A primer on crowd­fund­ing

Now, you can so­licit funds from mul­ti­ple in­vestors through on­line plat­forms

The Hindu Business Line - - YOUR MONEY - NALINAKANTHI V Fund­ing fun­das

Have a busi­ness idea and won­der­ing how to raise cap­i­tal to take it to the next level? Well, you no longer have to run from pil­lar to post seek­ing fund­ing from banks or in­di­vid­u­als; you can now bor­row money at the click of a mouse.

The idea needn’t be a for-profit one. You can also raise money for so­cial-im­pact ini­tia­tives or even creative pur­suits such as books or movies. Wel­come to the world of crowd­fund­ing.

What is it?

Crowd­fund­ing is so­lic­it­ing funds from mul­ti­ple in­di­vid­ual in­vestors through a web-based plat­form.

The funds can be raised for so­cial/not-for-profit ini­tia­tives as well as com­mer­cial/for-profit ones. It is clas­si­fied into four types, depend­ing on the con­sid­er­a­tion, which can be fi­nan­cial or non-fi­nan­cial.

Crowd­fund­ing for a fi­nan­cial con­sid­er­a­tion can be cat­e­gorised into two — eq­uity crowd­fund­ing and peer-to-peer (P2P) lend­ing. In eq­uity crowd­fund­ing, in­di­vid­u­als lend money to busi­ness en­ti­ties and get eq­uity shares or a stake in the en­tity in re­turn. Typ­i­cally, this type of crowd­fund­ing is com­mon with start-ups try­ing to raise earlystage fund­ing, where the com­pany is yet to start gen­er­at­ing rev­enue.

Eq­uity crowd­fund­ing is more com­mon with idea/pro­to­type­stage com­pa­nies which may not find much favour with an­gel in­vestors or other fi­nan­cial in­vestors who may want to get some mar­ket val­i­da­tion and rev­enue trac­tion be­fore in­vest­ing in start-ups. In In­dia, an­gel in­vest­ing plat­forms such as Let­sVen­ture and 1crowd typ­i­cally act as eq­uity crowd­fund­ing plat­forms.

These plat­forms val­i­date the cre­den­tials of both in­vestors and start-ups. They con­duct due dili­gence on the start-ups that seek money, and the in­for­ma­tion is avail­able to mem­ber in­vestors to make in­formed de­ci­sions. There isn’t yet a reg­u­la­tory frame­work gov­ern­ing eq­uity crowd­fund­ing.

P2P lend­ing is when in­di­vid­u­als lend to small busi­nesses/in­di­vid­u­als for ei­ther a so­cial or a com­mer­cial ini­tia­tive. P2P lend­ing can also be for non-in­comegen­er­at­ing ac­tiv­i­ties. The con­sid­er­a­tion here is the in­ter­est on the amount lent. The re­turn varies with the risk as­so­ci­ated with the busi­ness and the in­di­vid­u­als run­ning the busi­ness — higher the risk, higher the re­turn. Some of the prom­i­nent P2P plat­forms in­clude Mi­laap, Kiva, Fair­cent and Cashku­mar.

P2P plat­forms in­sist on KYC ful­fil­ment for both lenders and bor­row­ers. Dili­gence ex­er­cise is done on bor­row­ers to as­sess credit-wor­thi­ness, gen­uine­ness and re­pay­ment ca­pa­bil­ity.

Crowd­fund­ing for non-fi­nan­cial con­sid­er­a­tion is of two types — so­cial lend­ing/do­na­tion crowd­fund­ing and re­ward crowd­fund­ing. Here the re­turn or con­sid­er­a­tion may or may not be com­men­su­rate with the money raised.

In the case of do­na­tion or so­cial lend­ing, there is no con­sid­er­a­tion; for ex­am­ple, it could be for serv­ing a so­cial cause, do­ing char­ity or sup­port­ing an artis­tic cause. In the US, plat­forms such Kick­starter and Indiegogo sup­port do­na­tion crowd­fund­ing. In In­dia, P2P plat­forms such as Ketto, Mi­laap and Rang De sup­port do­na­tion.

In re­ward crowd­fund­ing, the con­sid­er­a­tion for in­vestors is a tan­gi­ble re­ward — im­me­di­ate or in the near fu­ture. Re­ward crowd­fund­ing is not as preva­lent in In­dia, un­like P2P or so­cial­lend­ing plat­forms.

Crowd­fund­ing not only sup­ports in­vestors who want to earn more by in­vest­ing/lend­ing to early-stage ven­tures, but also en­ables them to sup­port or do­nate for a cause they be­lieve in.

For bor­row­ers who may not be able to get bank loans due to strin­gent reg­u­la­tions, crowd­fund­ing can be used to raise cap­i­tal. They can choose the in­stru­ment that works well for them — eq­uity or debt.

Chal­lenges

As an in­vestor, one needs to ex­er­cise cau­tion and do her home­work be­fore com­mit­ting cap­i­tal to start-ups that seek money through crowd­fund­ing plat­forms, given that these are un­se­cured bor­row­ings and there is no guar­an­tee that the lender will re­pay. Also, cur­rently, there is no elab­o­rate reg­u­la­tory frame­work, ex­cept in the case of P2P lend­ing (an­nounced in Oc­to­ber 2017).

While these plat­forms are a good source of funds for star­tups, en­trepreneurs need to be ju­di­cious with money, and ex­plore other sources such as schol­ar­ships and awards.

The au­thor is co-founder, Rana In­vest­ment Ad­vi­sors. You can lend for a fixed rate of re­turn or as eq­uity

Eq­uity crowd­fund­ing and P2P are most pop­u­lar in In­dia

IS­TOCK.COM/ANDREYPOPOV

Crowd­fund­ing en­ables you to do­nate for or sup­port a so­cial cause

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