Latest Kleeto News
Jan 14, 2016
Most crowdfunding platforms have a minimum investment threshold starting at Rs 5–10 lakh. Upper limits in investments are set by the companies raising funds. 14 January 2016, 10:26 AM IST Follow ETtech Share 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. 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. Grex plays the unbiased role of an exchange; it does not concern itself with scrutinising the quality of companies. The due diligence process is a little different with Let'sVenture and Equity Crest. They say they have a more elaborate 'curation' process prior to showcasing the company to prospective investors. Companies can list on the website, but to raise money, they have to undergo a qualitative due diligence process which includes different levels of product, process and revenue validation. "We need to know how genuine and viable the business is before inviting investors to have a look at it. We also check the credentials of investors before getting them on board the platform," says Shanti Mohan, CEO, Let'sVenture. "Once our explanatory decks (prepared for the company) are ready, we start offline and online engagement with potential investors. We've 1,300 investors from over 23 countries. " Indian crowdfunding platforms, on an average, take 3-4 weeks to raise money. In cases involving large equity placements (to raise Rs 6 to 8 crore) the fund-raising schedule was extended by a few more weeks. "We were just six months old when we raised our first round of funding (about Rs 65 lakh). We raised the amount in three week," says Able Joseph, founder of matchmaking portal Aisle. "Crowdfunding platforms are good for entrepreneurs who are unable to network for funding. What you're essentially doing is entrusting the work of finding suitable investors with the platform; they also take care of cumbersome paperwork. " Most crowdfunding platforms have a minimum investment threshold starting at Rs 5-10 lakh. Upper limits in investments are set by the companies raising funds. "It's not difficult to find startup investors, but finding good investors is a problem. We try to address this issue using the platform," says Durai of Termsheet, adding, "It's like match-making... and we'd never want to do bad match-making. " Sticky Assets Investments in startups are hardly liquid in nature. An equity buyback by promoters or a venture capital buyout are the typical routes available for investors to redeem their investments. To circumvent this handicap, crowdfunding platforms like Grex plan to append secondary market infrastructure to their existing portal framework. This will facilitate trading in start-up securities (the rub is this may take a lot of time to fructify). Grex, for example, has tied up with CDSL and Orbis for depository and custodian services and Link Intime as registrar and transfer agents. "Trading is complex; we're trying to cover all facets before actually starting secondary trading of start-up securities. Firstly, we need more listings on the platform," says Kumar. But Amit Banka, founder of Equity Crest, says secondary trading is tricky as this segment is not regulated well. "Also, from a secondary deal point of view, a company has to do very well. If a company is doing well, it'll always find buyers regardless of the presence of a secondary market. If a company is not, it'll not find buyers even in the secondary market. " Even so, after raising money on the platform, companies are free to raise further capital from other sources. The agreement lays out conditions for further equity dilution and capital raising. In normal course, equity holdings of all existing shareholders are diluted in further rounds. This means a 'pari-passu charge' is created on all existing shareholders. "The future of equity crowdfunding is bright," says Banka. But equity crowdfunding platforms are coming up at a time when capital market regulator Sebi has turned its gaze on the segment. Sebi has set up a committee, headed by Infosys founder NR Narayana Murthy, to frame rules, recommend ways to smoothen investments and also suggest legal changes, including those related to taxation. "There're some regulatory tangles here... but as per current regulations, it is acceptable to make equity placements to restricted audience - which is the case with equity crowdfunding platforms," says Sandeep Parekh, former executive director of Sebi and founder of Finsec Law Advisors. "At no point, can they sell these securities to general retail investors; in that case, it may violate 'collective investment scheme' provisions. It is kosher as long as these platforms make placements to select, well-informed rich investors. " As startup investing is fraught with risk, experts advise investors should tread carefully, even if they are picking firms off an online platform.