Sunday, 21 February 2016 11:57

Why startups are now turning to crowdfunding platforms like Grex and Equity Crest to raise money Featured

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A year ago, Sunil Mahajan, CEO of Kleeto, approached a few seed funds and venture capitalists to raise working capital for the record management solutions company. Forget funding, many of them did not even give Mahajan a patient hearing.

Kleeto faced an unusual problem — its capital requirement was very small. That made it a pariah for the investors it contacted. The investors were besotted with ecommerce startups, which required bigger capital and ergo, represented bigger ambitions and bigger markets, although they carried bigger risks. "VC funds had no appetite to invest in B-to-B profile like ours," says Mahajan.

Mahajan had many fruitless meetings with investors for several months. Then one day, he was introduced to Grex Alternative Investments Market (Grex), a newly launched exchange-like platform.

Platforms like Grex help startup companies to raise funds from multiple investors. On the face of it, they are similar to crowdfunding platforms that help companies raise money — often small amounts — from the public for a definite purpose. But there are a few key differences. Startup platforms charge a commission from the company raising capital. In the case of normal crowdfunding, investors do not expect any return from their investments. In startup crowdfunding, investors expect dizzy returns from their investments.

The number of investors would be limited in startup crowdfunding whereas in normal crowdfunding, investors would number hundreds, if not thousands. Last but not the least, startups usually dilute their stake in favour of investors when they raise money through crowdfunding platforms. Hence, the name equity crowdfunding After several rounds of discussions, Mahajan agreed to list Kleeto on the Grex platform. The fundraising was a breeze. Kleeto raised Rs 1.5 crore (with 10% oversubscription) from 13 investors in 12 days. The company had to dilute 4.8% to raise the desired amount. Kleeto was also the first company to collect money on the Grex platform. "It was not easy convincing the Kleeto management to list on Grex," says Manish Kumar, founder-CEO of GREX.

Equity funding through online platforms has become the newest channel for start-up companies to raise working capital. In recent months, a bunch of crowdfunding platforms such as Let'sVenture, Termsheet, Equity Crest and Grex have sprouted, helping startups catering to businesses as diverse as energy companies and matchmaking platforms, robotics and art, among others. These platforms have completed nearly 60 early-stage fund raising deals, each ranging between Rs 25 lakh and Rs 6 crore till date.

Many of these platforms are modelled on the lines of western gateways such as AngelList, Seedrs, RockThePost and Indiegogo and run on a similar exterior framework, but they have different approaches to listing companies and drumming up funds from investors. "Investors in developed market put their money in startups to own a prospective break-out business. In India, we only have investors who want to make some good returns. So platforms are structured in a way to include only businesses with high growth possibilities," said the CEO of a crowdfunding platform, requesting anonymity.

Platforms like AngelList have started 'syndicates' to hand-hold new investors. Syndicates are robust start-up investors who assist (and even co-invest with) newer investors. For their services, syndicate leaders get a share in investment gains made by a new investor. "Syndicate investment options may take time as there are not many credible start-up investors in India," says Vivek Durai, founder of Chennaibased Termsheet, an equity crowdfunding platform Early Worms Equity crowdfunding happens early in the life of startups. Often, it could be even before the launch of a company's products or services. But most crowdfunding platforms need a concrete business proposal — a basic idea will not suffice — or see the product to support the entrepreneur's claims. "We need to have some idea about their product before clearing their business proposal. They've to show us what their product is," says Durai. "Once we like the product and the business idea, we visit the facility. Only after these checks, we showcase the company to potential investors." Grex has empanelled 'sponsors' who hand-hold companies to list on the exchange. Sponsors perform the duties of a normal merchant banker — right from pre-issue due diligence to parading the company before prospective investors.

Read 453 times Last modified on Sunday, 21 February 2016 12:07
Brian Cohen

Brian is the Chief Editor at fundedflow