What is crowdfunding

Fledgling startups have now hit upon a new avenue to raise funds - crowdfunding. Breaking away from the boundaries of traditional corporate funding, many aspiring entrepreneurs are shunning strict banking norms and piles of paperwork to seek investment directly from interested individuals.

Industry experts say the concept of crowdfunding, which involves raising small sums of money from a large pool of individuals who are ready to 'help realize an inventor's dream', will quickly bypass traditional venture capital and investment banking to become a mainstream avenue for any early-stage startup.

"Although they weren't aware that they were actually engaging in crowdfunding, there have been many companies that have generated the initial working capital through individuals who showed interest in their projects. Organized crowdfunding, however, has now taken shape in the city and will soon be the best way to raise funds for any startup, especially those involved in product innovations and disruptive technology," said Vinutha Rallapalli, head of the Hyderabad and Bangalore chapters of Lead Angels, a network of angel investors.

 Bringing innovators closer to potential investors is the growing number of online crowdfunding platforms that are now calling themselves the 'launch pads' of groundbreaking ideas. "It is our job to bridge the gap between innovators and inventors by bringing the two onto the same platform. In Hyderabad, there is a staggering number of hardware innovators that have reached out to us to help them design a successful crowdfunding strategy," said Satish Kataria, managing director of Catapooolt, an online crowdfunding platform. Catapooolt is getting ready to host a crowdfunding pitching event in the city in January, where startups will pitch their ideas in an auction-like setting to get investors on board.

 However, this alternative form of funding, industry insiders assert, comes with its own set of shortcomings. Although capital market regulator SEBI (Securities and Exchange Board of India) is expected to soon introduce crowdfunding norms to regularize this investment model, the move would still 'fall short' of the regulations necessary to boost crowdfunding.

 "Even though there is sufficient awareness regarding the concept, there are no clear regulations currently to tackle the risks such as money-laundering and other fraudulent acts associated with such a model of investment," said Rallapalli.

 This, however, hasn't deterred many in the city from turning to online investor communities to get their projects off the ground. "It took a while for us to circumvent regulations to introduce equity-based crowdfunding on our platform. However, the move has been welcomed by an increasing number of software-based application startups from Hyderabad who are now preferring to crowdfund their projects instead of seeking investments the traditional way," said Anil Kolli, founder of Beehive, a city-based online crowdfunding platform.