‘Crowdfunding is a great way for new businesses to test the waters before launching product, going big’
October 21, 2020 12:01 PM
Credit and Finance for MSMEs: While there are several alternative financing sources such as equity crowdfunding, revenue-based financing, peer-to-peer consumers, reward-based and donation-based crowdfunding – most of these are either prohibited or have high entry barriers.
Crowdfunding was started as a social experiment several years ago.
By Varun Sheth
Credit and Finance for MSMEs: When Narayana Peesapaty came up with the idea of edible cutlery, he faced several challenges to set up and run his business. He established Bakey’s with an aim to provide an alternative to plastic cutlery and bamboo chopsticks. Although his idea was innovative and noble, he struggled to find investors for his company. So, when Narayana exhausted his savings and bank loan money to run the business, he turned towards crowdfunding. People liked and appreciated his idea so much that he was able to raise Rs 2.4 million on a crowdfunding platform.
Over the years, crowdfunding has gained momentum among entrepreneurs as a viable alternative financial option. Social entrepreneurs, startups, and MSME have emerged as the backbone of the Indian economy, contributing to the socio-economic growth of the country. The MSME contributes an estimated 30 per cent to 35 per cent of the GDP. The sectoral distribution shows that around 49 per cent of MSMEs are from rural, while 51 per cent are from the semi-urban and urban areas. However, these businesses struggle to survive in the market due to a lack of working capital. Social startups and MSMEs struggle to raise funds for their business due to limited financing options and the lack of network with the investors.
While there are several alternative financing sources such as equity crowdfunding, revenue-based financing, peer-to-peer consumers, reward-based and donation-based crowdfunding – most of these are either prohibited or have high entry barriers.
According to the policies set by the government equity-based crowdfunding is prohibited, whereas peer-to-peer lending is managed by the RBI. Community crowdfunding, which includes donations and rewards-based crowdfunding, is the most accessible and successful way for these innovative entrepreneurs to realize their dreams.
Crowdfunding for the business growth
Easy way to raise funds: Many early-stage startups struggle to raise funds and bring required seed funding for their products and solutions. Conventional methods of raising capital are rather time-consuming and documentation heavy. A startup can directly approach the crowdfunding platform to raise funds for their business. Donation-based crowdfunding is the safest way to raise funds for any startup as there are no repayment schedules or high-interest rates. Individuals who truly believe in the product concept are willing to donate now, for a better and sustainable future tomorrow.
Validation of your business idea: Crowdfunding for your startup is a great way to ‘test the waters’ before you actually go big and launch the product or service. The response of the donors helps you understand your idea will work in the market and where it stands in the industry. It’s actually the crowd telling you what’s working and what needs to be weeded out – that’s exactly what an entrepreneur would want. The crowd’s response also helps you to make the necessary changes in your idea and make it more suitable for the market.
Great marketing tool: An active crowdfunding campaign is a good way to introduce a venture’s overall mission and vision to the market, as it is a free and easy way to reach numerous channels. Crowdfunding platforms incorporate social media and website details of the startup which enable thousands of organic visits from unique users and potential funders. These users are also important for viral marketing, as they have the ability to share and spread the word to their connections
Opportunity to pre-sell: Launching a crowdfunding campaign gives an entrepreneur the ability to pre-sell a product or concept that they have not yet taken to the market. This is a good way to gauge user reaction and analyse the market to decide whether to pursue or pivot on a given concept.
The rapid outbreak of the Covid-19 pandemic shocked governments across the world, even the most developed countries were brought to a standstill. The pandemic has not only stressed our healthcare institutes but also crippled our economy. According to a private study hosted by Spocto, an estimated 78 percent of Indian MSMEs had to pull their shutters down due to the lockdown.
One such example is the Chamar Studio by Sudheer Rajbhar, a Mumbai-based artist, who employs artisans from the Chamar caste, a Dalit community, from the slums of Dharavi to make bags and wallets. The pandemic and lockdown undoubtedly hit the artisans quite hard and there has been a severe impact on artisan’s livelihood. It was challenging for Sudheer to manage the businesses as well as the salaries of artisans. So, he decided to start a fundraiser on a crowdfunding platform with the aim to support his artisan’s family with a minimum income. The campaign has enabled him, and the artisans to sail through the current situation.
Undoubtedly, the entertainment industry has seen a huge blow due to the pandemic, however, the worst affected ones are the artists of the performing arts. The popular Rambo Circus, India, and international tour came to a standstill due to the lockdown. The responsibility of around 80 artists and 20 animals solely came on Sujit Dilip, the proprietor of Rambo Circus. Initially, Sujit was ‘embarrassed’ to ask for help but he buried his emotions and reached out to the public for help. He started a fundraiser and to his surprise, the entire community came forward to his support. In one of Sujit’s interviews, he mentioned “The artists always felt they’re the neglected part of the society. But today for the first time we are feeling proud that so many people are thinking about us.”
Recognizing the feasibility, accessibility, and impact of crowdfunding, it is an excellent way for startups and social entrepreneurs to raise funds for their business. Crowdfunding was started as a social experiment several years ago however today it is a great tool to bring community change in society. With the industry still evolving and becoming more efficient, there is no better time than now to take advantage of the associated benefits!
Varun Sheth is the CEO & Co-founder of Ketto.org. Views expressed are the author’s own.