Crowdfunding – a boon or bane

According to SEBI, Crowdfunding shall be defined as solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.

SEBI is currently in the process of establishing regulations on crowdfunding. Once this picks up, it will be a boon to the SME/early-stage startups to raise funds from small-time investors.

Types of crowdfunding:

  1. Social/Donation crowdfunding
  2. Reward crowdfunding
  3. Peer – to – peer lending
  4. Equity crowdfunding

The first two shall be social funding and last two shall be financial return funding.

Social media is going to play a pivotal role in this crowdfunding and it is going to be a new stream of revenue for them by acting as a facilitator between the investor/lender and issuer/borrower. With the recent initiatives by the Indian government through Digital India programme, a substantial amount of Indian population will be brought into the world of internet.

Already many crowdfunding platforms such as Faircent, Lendbox, i-Lend have started to emerge in India primarily in the area of peer-to-peer lending. However, it is yet to pick up pace in India as these platforms are awaiting for regulations from government agencies such as RBI, SEBI, Income tax, etc.

It is good to view the crowdfunding from a positive angle, however the crowdfunding platform, if not properly regulated shall lead to a market for illegal/unlawful activities. This will force government agencies such as SEBI, RBI, Income tax, etc to impose a lot restrictions/checks to bring in accountability.

 

Benefits of crowdfunding:

  1. Helps SME/early -stage startups to raise funds from investors.
  2. Low cost of capital compared to unsecured lending from banks/financial institutions.
  • Investors are provided with a new avenue from investment.
  1. Crowdfunding platforms shall perform the necessary due diligence to safeguard interest of the investors.

Risks of crowdfunding:

  1. Trust issues: Issuers/Borrowers should convince the investors about the investment viability in order to procure funds from the lenders/investors.
  2. Conservative investors: Risk appetite level of individual investors are substantially low compared to that of VCs’ and PEs’. In India, the mentality of the population, in general, is to invest in instruments with a low level of risk. This is the reason for higher interest rates in India for savings/fixed deposits compared to that of interest rates in developed countries.
  • Laundering: The biggest risk in crowdfunding is the risk of money laundering. SEBI would never want another SAHARA case to deal with.
  1. Risk of default/fraud: The primary concern of SEBI is to protect the interest of investors. There will be no or less recourse to the investors in case of default by issuers/borrowers. In a case of VC/PE funding, the concerned VC/PE shall appoint top-level finance professionals to perform a due diligence of the issuer/borrower in order to assess the risk of investment. However, in the case of crowdfunding, the platform shall be responsible to perform the necessary due-diligence. The dependability on the platform becomes higher and the equivalent risk is also really high.
  2. Cost of compliance: SEBI, in order to mitigate the risks, shall be forced to come up with a lot of documentation formalities to be complied with by the issuer/borrower. Presently, if a Company plans to go for listing, the average period for preparing the necessary documentation shall be 6-8 months and related cost shall range from 50-75 lakhs depending on the amount of issue. SME/early-stage start-ups definitely cannot afford for this.

SEBI is forced to come up with a rigid as well as issuer-friendly regulations in order to source funds from the open market.

Other government agencies such as RBI, Income tax, etc are studying about the crowdfunding and shall soon come up with their own set of regulations.

Conclusion:

Crowdfunding is a break- through for the SME/early-stage startups, especially the bootstrapped ones, to source funds from the market. However, practical and legal issues involved in opening up a new market, shall force the government agencies to come up with a lot of regulations to be complied by the issuer/borrower which shall directly lead to SMEs’/early-stage startups backing out from the idea of crowdsourcing.

Making the crowdsourcing a reality, is a long road ahead.

 

This article was published in yourstory.com.

Budget Highlights 2016

QED Budget highlights 2016   (Click on the link to view the document)

The Indian Government had announced its fiscal budget for the 2016-17 on 29th February 2016. We are pleased to share with you some of the highlights of the budget in the attached document.

