When My Venture asked to write about crowdfunding, the first thing I did was a google search to see the kind of information available in the public domain. After hours, I was still thinking what should I write that is not already written by experts in the subject.
Until recently, when someone spoke of about funding, you would think of only the obvious investing out of personal savings or loan from family and friends or bank well if you have security or some newer ways of the recent past like angel investors or venture capitalists for a huge stake in the business.
The most recent edition to ways of raising funds for a business is crowdfunding. As the name suggests, it simply means getting funded by crowd. This concept has existed for years to come in the space of philanthropy but globally at a commercial level, it started seeing light when Michael Sullivan launched fundavlog in 2006.
In the Indian concept, this has existed for decades through various grass root funding methodologies like chit funds and our very own success story Amul which pools in milk to sell under a single brand.
Concept of CrowdFunding
While, it’s extremely exciting to get funded through crowdfunding and it gives start ups access to funding opportunities like never before. It can be quite confusing and mind boggling because it’s a fairly new sector and has its own greys.
According, to the UK Crowdfunding Association , there are officially three different forms of crowdfunding:
Donation crowdfunding – This is the oldest form where philanthropist donate small sums of money towards social causes close to their heart such as healthcare, child welfare, education fund, etc. In return, the donor gets a feeling of self satisfaction and having made a difference which is priceless. Occasionally, he may get movie tickets, concert tickets or any gift in kind. This type of crowdfunding is recognised and accepted by the Indian law and such donations are treated as allowable expenditure under section 80G of the Income Tax Act, 1961.
Debt crowdfunding – Investors lend money (provide a debt) to the start-up which they wish to back up for an interest. At the end of a period or project the investor will receive his money along with a fixed rate of interest.
In India, this is classified under public deposits, currently, deposits from public can be called for only by public limited companies under section 58AA of the Companies Act, 1956. Hence, the concept of Debt crowdfunding will still take time to see light in India.
Equity crowdfunding – Investors get stake in the form of equity shares in the company in exchange of money. If the startup does well, the investor share price goes up and he can make his money and vice versa.
In India, this is still to become an option unlike our US counter parts, publicly trading or issuing of shares is allowed only on the stock exchange. I am sure no start up wants to start with the wrong foot with the Ministry of Corporate Affairs and SEBI.
You must be wondering, are there any crowdfunding options?
Well, yes, you pooling resources like Amul did or take pre sales orders prior to production like Buttercup.com is currently doing. I would like to sign off by saying, fund through the right source and at the right time… happy funding…
Courtesy: *Tulsi Khemka*| Director | Bita Consulting| 381/A, 1st cross, 4th Block, Koramangala, Bangalore – 34