In lay terms, crowdsourcing could be defined as:

Crowd funding is like the elder cousin to crowdsourcing; it amounts to combining capital with a community of individuals or 'the crowd', the result being the concept of crowdfunding. In simple words it can be defined as - "Aggregating small investments from a large pool of investors". Presently, crowdfunding is a tiny financial model but it is expected to experience high growth and adoption as a means of 'democratizing' access to capital.

Crowd funding or Crowdfunding (crowd financing, equity crowdfunding or crowd sourced capital) refers to the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other individuals or organizations. Crowd funding occurs for a variety of purposes - from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns, to funding a startup company, movie or small business or for creating free software.

Survival being the top priority for SMEs in the face of intensifying competition from around the globe, crowdsourcing could serve as a differentiator. It would help an SME reach out to thousands of people having great ideas and potential, and eventually help in attaining the company's goals of growth and expansion.

The role of SMEs in the growth of the Indian economy is real and substantial but access to capital is restricted in spite of favourable government policy declarations. The new concept of crowdfunding could turn out to be a potential solution to the major funding challenges faced by SMEs.

In its true sense crowdsourcing and crowdfunding are an 'everything for nothing', win-win formula for all the parties involved. The benefits include putting in place a transparent system, a talented pool of professionals, on-time delivery and the right amount of finance required, with a minimal service charge to be paid to the platform helping to achieve this.

The US-based site Kickstarter has raised millions of dollars for mostly arts and media projects. The biggest of these, a video game called Double Fine Adventure, is stated to have raised more than US$ 3 million from over 80,000 backers.

In India, some big names like Hero Motocorp, Parle Agro, Procter & Gamble India and others have already embraced crowdsourcing and they are understood to have met their business goals. So, it's time for Indian SMEs to move in this direction. Companies like Jade Magnet etc. and social media networks like Twitter and Facebook are some of the platforms that have helped businesses exploit crowdfunding.

With more than 100 million Internet users, India is fertile ground for crowdsourcing and crowdfunding to become the next significant 'game changers' in enhancing business and entrepreneurship opportunities in the country.

With the widespread use of the mobile phone as a means of accessing / exchanging information and with social media becoming a widely employed, reliable marketing tool, it automatically creates a strong network of individuals that companies can tap into for ideas, business operations, support services and / or funding. For example, Wikipedia, instead of creating an encyclopedia on their own by hiring researchers, writers and editors, gave 'the crowd' the ability to create information on their own.

On the flip side, there are certain disadvantages with crowdsourcing and crowdfunding that need to be assessed upfront and addressed suitably. For instance, problems in managing crowdfunds, tracking and keeping records of contributors / lenders / donors, and delivering the rewards / coupons / tickets / compensation / dividends, as promised at the time of project initiation.

Latest Developments

The recent news from the US on the 'crowdfunding' bill or JOBS (Jumpstart Our Business Startups) Act is that the measure has been passed by both houses of Congress and is awaiting approval by President Barack Obama. Once the bill is signed, it would become law and would transform the process of raising capital for start-up businesses by removing some of the strict regulatory bottlenecks in place up to now.

The bill would enable companies raise up to US$ 1 million a year through crowdfunding (or US$ 2 million, if the company provides prospective investors with audited financial statements). US$ 100,000 is the dividing line for qualifying investors - investors with incomes or net worth of less than US$ 100,000 can invest up to U$ 2,000 or 5% of annual income (whichever is greater) in a company; and those with incomes or net worth greater than US$ 100,000 can invest 10% of either net worth or income, up to US$ 100,000. Private companies would be able to have as many as 1,000 shareholders, up from the current cap of 500. Startups will be able to offer and sell securities through crowdfunding sites or via social networks. It would provide entrepreneurs, start-ups with a single, streamlined regulatory process. It would allow entrepreneurs to raise up to US$ 1 million per year through an SEC-registered crowdfunding portal.

India being one of the fastest growing markets for notebook PCs, mobile phones, smartphones and wireless telephony services, with tremendous reach of social media, crowdsourcing and crowdfunding are bound to find takers in the near- to mid-term, if the right policy framework and institutional support can be put in place by the government.