This Budget contains a number of tax proposals for providing relief to small taxpayers, incentivizing domestic value addition, encouraging startup and increasing their attractiveness for investment, to boost growth and employment generation, reducing litigation and providing certainty, and for simplification and rationalization of taxation. There are no drastic announcements made in this budget, however this budget has been aligned with the Central Government’s Make in India and Startup India campaigns.

Accelerating investments in infrastructure i.e hard infrastructure and soft infrastructure, stands out as a key priority for the budget. This is also a critical enabler for ease of doing business. Steps have been taken to improve the ease of doing business by making legislations business-friendly and also to make the business environment for start-ups more conducive. It proposes to enable registration of companies in a single day.

The budget is, overall, in the right direction insofar as ease of doing business is concerned. However, it is not an issue that can be resolved in a single budget or through a single action, but is a process and a journey to which this budget contributes significantly

We have put in our best efforts to bring in the key proposals for your attention through this document. I am hopeful that this document serves its purpose.

 

A must-read for every venture wanting to raise funds.

Every startup has to invest a lot of time and effort to raise money to scale and keep the business going. All the effort and time invested, could be for nought, if, one very important, but oft under-estimated aspect is ignored.

That, is the compliance and regulatory health of any start-up. It includes everything from the start-up’s incorporation certificate to intellectual property rights.

Every VC/Angel investor, before pumping in their money, will perform a due-diligence process. This process varies in tenure and complexity based on the industry, nature of transaction and also the stage of investment. Any deal is successfully closed, only after satisfactory-completion of due-diligence, failing which, the deal drops dead. Sometimes, they get a legal opinion, before proceeding.

In venture financing, legal opinion is primarily intended to provide the investors with comfort that the records and procedures relating to the company’s formation, corporate governance, continued existence and capitalization, are not only in order but it also has the legal authority to enter into, the subject investment, without any potential legal issues.

One cannot fault a VC/Angels/PE, for being too finicky about due-diligence, for it is usually the minor details that make or break a deal.

Many start-up entrepreneurs moan about, how all these rules and regulations are destroying the zeal of running a business. True as that may be, adherence to processes and procedures, not only impresses an investor, but also has a bearing on the valuation of the enterprise, thereby netting the promoter and the company, much more than what they would have spent on compliance and normalising such issues.

Nevertheless, these are very procedural tasks, involving regulatory compliances, and therefore, not to be chanced with. Well, atleast if you want your start-up to focus on business and not on legal issues.

It is here, where most Indian start-ups fail to grasp the notion of experts/professionals. Get your infrastructure and compliances in place before hitting the road for fund-raising. Any expansion/scaling up will spectacularly collapse, if basic compliances are not ensured, as it could lead to a vicious circle of legal issues due to non-conformity. All this could result in the promoters spending more time and resources on rectifying this, rather than on core operations.

Understand this. Your pitch is a one-shot opportunity, and it doesn’t make sense when it gets rejected over non-operational issues. Grab the opportunity and deal with the relevant issues accordingly. Accord the respect, that these regulations deserve. Even grudgingly, is just fine.

Better to be safe, than sorry.

Here are a few points for start-ups to focus on, when setting their house in order:

  • Incorporation (legalisation): The most basic mistake that most entrepreneurs commit, is their failure to corporatize or legalise their entity, and, as a result, lose the advantage of ring-fencing themselves with an artificial-legal entity. Failure to do this, has been the bane and downfall of many a start-up. A legal entity, not only adds professionalism to the start-up, but also provides a sense of confidence to the other transacting party.

 

  • Revenue Registration/Dues: The one thing that every person hates more than Justin Bieber music; Tax. Yes, that obligation to pay the government whenever due, no matter what. No school-time leave letter – esque excuses allowed.

This also stretches to Provident Fund(PF) Compliance, Service Tax (ST), VAT (Value-Added-Tax) etc. So, naturally, it is prudent that start-ups get their revenue registrations in place first, as even non-filing/registration, attracts the long arm of the law.

