Crowdfunding can help startups

Even if you dream big, more often than not, just the basic lack of resources can put a blockade to all your ambitions. This is a serious challenge faced by entrepreneurs very early on in their journey to fulfil their dreams. The fundamental problem of acquiring funds to finance the ideas of these innovative minds can often interrupt their flight to success before takeoff.

From finding venture capitalists interested in their business, reliable investors who share their vision, to even relying on bank loans and credit cards for initial investment, startups face a lot of hurdles in the beginning of their journey. This is especially true for those entrepreneurs who may have the right combination of creativity and innovation, but lack the confidence in their financial aptitude and risk assessment. With institutional investors not ready to risk investment in radically new ideas, a lot of budding entrepreneurs do not get bank loans.

Now, the government resolved to solve these issues faced by startups with a special focus on funding and taxation relief to entrepreneurs, through the StartUp India initiative. But this push from the government is not enough to ensure the survival of these entrepreneurs.

Finding the right investors and enough capital to fulfil their needs is a building step in the development of any startup. To aid them with this basic requirement, there is a new way of accumulating funds to run your business, a true messiah for the start up culture- equity crowdfunding.

While equity crowdfunding has already been a rage in the west for quite some time now, with many well known kick-starting companies in place in the US, and laws based on the industry, it is gaining a lot of mileage in India as well due to the convenience and mitigated risk.

Through the mechanism of equity crowdfunding, a group of investors can collectively fund a start up in return for equity in the company, which gives these investors a small amount of ownership in the company. If the startup becomes the next big thing, the investors benefit hugely from the increased value of their shares.

Not every great idea gets picked up by a venture capitalist as the ‘next big thing’. More and more investors are looking for very specific ideas, with their interests confined to a growing, marketable industry. A lot of big firms who indulge in such capital investment are already saturated by their responsibilities to various startups to be ready to take on a new, unconvincing challenge.

This dearth of committed big investors, who only eye high yielding ultra-innovative projects, leaves crowdfunding as a viable option, and allows the retention of capital from various smaller investors. Often, entrepreneurs who require low capital cannot find investors for the specific amount. At such times, crowdfunding becomes a way out.

Stronger hold
Since the concept of equity crowdfunding implies a group of small investors with minimal stake in the company, crowdfunding also ensures that the entrepreneur enjoys a stronger hold of the company than in the case of a major investor, thus allowing for autonomy in the operations of the startup. It prevents any scope of strong-arming by an influential investor.
This also helps in avoiding conflicts in investor- entrepreneur relations, which can often be the sign of doom in any business.

More and more entrepreneurs are following this route in order to hold the reins of the company, with maximum financial support but minimum interference in functioning. Of course, like every other business, they do have the responsibility of keeping these stakeholders satisfied, without being steamrolled by them during decision making.

With India dependent on the success of entrepreneurship to facilitate the growing economy, such initiatives are bound to make a significant contribution to the industry. Equity crowdfunding is precisely what is called for to kick start the startup world, and help entrepreneurs in the crucial stage of funding, to ensure that good projects are not nipped in the bud.

As many businesses have faced economic ruin and accumulated losses due to rising debts through bank loans and credit facilities, often shutting down shop sooner than later, it is necessary to encourage the environment of equity crowdfunding to solve these hassles.

(The writer is Co-Founder and Managing Director, CORE Diagnostics)