Finding funds for your startup can be an unnerving prospect if you don’t know where to look. When you are just launching your startup, investors may not be interested in funding your business idea. You may have to resort to bootstrapping your business or lending from creditors for the seed money. Crowdfunding is not something that most businesses try out.
Once convinced of the viability of your idea, angel investors and venture capitalists can agree to invest in your startup. But you will have to share equity with them. You’ll lose absolute control over your enterprise as a business owner.
None of these risks and challenges will come up if you choose to crowdfund your startup.
What Is Crowdfunding?
Crowdfunding is a relatively new way to raise funds for startups in India, though it’s a popular strategy in countries like the US. As the name suggests, crowdfunding involves finding capital from more than one source, mainly through online and social networking platforms. Startup experts believe that it is especially effective if your business has a cultural or social cause because you can create a crowdfunding campaign based on that to attract investors or customers.
How Does Crowdfunding Work?
There are online platforms where you can put up a detailed description of your business idea to attract interested people. Your advertisement should include the goals of your business, a pitch to your target audience, and fund requirements.
If the customers are impressed by your business or your product, they’ll give you money. The funding can come through donations or pre-orders on your product.
By choosing crowdfunding as your fundraising strategy, you can also introduce your product to the market and start an advertising campaign for it.
You can understand the market response to your product firsthand by looking at how well people respond to your crowdfunding campaign.
A crowdfunding campaign that stands out will bring you the seed money and funding required to launch your product to the market.
Some of the crowdfunding platforms you can try today are Kickstarter, Indiegogo, Milaap, Ketto, Catapooolt, FuelADream, Fundable, and Wishberry.
Let’s look at some of the advantages of choosing crowdfunding platforms.
Advantages Of Crowdfunding
Before we go on to the advantages of crowdfunding, here’s an important startup tip. The success of your crowdfunding campaign in a highly competitive platform depends on the clarity of your business plan, the market analysis you have done, and approaching the right audience.
Crowdfunding Is Easy And Free To Launch
Starting a campaign on an online crowdfunding platform is hassle-free. Better yet, most online platforms let you begin a campaign free of cost. You will have to pay a minimal fee when you raise funds.
It lets you bypass the complex processes involved in getting funds from professional investors and loans from banks. Also, the disappointment you have to endure as a business owner when your proposal is rejected for reasons other than customer satisfaction.
Opportunity To Interact With Customers Even Before Your Product Is Launched
You will be targeting your niche market for crowdfunding your business idea. It introduces a startup’s mission and vision to the market, as it is a free and easy way to reach many channels.
In effect, it lays the foundation of your market analysis and identifies your target audience. Entrepreneurs gain market validation for their products through crowdfunding campaigns.
Since your startup is in its initial stages, it may have a great scope for expansion. A crowdfunding campaign gives the entrepreneur a chance to engage with the crowd and receive comments, feedback, and ideas.
A successful crowdfunding campaign proves the viability of your startup to future investors to invest in it in the later stages.
A Great Advertising Strategy
As we discussed earlier, crowdfunding campaigns are not just fundraising campaigns but also advertising. It lets you connect with your prospective customers. You can build customer loyalty for your product early on.
Pre-selling is another great feature of crowdfunding. You can pitch the idea to the market and gain sales prospects.
Types Of Crowdfunding And SEBI Regulations
There are different types of crowdfunding defined by law.
A large number of contributors individually donate and contribute a small amount of money to the endeavour without expecting any returns. This type of crowdfunding is mainly done for projects involving social, artistic, or philanthropic causes. Donation-based crowdfunding is legal in India.
Also known as debt crowdfunding, it involves borrowing and lending funds individually on online platforms. The interest rate for lending is set by the platform. Peer-to-Peer platforms can either facilitate loans between individuals, or gather funds for Micro, Small, and Medium Enterprises.
Here, the individuals contribute to a business in exchange for a reward. The reward could be a product or service that the company offers. Companies that are involved in software development, motion picture promotion, scientific research, civic projects, etc. rely on reward-based crowdfunding.
In this type of crowdfunding, the contributors invest in a business in exchange for equity. The contributors can become part owners of the company by gaining equity shares for the capital they invested. Equity-based crowdfunding is illegal in India.
The Securities And Exchange Board of India (SEBI) has issued regulations against equity crowdfunding in India, terming it “unauthorized, unregulated, and illegal.” The Consultation Paper on Crowdfunding in India, released by SEBI in June 2016, rules that only ‘Accredited Investors’ can invest money in a project for crowdfunding.
The qualification criteria of ‘Accredited Investor’ for companies incorporated under the Companies Act include:
- a minimum net worth of Rs. 20 crore,
- High Net Worth Individuals (HNIs) with a net worth of minimum Rs. 2 crores, and
- Eligible Retail Investors who fulfil the prescribed criteria.
As a result, major crowdsourcing companies in India like AngelList and LetsVenture have released a disclaimer that they are neither crowdfunding platforms nor stock exchanges. Rather, they are registered as Alternative Investment Funds or AIFs. AIF stands for privately pooled investment platforms that collect funds from investors and operate for their maximum benefit. These include venture capital funds, angel investors, social venture funds, micro, small and medium enterprise (SME) funds, and others.
SEBI has enforced this regulation to help investees from investors who are “uninformed and unsophisticated” who may behave with a “herd mentality.” Moreover, this regulation safeguards investors from losing all their money through equity investments if a company they invested in folds.
The downside is that it keeps small-scale investors from investing in the booming startup ecosystem in India. Because of scams and frauds that go on in the investment industry that is still nascent in the country, many people lose a chance to invest in business ideas they believe in.
But startups like Tyke and Sateeq have found a way around it. Other investors have already come on board with that idea.
Sateeq was founded by Krishna Maggo in 2021 to democratize angel investing, by making it accessible to anyone who wants to invest in startups. The startup lets investors chip in as low as Rs. 5000, as compared to angel investment companies where the minimum ticket size per startup is between Rs. 3-10 lakh.
Tyke is another startup investment platform that lets an individual invest as low as Rs. 5,000. It has an automated investment portal that takes only a few minutes to make the first investment. Tyke has helped businesses like Tuttifrutti and NowZone to raise funds.
Both investment startups Tyke and Sateeq enable community funding that is based on Compulsorily Convertible Debentures (CCDs). A compulsory convertible debenture (CCD) is a type of bond that has to be converted into stock by a specified date. This is most often during an acquisition or IPO. It is classified as hybrid security, which means that it is neither purely a bond nor a stock.
By using CCDs, these startups are able to bypass the regulations of SEBI legally and allow large numbers of small investors to invest in a startup. This could pave the way for a new trend in startup investments in India which will encourage huge crowdfunding campaigns for companies here.
At INR 34,242 crore in 2017, India has the largest number of people volunteering and donating money in the world. In this, formal giving only accounts for 10 percent, split between charitable trusts and nonprofits and disaster relief. The rest goes to informal giving, i.e., to community and religious accounts (INR 30,700 crore). But with the explosive growth of startups in India, people are willing to invest in business ideas they think will make a difference. Reward-based crowdfunding at 1.45 million U.S. dollars in 2016, is a large industry. With innovative ideas like that of Tyke and Sateeq, startups can stop relying on angel investors or venture capitalists for funds. Rather, they can choose crowdfunding as a hassle-free strategy to raise funds for their startups.
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