  • Founders Agreement : If it isn’t complete lack of knowledge of corporate law, that does it in, for start-ups, then it’s the founders themselves. No one remembers what they have typed in their mail the previous night, let alone verbal agreements, that are the norm during the start-up phase. Putting things in words, is not a reflection of lack of trust, its just prudence.

 

Think of it as a pre-nuptial agreement. You don’t want to be the Winklevoss twins or Divya Narendra, do you?

 

  • Legal issues : No matter how frivolous, real or imaginary; all it requires to scare away potential investors, is to utter “lawsuit”. Every legal case is unique and a legal advisor is a must; even more vital, in cases, where it involves Intellectual Property and Complex agreements and contracts. It is better to tackle all outstanding issues head on, rather than soft-pedalling, and, inadvertently becoming targets for litigation-sharks.

Let your legal health do the talking, rather than trying to convince someone to put their money in a place, which is replete with legal landmines.

  • Organisation: You have incorporated your start-up, your composition is still skeletal and you are the PA, MD, Courier Boy and what not. Nevertheless, start implementing basic forms of corporate governance. Start-up, as a mentality, or, attitude always drives a person; but as a form of working, i.e, without organisation, can only drive you nuts. Start striving to put relevant processes, procedures etc., in place from the moment you set up shop.

 

  • Accounting: You might look presentable, smart, and heck, you could even have Mila Kunis as your brand ambassador, but, when your numbers start to resemble the mess they are, its your accountant, who starts looking more like Mila Kunis. Pull up your socks, and, start keeping account of all your income and expenditure. Maintain Income and Expenditure statement, P&L Accounts, other Financial statements.

 

If it is eating too much of your time, and weaning you away from core business-building activities, outsource it to someone who does it professionally. Its prudent to keep a professional by your side. Don’t crib over the costs involved. One, it is never as expensive as it is made out to be, and you are as important to them, as they are to you. Two, you just spent three-grand on that Manchester-United jersey. So, don’t crib.

  • Employee Agreements: Every employee who works, must be contracted, with basic clauses to protect the interests of both the parties. Also, records of past employees to be maintained. Basic compliances like Labour law, PF etc., to be met.

No investor/country, looks kindly at a start-up with labour issues. No matter how big or how small the violation might be, the first thing that crops when, they hear of any labour violation, is something akin to child labour. So don’t take this lightly. You have been warned. Don’t forget, you are an employee too.

  • Intellectual Property: Ok , if its not enough dealing with the various arms of the government, you also have to deal with Intellectual property asap. Ownership of Intellectual Property , including non-exclusive licenses, infringement, inappropriate use and potential action, have to be dealt and agreed upon.

The only bankable asset in every tech start up is its Intellectual Property. Any minor issues on this front, is more than enough to scare off your investors.

  • Third-party Agreements: The same rules apply for every third-party that transacts with the enterprise. Vendors, Associates, Affiliates, Contractors and other other partners need to sign proper agreements, with non-disclosures, how the relationship is defined, responsibilities, and IP assignment.

 

  • Previous fundraising documents:If you have already raised funds, then future investors would like to know the details of fundraising, utilisation, its impact etc.,. Better put these in order, so they can understand them thoroughly.

 

The above list reflects nothing more than a scratch on the surface, compared to what a deep and thorough due-diligence would encompass. These are some of the issues that you can take care of yourself, or, by roping in some experts, rather than waiting for due-diligence to pick up these issues, and act upon it then. It is better to have all these issues sorted before you pitch, than having all these on the plate, and trying to convince your investors to look past them.

If you are an entrepreneur, it makes sense to de-risk, whenever and wherever possible, right?. Then, start it with your start-up.

Never forget, that the importance of a corporate entity, with its house in order, is never underestimated.

Q.E.D – It means money.