Can't get money for your venture? Here is how crowdfunding could work for you

Newly formed National Crowdfunding Association of India (NCFA India) is an organisation that evangelizes crowdfunding in India in collaboration with World Crowdfund Federation. It works closely with industry groups, government, academia, other business associations and affiliates to create a vibrant crowdfunding industry and voice across the country.

In conversation with Firstbiz, Sneha Kohli, Co-Founder, NCFA, throws light on a concept still at its infancy but with a potential for more for the startup community.

FB: Crowdfunding seems to be picking up steam with early stage entrepreneurs in India. Is it a new concept in India?

Kohli: The concept of crowdfunding and crowd sourcing is not new in India. In 1976, Shyam Benegal collected Rs 2 each from five lakh farmers to make the national award winning film Manthan. Manthan was a true story of a struggling entrepreneur who was later known as ’the father of white revolution.'

However, the newly coined term ‘crowdfunding’ has emerged out of the west and has been catering to not only creative projects but also hardcore equity investments. People have started perceiving this very enthusiastically and that gives more confidence to the concept, thus increasing the trust factor.

[caption id=“attachment_87435” align=“alignleft” width=“380”] Sneha Kohli, Founder, NCFA[/caption]

We, as an association, are trying to create more awareness and educate people along the way. Given the current tremendous response, we believe it is most certain that more people will be interested in crowdfunding.

FB: What are the key advantages of crowdfunding?

Kohli: Well, there are plenty. It is an easier means of raising capital compared to traditional ways. The proof of concept for an idea, market traction, early adopters, social proof, press coverage, marketing, potential investor interest, audience acceptance, alternative ways of raising money to convince more mature investors of an idea, pre-selling, access to capital, risk hedging, etc. It also helps generate user feedback allowing for enhancements or sourcing new ideas.

FB: How are funds that are raised taxed or accounted for? Are there any regulations for crowdfunding in India?

Kohli: Every platform has a different way to structure this. Most commonly, funds raised are not in the books of platforms and are passed directly to campaigners ensuring that they are taxed accordingly. The campaigner can take these funds as an individual or a company and current tax regulations apply to them in either circumstance making it completely legal.

FB: What are the barriers to crowdfunding?

Kohli: The giving culture in India is different from the west. It is one of the main barriers for creative projects and is bit skewed towards family and friends as opposed to random people investing. But in equity crowdfunding, the scenario changes completely as there is a return attached to it. However, one barrier here is the current set of regulations that’s hindering the initial growth of such investments. If Security and Exchange Board of India (SEBI) steps up to create regulations soon as SEC did in the US then things will take a completely different turn.

FB: Crowdfunding is gathering momentum globally. Although it is still at a nascent stage in India, are there any early trends indicative of growth? What are the typical funding amounts that are raised?

Kohli: One early trend that can be identified is that crowdfunding platforms have begun to gain traction in India. Currently, the approximate amount raised for reward-based crowdfunding with or without a crowdfunding platform is Rs. 6-7 crore. If you consider social projects funding, micro-lending, or political contributions, than the numbers are huge. These numbers are only for reward-based crowdfunding in India. We project this figure to grow more than three times in the next two years. On an average, projects have raised Rs. 2-3 lakh and some even more. Most funds raised have taken place in the last two years as the market has started picking up since 2011.

FB: What are the risks associated with capital raised through this route?

Kohli: Similar to other industry, there are risks involved in crowdfunding as well. More straight forward ones are people investing and not getting the rewards, fraud investments in unrealistic projects, etc. However, solutions to these problems will emerge as the industry becomes more mature and a body such as ours creates more structured standards for the industry. Funding platforms already have a robust policy for accepting projects and have a high rejection rate. Some have policies to ensure post-funding communications and delivery. As said before, with the industry maturing more mechanisms will be in place. Once equity funding is made legal, we can expect SEBI to come out with its own rules and regulations for this industry.