy up to $96 billion a year by 2025 in crowdfunding investments.”
As of 2013, the U.S. had 344 crowdfunding platforms, the U.K. 87 and India only 10, the World Bank notes. According to Venture Capital, which tracks private company financials, transactions (private equity, venture capital and M&A) and their valuations in India, crowdfunding platform Impact Guru has received $500,000 from RB Investments, Fundnel (a Southeast Asia-based private investment platform) and others. Ketto has received $700,000 from Intellecap Impact Investment Network. And various angel networks — Calcutta, Chennai, Singapore — have funded other platforms.
Types of Crowdfunding
Serial entrepreneur Meena Ganesh (TutorVista, GrowthStory), who is an advisor to Indian crowdfunding site Milaap, says that crowdfunding can be divided into donation-based (charity/personal causes), debt-based (peer to peer) and equity-based. “The current status of the first category is around $4 billion per annum with online constituting less than 2% ($80 million). Other types are in a nascent stage.”
A report by global professional services firm PwC recognizes the following categories:
Seed crowdfunding: The use of “rewards-based” crowdfunding platforms to fund the creation, launch or development of new businesses, products and services where backers pay upfront for a product, service or project.Equity crowdfunding: Enables small and large investors (sometimes called mini-angel investors) to purchase small parcels of shares. This gets a lot of press attention – but makes up only a small percentage of overall crowdfunding.
Crowdlending: Peer-to-peer lending. (Dhirubhai Ambani’s Reliance Textiles and Karsanbhai Patel’s Nirma – both in the state of Gujarat — are known as among the world’s largest crowdlending projects.)
Donations-based crowdfunding: Used to help community initiatives.
Says Piyush Jain, co-founder and CEO of Impact Guru:“Crowdfunding is still in a nascent stage in India. However, its market potential is huge. The industry is growing exponentially with a CAGR (compound annual growth rate) of more than 100%. Evidence from the past four years of growth in crowdfunding in China suggests that donation crowdfunding in India can grow 16 times resulting in annual funds raised by crowdfunding platforms exceeding Rs. 1,600 crore ($250 million) by 2021.”
Impact Guru has a tieup with GlobalGiving, the world’s largest nonprofit crowdfunding platform. (LetsVenture, one of India’s largest marketplaces for startup funding, has signed a strategic collaboration agreement with Israel-based OurCrowd, a global leader in equity crowdfunding.) “The Indian diaspora, especially in the U.S. and the U.K., will be key in helping crowdfunding in India grow,” adds Jain.
According to Bain and Company’s India Philanthropy Report 2017, funding by private individuals in India was Rs. 36,000 crore in 2016. “There is a large market opportunity to gradually move about 7% to 10% of this online,” Jain notes. “India has the largest number of NGOs (non-governmental organizations) in the world (3.3 million) and over 350 million people who give to various religious and social causes every year.”
Can India Leapfrog?
Will India be able to “leapfrog” over the West? Says Ganesh: “While the term ‘leapfrog’ may mean different things in different contexts, the primary shift that we are witnessing is that crowdfunding is being driven increasingly by mobile — particularly messenger applications [like] Whatsapp, Telegram — and enabled by mobile payments like Paytm. This is significantly different from the West, particularly the U.S., where it was driven primarily by a desktop — the web, social networks (Facebook, Twitter), and card-based payments. What this entails is that the product needs to suit the local ecosystem.”
Impact Guru bills itself as “primarily focused on donation-based crowdfunding. We also support rewards-based crowdfunding and have had a few fundraisers that offered rewards.” Explains Ketto’s Sheth: “We are both donation-based and reward-based, but preferably donation-based only.” Milaap is a platform for personal and social causes. BitGiving enables artists, engineers and creators of all kinds to come together. “Wishberry is a new way to bring creative and innovative ideas to life. It is a rewards-based crowdfunding website for creative entrepreneurs in India,” says co-founder Priyanka Agarwal.
What’s stopping these platforms from growing quickly? One answer is that the Securities & Exchange Board of India (SEBI) is trying to put some rules in place — but its pace is slow. And some feel that the sluggishness may hinder the fast-moving sector.
“Two years back, SEBI released a consultation paper which sought to regulate crowdfunding, which is not pool managed, but the investor directly invests into the startup,” says Sheth. “Again in 2016, SEBI issued a press release titled ‘SEBI Cautions Investors.’ It covers various matters pertaining to the stock markets.” One issue is that with more 200 investors, the platforms may start acting as stock exchanges.
“SEBI has been unable to come to a consensus,” says Ray. “They are presenting the same paper again and again.”
The market regulator has also written to social networking site LinkedIn — which has around 42 million users in India — to clarify whether it is acting as a fundraising platform by connecting funding groups and angel investors with startup opportunities. According to a report in business daily Mint:
“The market regulator is concerned because it is possible that the number of investors funding such entrepreneurial activity on LinkedIn could cross 200. The current private placement norms under the Companies Act do not allow any entity to raise investments from more than 200 investors without a public issue of the securities offered in return for such investments and listing the securities with a listed exchange.”
But some countries have solved the problem. The U.S. has its JOBS (Jumpstart Our Business Startups) Act. Others are willing to live with the shortcomings and get the process started.
China has partly sacrificed regulation for growth. A European Commission study titled, “Assessing the Potential for Crowdfunding and Other Forms of Alternative Finance to Support Research and Innovation,” notes: “The Chinese crowdfunding market is the largest in the world. This is not surprising … the Chinese alternative finance market is largely unregulated.”
‘A Level Playing Field’
There is another side to the picture: There are those who believe the delay is justified. “SEBI’s committee focuses on lending and equity-based crowdfunding where retail investors are involved with return-of-investment expectations,” says Ganesh. “So it’s wise on SEBI’s part to propose a framework to ensure client protection, a grievance-addressing mechanism (for both lenders and borrowers), but [also] to make it less onerous so that the sector can grow.”
Some are sitting on the fence. “Equity crowdfunding online is not legal in the country as per SEBI regulations and thus we don’t do it,” says Jain.
1Crowd is one of the few sites that calls itself an “equity crowd funding platform.” Says co-founder Anup Kuruvilla: “SEBI will eventually establish some crowdfunding regulations and we will likely be covered under them. Such rules are necessary to create a level playing field. Equity crowdfunding is an alternative to membership in big angel networks, which cater to ultra high net worth individuals.”
“I feel that equity crowdfunding, in general, can be risky if it is unrestricted,” says Wishberry’s Agarwal. “There are several platforms that exist today that enable people to invest in startups by just reading positive press around the same. People can get starry-eyed and want to put their money on the most ‘glamorous’ venture. They don’t take into account that only one out of 100 startups succeed. Thus, SEBI regulations are needed to ensure that new-age ultra high net worth individuals are cautious and well informed before they risk assets. Restricting participation is important. Wishberry wants to grow within the ecosystem the Indian regulatory bodies develop.”