17 June 2021

Research pick: Microfinance for Indian startups - "Crowdfunding and start-ups: an Indian context"

Crowdfunding has proven a useful way to gather funds for charitable and activist causes, to help launch a product or book, and even to provide financial backing for individuals or groups in all kinds of endeavours. The concept involves calling on other people to make a donation to the worthy cause, promotion is usually done through a website, social media, email, and other communication routes, but might well also involve more traditional approaches such as posters, billboards, and conventional media advertising.

Writing in the International Journal of Social Entrepreneurship and Innovation, Socrates Shahrour and M.H. Uma of the CMS Business School at the Jain (Deemed-to-be) University in Bangalore, discuss the notion of crowdfunding in the context of start-up companies in India. The team points out that start-up companies make an important contribution to the economy as well as offering new opportunities for employment. Moreover, as the company grows so too should its contribution to the economy and its role as an employer.

By the very nature of a start-up company, it is at its beginnings and all such fledgling companies need capital investment of some sort. Traditionally, this might come through a bank loan or investment from individuals or even other companies. However, without a proven track record, it is often difficult for an entrepreneur to garner the funds to lift their business plan from the word processor and into the real world of developing and offering a product or providing a service.

Crowdfunding is an alternative approach where a multitude of small financial contributions, microfinance, accumulate sufficiently to allow the entrepreneur to make this leap. In return, those who provide the microfinancing will earn some kind of reward, perhaps something small like the kudos of being recognised officially as an early backer or something substantial like an early offering of the product or service for free or at a discount commensurate with their initial financial contribution.

Microfinance was recognised as long ago as the 1970s if not earlier but in the age of social media it becomes possible for an entrepreneur to reach and so recruit backers in far greater numbers and much faster than was plausible in the world of pen and paper rather than smartphones. Indeed, with a bigger crowdfunding audience, the contribution an individual needs to make to the start-up project can be much smaller than would be required from a smaller niche of backers or investors.

The team has reviewed the concept of crowdfunding in India and the legality of different approaches. They find that in the context of start-ups in India, the notion of peer-to-peer (P2P) microfinancing is more appropriate where other small companies help the start-ups and pay it forward as they develop. The rationale for this is that crowdfunding for donations in exchange for rewards does not fit well with the current legal framework in India.

Shahrour, S. and Uma, M.H. (2020) ‘Crowdfunding and start-ups: an Indian context’, Int. J. Social Entrepreneurship and Innovation, Vol. 5, No. 4, pp.335–343.

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