Crowdfunding means practice of raising capital/fund/money for a particular project/cause from crowd (large number of people) using the internet or social media like Facebook, Twitter, Website etc
- It helps to improve the presence of small businesses and startups in social media, increases their investment base, and funding prospects.
- There are different types of crowdfunding like debt based, equity-based, cause-based, rewards based, software value token, donation based, litigation, etc.
- Public-Private Partnership based on the equity-based model is practised in crowdfunding in India.
Crowdfunding is not a new concept but has been since ages in Indian Society such as donations-collected for religious functions or festivals or village ceremonies. It has also been used in films, social causes, music festivals etc.
Modern crowdfunding model is generally based on three types of actors:
- Project initiator who proposes the idea,
- Individuals or groups who support the idea, and
- A platform that brings the parties together to launch the idea.
Benefits of Crowdfunding:
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It’s more efficient than traditional fundraising. There is no need of formal banking system so process of raising capital/fund is easier and quicker and consumes less time.
- It helps in elevation and progress of small and medium scale industries, thus enhances the productivity of innovation and entrepreneurship.
- It helps in improving the ease of doing business policy.
- It allows creators to attain low-cost capital.
- A greater publicity, stronger customer base, and an easier time finding employees is the result of crowdfunding.
- Allow people to donate or invest in food- and agriculture-related opportunities. AgFunder is one of such global platform.
- It bypasses caste or gender prejudice to community network and hence inclusiveness is enhanced.
- It reduces costs. The platforms reduce search and transaction costs, which allow a higher participation in the market.
- It opens up some of the neglected markets to individual investors.
- Investors add value to companies and hence the value of companies is increased with crowdfunding.
Risks associated with crowd funding:
- It is risky for the new small-scale investors and entrepreneurs and hence they often fail in their novice ventures.
- Reputation is damaged if there is a failure to meet goals and targets or to generate interest which results in a public failure.
- Intellectual Property (IP) protection can be an issue as creators who engage in crowdfunding are required to release their product to the public in early stages of funding which exposes them to the risk of copy by competitors.
- There is a risk that if the same network of supporters is reached out to multiple times, that network will eventually cease to supply necessary support and hence all the effort would go in vain in the end.
- Since it is without a regulatory framework there is a fear of public misuse.
- Since it is not formal banking system, chances of fraud and money laundering are high here.
- There is a problem of creditworthiness and enforceability.
- There is lack of expertise as the ratio of a novice is high here.
- There is immaturity in startup sector in India and hence the chances of failure are very high.
There should be a complete transparency and accountability to do away with fraud & illegal activities. Awareness should be spread with the help of social media. It should be ensured that the money should reach directly from the one who raises money to the contributor. There should be documentation of details so that there is no misuse of the funds collected. Also, there should be laws to support the crowdfunding and entrepreneurship in India.
The mindset of people should change and belief in private entities should be there too as they are not solely profit oriented. A pro-business environment is necessary to be established in India for crowdfunding to be successful.