Entrepreneurs in the US now have access to a new class of capital, funds from unaccredited investors. In other words, any individual who has the cash can now become a startup investor in the US. Prior to this, only individuals whose net worth, along with that of their spouse, exceeded $1 million were allowed to invest in startups through equity crowdfunding. Alternatively, an accredited investor had to be an individual with income exceeding $200,000 in each of the two most recent years with reasonable expectation of earning just as much in the current year. That has now changed with the US Securities and Exchange Commission finally bringing in the regulations for equity crowdfunding earlier this week. The move is expected to open the doors to new capital from an hitherto untapped investor class, and can also lead to a range of crowdfunding platforms springing up.
What if something similar was allowed in India? Techcircle asked some investors and entrepreneurs in India about the pros and cons of such a move. This is what they had to say:
“We need this in India”
We definitely need this facility in India since venture capital funding options are limited and are mostly from overseas players. We also need online crowdfunding platforms.
“Dangerous to have equity crowdfunding here”
The Indian startup ecosystem is still in the early stages; the understanding of startup investment as an asset class is very poor. People, who are not deeply involved in it, can get carried away by the media hype of a few highly successful startups. The fact that these account for less than 1% of the total startups that get funded is never apparent to the common investor. The entrepreneur can get saddled with such first-time investors who do not understand the asset class and inherent risks associated with it. In India, it would be dangerous to open up similar equity crowdfunding possibilities for common investors as it will do more harm than good for the ecosystem.
“Don’t think investors need accreditation in India”
“I don’t think there is any such term as accredited investor in India, but I am not very sure on this. There are retail investors, high net-worth individuals and qualified institutional buyers. As of now, anyone can become a member of one of these platforms through a fairly simple application process and write cheques to companies. The procedure would be different depending on the platform, but I don’t think investors need to have any accreditation for investing through either platform.”
“Less-sophisticated investors as shareholders may add new challenges”
If equity crowdfunding is allowed in India, it will be a good source of capital for emerging companies. However, retail investors should be fully aware of the inherent risk in investing in startups.
Moreover, many investors may not have the ability to analyse or access information on the success potential of a startup. Less-sophisticated investors as shareholders may add new challenges. If the regulatory approach becomes very restrictive, it will be difficult for crowdfunding to be a source of investment for startup companies.
“Unlocking the power of the crowd will help”
Unlocking the power of the crowd can always help and add alternative funding strategies for startups in the pre-series A stage. The advantage is that your micro-investors become early adopters and customers in your business. While this would be definitely a great step, an Indian crowdfunding platform would need to develop over time. I am not sure if it will be an instant success as this is not a known investment class for the average investor, but given enough time it can develop into a great platform and resource for the Indian ecosystem.
“Need more innovators to have more investors”
An equity crowdfunding model is needed for India as well. However, it would not radically change the investment scene in India. I don’t think it can bring or create more new investors. It’s going to be the existing angel investors who are going to look at this as a new opportunity to explore more startup ideas. On the other side, we do not have more innovative, original ideas coming up in the startup space. Every other company is a ‘me too’ startup idea. Therefore, fundamentally we need more innovators to have more new investors.
“Already saturated with incubators and angel groups”
I don’t think it makes a difference in the Indian context; we’re saturated with incubators and angel groups. A terrific idea and team will find a way to get funded. The bigger problem is the lack of later stage money willing to fund growth rounds, keeping in mind the timelines needed to bring great businesses in India to scale.
Like this report? Sign up for our daily newsletter to get our top reports.