Why crowdfunding is beneficial for startups and entrepreneurs?
Crowdfunding in India is in an adolescent phase but it has shown much promise in little time. A World Bank report predicts that global investment in the crowdfunding industry will reach $93 billion by 2025.
This growing industry is reshaping the way we look at raising funds and gathering support for a specific purpose. The purpose could be artistic, a donation for some specific need, or to fuel your dream business. Crowdfunding will help you find support in the form of financial backers.
A report found that the number of IT startups in the country has slumped to 800 in the first nine months of 2017 from over 6,000 in all of 2016. The main reasons being lack of funding and innovation.
This article delves into how crowdfunding can help startups maximize innovation and get the funding that they need.
Why do most startups fail?
It is a statistical reality that 70% of startups in India die at a very early stage. It was found in a study by IBM Institute for Business Value and Oxford Economics that 90 percent of Indian startups fail within the first five years.
India is the 2nd biggest market in the world, second only to China. As per the International Monetary Fund, India is the 5th largest economy in the world on the basis of GDP figures.
In principle, this should make India the breeding ground for startups. However, the situation is not so simple, especially since it involves financial factors.
Although India is the 2nd largest market and has the 5th largest economy, it does not imply a safe-haven for all kinds of startups and businesses. Businesses need to be innovative and creative at all times to survive in such a competitive environment. They need to keep pace with the upcoming trends and the changing dynamics of what is desirable.
Innovation is key but one also needs to think creatively about the ways in which funding can be acquired. In India, the primary source of funding for any startup is through angel investors and venture capitalists. In fact, a lot of businesses fail while trying to obtain such funding due to the difficulties involved.
Creating trust in India is also more difficult than a lot of other markets because Indian culture idolizes frugality. So, people generally tend to avoid wasteful or excessive expenditures. This creates a lot of trouble for startups not only in finding investors but also in getting initial customers after finding investors.
Problems faced by small startups
Startups come in all shapes and sizes. They can be the big unicorn ventures or your run of the mill businesses that aim to serve a specific need with their creative idea. Irrespective of the size, shape, form, and function, all businesses need monetary investment in the initial stages of their operation. This investment can be the determining factor in their survival.
When it comes to size, one can imagine that it must be more difficult for smaller startups to raise funding than bigger startups with grandiose ideas. It is easy to swoop someone away with a grand idea of a big organization but to sell a good idea by way of a small organization serving small-genuine needs is difficult.
As a result, a lot of such small startups end up borrowing money from family members or private lenders or through bank loans. This creates an enormous burden on a fledgling organization.
Young entrepreneurs need room to be creative, but the financial burden of loans can seriously hinder their creative spirit.
Any kind of startup enterprise, small or big, can escape the financial burdens of traditional modes of fund-raising by choosing crowdfunding as the medium of raising capital from the general public.
What is Crowdfunding?
Crowdfunding is a medium by which startups and young entrepreneurs can finance their business venture by using small amounts of capital contributions from a large number of individuals. It provides a platform where entrepreneurs and startups can showcase their business idea to the world and internet users all over the world can choose to make contributions to their ventures. Contributions are usually made by an initial investor in return for a special benefit.
There are various types of Crowdfunding like Reward-Based crowdfunding, Peer-to-Peer lending, Donation-Based crowdfunding, Equity crowdfunding, Real Estate crowdfunding, and more.
The type of crowdfunding depends on the purpose of raising funds and the nature of the object sought to be achieved. So, an entrepreneur raising funds for his startup business can go for Reward-Based crowdfunding where they will reward their backers once the goal is achieved. Or they can go for Equity-Based crowdfunding where backers will get a specified share in the business equity once the goal is met.
On the contrary, a person in need of funds for some medical emergency can opt for a Donation-Based crowdfunding campaign. This will help the person in raising funds for medical treatment without the burden of repayment.
Why is Crowdfunding relevant?
Crowdfunding platforms are accessible through the internet. They are dependent on the abundance of internet users for their successful operation. The more users you can reach to present your business idea and gain funding, the easier it will be to reach the target and start business operations.
