The crowd-funding opportunity

Shyamal Banerjee/Mint

Crowd-funding markets have recently emerged as a viable alternative for sourcing capital to support innovative, entrepreneurial ideas and ventures. In these markets, any individual can propose an idea that requires funding, and interested others can contribute funds to support the idea. Like many socially networked ideas, this one has taken off in a viral way: entrepreneurs are already using crowd-funding platforms to raise hundreds of thousands of dollars in pure donations. In the US, there have now been more than 10,000 Kickstarter projects funded, with more than $75 million pledged and a 44% success rate, while ProFounder.com has reported average individual investments on the order of $1,300, with entrepreneurs typically raising more than $30,000 from the broader community towards a given project.

Given how crowd-funding has fuelled innovation and entrepreneurship elsewhere, it’s only right that policymakers in India start to deal with crowd-funding in a serious way.

The potential for entrepreneurs is tremendous, especially in a context where search friction between angels, VCs and entrepreneurs is high and when financial institutions aren’t lending money that easily. In the past several months, politicians in the US from both sides of the aisle have turned their attention to easing current restrictions on crowd-funding. In the US Congress, a Bill has been introduced to allow an unlimited number of people to contribute a total of $5 million to a start-up, with individuals’ contributions capped at $10,000, or 10% of their annual incomes. Policymakers in India might want to take cues and adopt similar legislation.

Certain issues in the design and execution of crowd-funding platforms warrant some caution. A novel aspect of crowd-funded markets is the nature of the publicly observable popularity indicators typically recorded and published within the marketplace. Crowd-funding involves financial investments (and future potential for an equity stake in the venture, subject to market regulations). Thus unlike e-commerce platforms such as Amazon, the popularity indicators for crowd-funding are more complex, with much deeper implications for user behaviour and potential for fraud. The key to enabling crowd-funding would be to create an exemption that addresses such concerns of fraud or market manipulation. Two issues need to be kept in mind in the Indian context. The first pertains to whether the issuance of securities through crowd-funding would require registration with the Securities and Exchange Board of India (Sebi). The second is whether the Internet websites that trade these securities require registration as broker-dealers that are subject to securities regulations. Regulators need to consider what information about the business, the use of funds raised and the start-up’s founders should be disclosed to investors. It may make sense to restrict participation by individuals or firms that have been convicted or sanctioned for prior securities fraud. A Sebi filing or notice should be required so that activities in these offerings could be observed. A potential concern that arises is whether allowing the public to buy equity stakes through crowd-funding has the potential to create another dot-com bubble where individuals follow each others’ lead in investing money with the expectation that each start-up would turn out to be a Google or a Facebook.

Indian policymakers need to think of new ways to unlock capital for businesses, start-ups and entrepreneurs, while still protecting investors from bad investments. If small-dollar donors became investors with a stake in a venture, the only limit to how energized and dynamic this marketplace would become is our own imagination. There is a great opportunity for Indian executives and policymakers and entrepreneurs to act quickly to embrace crowd-sourcing and enable crowd-funding in the Indian context.

Ravi Bapna and Anindya Ghose are business professors at the University of Minnesota and New York University, respectively, and conduct their India-based research affiliated with the Indian School of Business

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