Three friends—Mit Jani, Vivek Chaudhry and Prateek Gupta—from Ahmedabad won the best debut film award at the 62nd National Film Awards 2014 for their documentary film Goonga Pehelwan. The film is about a speech and hearing impaired athlete Virender Singh, who wants to compete at the Rio Olympics 2016. Singh is a wrestler from Haryana, now training in Delhi, and has won medals at many international competitions for the differently abled—gold at Deaflympics at Melbourne and Bulgaria, silver and bronze medals at World Deaf Wrestling Championship at Armenia and Bulgaria, and also a bronze medal at Deaflympics held in Taiwan. Yet he lacks support, which prompted the trio to produce a documentary on Singh.

Chaudhry, who has done a masters in business administration (his two friends are chartered accountants), said, “I read an article about Virender Singh in 2012 in Mint. The article prompted me to research on him since no one knew about this talented athlete." The filmmakers, all of who are 25 years old, made the film with the help of Drishti Media, a non-government organization (NGO). The film was promoted using crowdsourced money. Drishti Media contributed 3.5 lakh, while Wishberry, a crowdsourcing agency, helped raise 3.3 lakh. They had approached Wishberry with the idea of raising funds through crowdsourcing after the film was shot. It took the platform about a month to agree with the project, and then 11 days to raise the required amount. Contributions ranged from as little as 100 to nearly a lakh. This is an example of reward-based crowdsourcing. Mint looks at the various models of crowdsourcing, and what happens to your money in these.

How it works

Crowdsourcing is a way to get inputs, information and even money from many people. You can raise money for education, medical assistance and even to start a business. The crowdsourcing market is minuscule in India compared with other avenues of funding. According to crowdsourcing platform Catapooolt, only about 20 crore has been raised this way in India in the past two years, but with the avenue gaining popularity, the level may rise to 100 crore by the end of the next financial year. In comparison, investments into venture capital-backed Indian technology companies stood at $4.35 billion in 2014.

In terms of ticket size, on average it is 2-3 lakh per project and 2,000-3,000 for individual donations. “In India, 60-65% of the crowdfunded money is for start-ups and 35-40% for individuals," said Satish Kataria, founder and managing director, Catapooolt.

Broadly there are four kinds of crowdsourcing models—rewards, donation, equity and debt. “Two models—reward-based and donations-based—dominate in India," said Priyanka Agarwal, co-founder and chief executive officer, Wishberry. Let’s take a look at what these are.

Reward-based: Here, a funder gets a reward in return for contribution. You can fund anything from a documentary to an innovation. For example, the Ahmedabad trio gave CDs and invitations to view the film. It works best for creative projects and tech start-ups.

Donation-based: One can donate money for a social cause, and also get tax benefit. To get the tax deduction, the money has to go to an institution that is approved by the government under section 80G of the Income-tax Act. You can claim tax deduction for 50% or 100% of the amount given to certain funds and charitable institutions.

Equity-based: In this model, when you fund, say, a start-up, you get a stake in the company. The payments are usually exchanged offline. This model is yet to gain traction in India.

Debt-based: This works like a loan; you earn an interest on the contribution, depending on the agreement. Usually, there is no fixed tenor. Once you get the principal and interest, you can lend to a new project. The debt model is similar to microfinance for social or rural ventures.

What happens to the money

Since you are contributing money, you would want to know how it is used and the end result. Of the money that you give, some goes towards commission and transaction cost for the crowdsourcing platform, and the remaining to the project or cause. “Usually, the cost is 7-9% of the amount. Financial institutions charge a transaction fee of 2-3%, while commission is 5-6%," said Piyush Jain, founder and chief executive officer, Impact Guru, a crowdsourcing platform incubated at Harvard Innovation Lab. So, overall, the funding cost can even be up to 10%. The remaining amount goes to the individual, NGO or start-up that is raising the funds.

Returns differ across models. In the reward-based model, returns are intangible. With donations, you may get a tax benefit. When it comes to the equity model, you get a stake in the firm, and with a debt model, money earns interest. In both equity and debt, the returns are negotiable and can differ.

Payments can be made via cash, cheque, credit card, debit card and Netbanking.

Rules to follow

Since crowdsourcing is a relatively new way in India to raise funds, as of now, a proper regulatory framework for crowdsourcing platforms does not exist. The reward and donation models are currently not regulated. But for the equity and debt models, the Securities and Exchange Board of India (Sebi) had recently announced that it is framing norms to allow more accredited investors to be part of crowdsourcing exercises.

“Since crowdsourcing platforms act as an intermediary between the funder and the funded, the transfer of money, depending on the amount, is regulated by the Reserve Bank of India’s intermediary guidelines," said Jain. So, the money that someone contributes, first goes to a nodal account. “Both the commission and the fund raised goes to the nodal bank account. It is then transferred to the respective crowdsourcing platform, and then the individual or the NGO or start-up," said Jain.

However, crowdsourcing being a new concept in India, the regulations are not well known and many crowdsourcing platforms do not have nodal accounts.

How to raise money

If you want to raise funds, you need to be well networked, have good communication skills and, of course, a good idea. Since the whole concept of crowdsourcing is based on gathering money from a network of people, these skills are important.

“You can raise money from own family and friends, or from strangers. For the latter, credibility is important. You can create awareness through friends, blogs, social media platforms and through word of mouth. Almost 40% of the transactions happens through social media," said Varun Sheth, co-founder and chief executive officer, Ketto, a crowdsourcing platform.

Continuously follow up with the crowdsourcing platform. Recognize the target group where the idea will have the most appeal. “You have to push your product forward and chase those who have the capacity to fund it," said Ishita Anand, co-founder and chief executive officer, BitGiving, a social crowdsourcing platform. For example, for a social cause, approach those who care about it.

“Campaigns spearheaded by individuals have garnered more success in India," added Anand, citing the example of Laxmi Agarwal, who led the campaign “Stop Acid Attack" last year and was able to raise more than 11 lakh in two months.

Gathering support for social causes may be easier than doing so for a business idea, because those who run crowdsourcing platforms say, Indian entrepreneurs are unable to present their case properly to interested parties. So, if you think you will not be able to tap enough people on your own, you can seek expert help. Let’s Venture, Wishberry, Ketto and Catapooolt are some crowdsourcing platforms.

While raising funds is difficult, it’s even tougher to check the authenticity of crowdsourcing platforms. One way to see if the platform is genuine is to check whether the fund transfer process is regulated. However, as of now, there isn’t any way to find out whether the money is going through a regulated channel. So, you may have to fall back on the word of mouth channel for this as well.