As of June 30, 2019, India has over 560 million internet users, second only to China. According to a July 2019 statistic, India has over 270 million Facebook users(highest in the world) and over 34.4 million active Twitter users. It must be quite evident that the potential for crowdfunding in India is monumental.
Furthermore, social media penetration in India is merely 23%, as of 2019. Social media penetration is based on active users of top social networks in a country compared to the total population. This implies that social media users in India will continue to grow consistently in the coming years.
Advantages of Crowdfunding for Startups and Entrepreneurs
Crowdfunding opens up a range of options for entrepreneurs to raise funds for their business ventures, even without giving up equity. It also reduces the risk by distributing it across a large number of contributors. Crowdfunding is perhaps aptly defined as the ‘democratization of the startup funding ecosystem’.
1. Low Risk and few Obligations
Starting a business is a challenging and risky endeavor. For the budding entrepreneur, a lot is at stake in the initial stages.
Crowdfunding provides a low-risk alternative to other fund-raising methods. Firstly, entrepreneurs can present their product idea in the best possible fashion to the general public. Thereafter they can choose to raise funds without giving up their equity rights. Additionally, if such an entrepreneur will not be liable for anything if their funding goal is not reached. Such funds collected are then returned to those who had contributed.
Crowdfunding also assists entrepreneurs in gaining market validation and gauge the support and demand for their products.
2. It’s a great Marketing Tool
Crowdfunding is a great marketing tool through which businesses can create and measure demand for their products. This can be done even before the final product is ready. It allows such startups to showcase their product to the world in the way they think best and promote it. Thus, helping the product reach the maximum number of potential investors and customers.
An effective crowdfunding campaign also helps in marketing the product online and creating a market base.
3. Crowdfunding increases creativity
Crowdfunding helps new business ventures and their executives in gaining valuable input from the crowd and their potential clients. They can do so via comments, discussions, and feedbacks.
This is a valuable resource for entrepreneurs. It gives them the opportunity to listen to the public, and gain insights about the product before actually selling it. This gives them more room to be creative and encourages innovation. It also ensures that the first time the product is sent to the customer, it is exactly as per their liking and based on their personal inputs.
4. It creates an established Customer Base
In the initial phases, every business struggles with finding the right customer base. It is extremely difficult to find the first few customers. This is why some startups struggle to make-do even after getting the desired funding.
Crowdfunding eases this pressure off of entrepreneurs even before they have sold any product by ensuring an established customer base. The general public is aware of the product and those who are interested in it will support the business by choosing to fund. Thus, the startup not only gets funding for their venture but also a valuable customer base.
5. Ease of Access
Crowdfunding is like a walk in the park, compared to traditional methods of raising funds like applying for a loan. Crowdfunding makes the initial stages of business a lot more relaxed with minimal form filling and submission requirements. This way, entrepreneurs can focus better on production and development.
Also, a crowdfunding campaign is free to launch. A nominal fee is applied while retrieving collected funds by the crowdfunding platform, for its services.
6. Quick and Fast Funding
Traditional sources of investment like bank loans, angel investors, and venture capital take up a lot of time. Also, there are a lot of variables due to which the investment could be denied or withheld.
Crowdfunding provides a speedier alternative. Entrepreneurs can choose a time frame of their liking and aim to reach their target goal within that time frame. This is usually very low as most of the crowdfunding campaigns last 30-60 days.
The crowdfunding platforms take around 1-3 weeks to transfer the funds raised by a successful campaign, depending upon their policy. No other channel of raising funds provides such a quick and hassle-free method of transferring funds.
Future of Crowdfunding in India
Crowdfunding is a growing industry in India and as we have seen before, the potential to grow is immense. According to a World Bank report, there are about 344 million households in the developing world who are able to make small crowd-fund investments in the community businesses. It is estimated that these will have the ability to deploy $96 billion a year by 2025 in crowdfunding investments.
It is about time that startups recognize the potential of and start considering crowdfunding as a viable means of raising funding for their business ventures. The statistics show that this industry is bound to grow. Everyone including the entrepreneurs, the businesses and the customers can benefit from this framework.
Crowdfunding provides a platform where businesses and their potential customers can come together to raise money for products that such businesses desire to make and which customers would be excited to use. It is the synergy of wants and desires of both businesses and customers that makes for a good business.