The adventure of starting and running a business is both thrilling and challenging, however, the majority of people lack the necessary funds to do so. As a result, most businesses go through a fundraising period in order to raise the necessary funds.
The internet continues to be an integral part of all our lives, and as a result, more and more entrepreneurs rely on it for fundraising. However, entrepreneurs and business owners in India need to consider several things before embarking on such a journey. Here’s a look at everything you need to know about using the Why Is Fundraising the Hottest Topic on the Internet.
What is Crowdfunding in Business?
Crowdfunding is a method by which fledgeling businesses collect funds from multiple investors through websites and social media platforms for a definite cause or objective. The funds collected can help finance projects, such as releasing a book, music video, or new product. Additionally, such funds can also go towards charitable and benevolent causes, such as community-based initiatives or building a business. These methods are modern alternatives to more traditional forms of funding, such as approaching banks or other financial institutions. They use the power of cumulative effort to make small contributions to fulfil your business’s fund requirements.
Types of Crowdfunding in India
- Social lending crowdfunding: Such community-based crowdfunding techniques are a legal way to make donations without expecting anything in return. Most of these donations go towards social causes or artists looking for funding for their projects.
- Pre-order crowdfunding: In pre-order crowdfunding, investors contribute a sum of money expecting to receive a product or service at a later stage. For instance, individuals pay today for a product they know the business will make and send over after a specified period.
- Reward crowdfunding: It is a legal type of community-based crowdfunding wherein people donate money expecting to receive a tangible reward in the future.
- Debt crowdfunding: It is a type of peer-to-peer lending which uses an online platform to match prospective investors with issuers. The platform enables such borrowers to receive unsecured loans at an interest rate fixed by the platform. Only NBFC-licensed agencies can undertake such transactions legally in India.
- Equity-based Crowdfunding: It is early-stage funding wherein businesses offer equity interests to investors online.
Does all Types of Online Fundraising Legal in India?
The Securities and Exchange Board of India, better known as SEBI, considers equity-based crowdfunding activities illegal in India. The SEBI is responsible for regulating the securities market in India, and its primary objective is to protect the interests of investors within the country. Equity-based fundraising brings several risks with it since it is a type of unregulated investment. If the investors lack the relevant skills and experience required to assess the risks involved, it may lead to heavy losses.
Small investors who possess only limited savings might invest in such risky endeavours expecting higher returns. However, the absence of regulations and security from the issuers hampers the liquidity of other investors. Additionally, in such cases, the investor has access to only soft information. Unlike venture capitalists and other financial institutions, they cannot undertake the required due diligence.
The primary funding sources that Indian startups rely on include angel investors, loans from financial institutions, and private equity. However, any public offering of equity happens after the business becomes viable commercially. When it comes to equity crowdfunding, startups seek funding at an earlier stage, mostly during pilot development. Since there are no rules and regulations in place regarding crowdfunding, such methods do not protect investors. The Indian government is yet to formulate guidelines that will help minimise investment risks and increase market liquidity in such cases.
SEBI Guidelines for Online Fundraising
SEBI had released rules regarding online fundraising in 2014 through a document titled ‘Consultation Paper on Crowdfunding in India’. The various guidelines outlined in this document are as follows:
- Allow only accredited investors to participate
- Qualified institutional buyers must hold at least 5% of issued securities
- Retail investor contribution must be between ₹20,000 to ₹60,000, and the maximum number of retail investors allowed is 200
- Startups less than two years old may participate in such fundraising drives
- All participating businesses must disclose details regarding their financial statements, management information and business plan
- Registered crowdfunding platforms must create a screening committee to perform the required due diligence and conduct checks on the startups and investors.
Do aware of the Must Read Topic: How to raise funds for Startups?
Benefits of Online Fundraising Efforts
Studies show that 54% of all individuals worldwide prefer to donate online. Hence, it is safe to say that using the internet can help improve your fundraising efforts in several ways. Let us now look at the benefits of relying on the internet for raising funds:
- Since fundraising schemes utilise automation, it can help businesses save both time and money
- Unlike traditional forms of fundraising, online methods allow for real-time collection and verification of funds, making it easier for organisations to maintain records
- By handling all the repetitive tasks associated with fundraising, online methods help organisations focus on their objectives
- It provides business owners instant access to financial data, making it easier to track and analyse them efficiently
- Eliminating manual processes also helps in reducing human error. Thus, it improves the overall accuracy of the financial records
- Improved access to data, analysis and reporting allows organisations to allocate their funds to programs more efficiently
- Such programs have the power to expand your reach and provide access to people worldwide
- It provides companies with an opportunity to market their product or service before they even hit the market
- Presenting to such a varied audience helps businesses achieve concept validation, which enables them to refine their approach.
What Can We Do to Assist You?
In 2019, the crowdfunding segment raised over $2 million, with studies expecting such platforms to grow by 0.7%. Hence, it is clear that such fundraising initiatives can help businesses get themselves off the ground. Crowdfunding works differently from traditional methods of fundraising, which require entrepreneurs to market their ideas to VCs, angels, and banks. It offers a more diverse opportunity by providing entrepreneurs access to more investors than ever before. However, businesses need to find a way to present themselves in the best possible manner to potential investors.
- Vakilsearch can help businesses put their best foot forward by offering them unique and effective fundraising pitch decks
- An effective pitch makes it easier to convince investors why they should believe in your business
- Since securing capital investment is a significant turning point for any entrepreneur, appropriate guidance is a must at this stage
- Vakilsearch can help companies discover various fundraising opportunities online to ensure they receive the funds to build the business of their dreams
- Schedule an appointment with our representatives at the earliest to receive assistance with all the aspects of fundraising.