Investment revolution: Exploring the potential of equity crowdfunding in India

India has emerged as the third-largest ecosystem for startups globally, boasting over 1.1 lakh DPIIT-recognised startups across 760+ districts as of October 2023.

In the next 5-7 years, this number is expected to double, with startups alone contributing to 3-5% of the total GDP. Thanks to significant support from the Government and the Private sector, startups are poised to become main job creators, paving the way for substantial wealth creation in India over the next decade or so.

According to a recent Goldman Sachs report titled 'The Rise of Affluent India,' the number of people with an annual income above $10,000, is projected to reach 100 million by 2027. Additionally, HSBC predicts that India will have more than six million millionaires by 2030.

This kind of exponential growth necessitates comprehensive ecosystem support. The Government should ease regulations wherever possible to fuel the growth and funding for startups. One promising avenue, currently not legal in India, is equity-based crowdfunding, and now is the opportune time for regulators to consider enabling it.

Taking inspiration from the United Kingdom, equity-based crowdfunding has become a prevalent method for SMEs and startups to raise capital. In 2011, crowdfunding platforms were responsible for only eight announced equity fundraisings in the UK.

Fast forward to 2021, and crowdfunders facilitated an impressive 573 rounds, making them the third most active investor type in the UK equity market, behind ‘private equity and venture capital firms’ (1,359) and ‘business angels’ (602).

In absolute terms, the total annual volume of equity-based crowdfunding in the UK grew from under 30 million GBP in 2013 to almost 550 million GBP in 2020, an increase of over 18 times in seven years.

Building a case for India, enabling equity-based crowdfunding at this juncture could be a game-changer, not only for startups but also for MSMEs. With rising incomes, Indians are seeking new investment avenues, while companies can find an additional source of funding to fuel their growth.

Here are some key reasons why now is an opportune moment for India to embrace equity crowdfunding:

Promotion of entrepreneurship and fuelling growth: Equity crowdfunding offers a new avenue for entrepreneurs and startups to raise capital. This democratisation of funding enables a broader range of businesses, including those in the early stages, to access funds without solely relying on traditional financing methods like bank loans or venture capital.

Diversification of investment opportunities: Equity crowdfunding allows a diverse group of investors, including retail investors, to participate in funding startups and small businesses. This diversification spreads the risk, allowing individuals with different risk appetites and investment preferences to invest in a variety of ventures.

Alternate investment opportunity and participation in wealth creation: By allowing a broader range of individuals to invest in startups, equity crowdfunding opens the door to wealth creation beyond current opportunities.

While stocks and mutual funds are currently the preferred investment choices for Indians, crowdfunding enables investors to directly invest in their preferred businesses and companies, potentially generating wealth.

For example, the UK-based crowdfunding platform Crowdcube mentions that 562 investors backed SaaS company Candidate ID in 2019, receiving a healthy 2.17x return just three years later when the company was acquired in 2022.

Job creation and economic growth: Startups and small businesses play a crucial role in job creation and economic growth. Enabling equity crowdfunding can facilitate the growth of these enterprises by providing them with the necessary capital to scale, hire more employees, and contribute to overall economic development.

Increased Investor Confidence: As equity crowdfunding becomes more common and accepted, it can lead to increased investor confidence. Transparent and well-regulated crowdfunding platforms can attract a larger pool of investors, creating a positive feedback loop for the entire investment ecosystem.

Educational Opportunities: The introduction of equity crowdfunding provides an opportunity to educate the public about investment strategies, risk management, and financial literacy. This knowledge can empower individuals to make informed investment decisions, fostering more financially informed citizens.

India stands at the forefront of the global startup ecosystem and the time is ripe to embrace equity-based crowdfunding as a catalyst for unprecedented growth.

With a burgeoning startup landscape and an aspirational population, enabling crowdfunding can not only fuel entrepreneurship but also democratize investment opportunities resulting in equitable wealth creation.

Drawing inspiration from successful models worldwide, particularly in the United Kingdom, India has the potential to ensure economic resilience, and job creation, and foster a more financially informed and inclusive society. As regulatory landscapes evolve and technological advancements pave the way, the introduction of equity crowdfunding stands poised to reshape India's investment landscape for the better.