Thursday, Oct 30, 2014

Raising funds, peer to peer

A more competitive investment market  will enable entrepreneurs to negotiate better deals and have a greater say in deciding the future of the company. A more competitive investment market will enable entrepreneurs to negotiate better deals and have a greater say in deciding the future of the company.
Posted: July 23, 2014 4:13 am

 

BY:Parth Saxena

Online crowd-financing platforms could be a major boost for India’s entrepreneurial ecosystem.

A major part of the world is consistently encouraging entrepreneurship. Start-ups are drawing the best people into the ecosystem, building solutions, executing them tirelessly and making  a significant impact on society. Over the years, start-ups have redefined the economics of business, particularly so in India. With many incubators, accelerators, investors and venture capitalists entering the start-up community, the support system for the same is rapidly gaining strength in terms of knowledge, experience, infrastructure and capital. Despite that, a start-up’s journey to success is filled with challenges and uncertainties.

One of the major reasons why start-ups fail is lack of adequate capital. In a place like India, where raising investment requires immense effort and a long turnaround time, there is a need for alternate funding sources. This will make the investment market more competitive, flexible and accessible to upcoming entrepreneurial talent.

The Securities and Exchange Board of India (Sebi) recently released a paper that discusses the legal and regulatory challenges involved in implementing crowd-funding in the country. Online crowd-financing forums are already active in many jurisdictions and, considering our present situation, have the potential to massively boost the entrepreneurial ecosystem. They will help start-ups reach out to potential investors in a much easier way. Additionally, a more competitive investment market will enable entrepreneurs to negotiate better deals and have a greater say in deciding the future of the company. I’ve come across a few cases where start-ups over-dilute  equity or are restrained from naturally building their company due to the limited investment opportunities available to them.

Sebi’s discussion paper considers the risks, benefits and responsibilities involved in opening our economy to crowdfunding from the perspectives of start-ups, investors and entities that set up the crowdfunding platforms. However, the proposed rules indicate high entry barriers for those who can raise funds and can invest. For instance, the regulations only allow those companies no more than 48 months old to raise funds. Many start-ups go through a long journey to realise their true value in the market. They undergo several pivot strategies and repeatedly reinvent themselves to eventually build a strong and longlasting foundation.

So, even after a few years of operation, they continue to operate as start-ups and seek to raise early stage investment. According to Sebi’s proposal, the crowd-funding system will not be accessible to such start-ups after a duration of 48 months. Hence, these start-ups will have to shift to existing methods of fundraising, and the purpose of having alternate funding sources will not be served. This may dilute the significance of introducing crowd-funding as many companies in the past have gone through continued…

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