India is emerging as a hub for innovative start-ups and start-up funding is a different ball game in itself. Since the budding start-ups require funds to pursue the business operations, the investors came into play. Thus equity crowdfunding has become the trending and effective way to raise funds for start-ups.
As per the Economic Survey 2021-22, the number of newly recognized start-ups has risen to around 14,000 compared to 733 in 2016-17. Currently, India is home to 61,400+ start-ups as of 10th January 2022. The rapid increase in start-ups has driven the need for equity crowdfunding.
What is equity crowdfunding?
It refers to the process of raising capital for early-stage businesses and start-ups. Under equity crowdfunding, a company's securities are offered to potential investors in exchange for start-up funding. Thus every investor is entitled to a specific stake in the firm proportional to their respective investment amount.
As per Valuates Reports' research, the equity crowdfunding market was valued at around $12.27 billion in 2019 and is projected to reach up to $25.8 billion globally by 2026.
How is equity crowdfunding different from other forms of crowdfunding?
Equity crowdfunding is poles apart from the other methods such as reward and donation crowdfunding. The equity model offers a more predictable and straightforward capital-raising process by proposing financial securities to the investors. The digital nature of equity crowdfunding adopts the more efficient and flexible way of start-up funding.
The other conventional methods for early-stage start-up funding depend on investments from a pool of professional investors. On the other hand, equity crowdfunding emphasizes a wide-ranging group of investors, including the retail ones. It focuses on raising the much-needed capital by acquiring small contributions from a massive number of investors.
Benefits of Equity Crowd Funding
Equity crowdfunding presents an exceptional approach to start-up funding. It offers lucrative benefits to both investors and companies. As a result, it has become a popular method for start-up funding in the segment.
• Possibility of Good Returns: Since there is a considerable risk, the prospects for outsized returns on equity crowdfunding are also higher. It is not possible to predict the scalability of start-ups at the initial stage. Yet, there are chances that a business might become a unicorn and provide attractive returns to the investors.
• Opportunity for Retail Investors: Before crowdfunding, only accredited or professional investors and individuals with high net-worth could participate in early-stage start-up funding. This is because the minimum amount onset for budding and projected ventures was relatively higher. Equity crowdfunding enables retail investors to put a smaller amount of money into such ventures.
• Portfolio Diversification: : Equity crowdfunding provides an opportunity to investors, especially
the retail ones, to diversify their portfolios. It can be done by shortlisting multiple businesses for investment purposes. A diversified portfolio also helps investors to cope-up with the market volatility.
The Final Word
Equity-based crowdfunding has opened the door to new prospects for nascent ventures. Thus the start-ups can bring their names and business motto in the limelight of zealous investors. The start-up funding was earlier driven by venture capitalists only. However, the revolution of equity crowdfunding has made the trail for retail investors to become a part of it.