Introduction to Equity Crowdfunding

Raising capital from Venture Capital funds and angel investors has always been a daunting task. A vast majority of pitch decks sent to them are never even opened. Unless you have a mutual connection, chances that the investor will go through your startup details are minimal. Most early-stage startup founders thus struggle to raise external funds and are forced to close down soon after they run out of bootstrapped capital. Raising funds through debt is an option but has multiple issues, including non-compliance with Sharia laws and huge repayment liability on the founders in case of startup failure.

Fortunately, there is another great way for startups to raise funding. Equity Crowdfunding is a method of fundraising in which the startup receives funds in return for equity (or shares) just like VC/angel fundraising. However, instead of one (or few) people or organizations providing the funding, a large group of people (the crowd) provide that funding. This process of matching startups and individual investors is facilitated through an online platform (like Mekyal Financial Technologies, for instance).

Equity crowdfunding is a win-win for both parties. Early-stage startups increase their chances of fundraising. Unlike debt, the investors hold a portion of the company and bear the risks of failure proportionally. It enables startups to raise large amounts of money without any security/collateral. Equity crowdfunding also lets startups validate their business model and provides them with free brand ambassadors for marketing their startup.  

On the other hand, equity crowdfunding opens a high-risk high-return asset class of private equity previously reserved only for institutional investors and large angels. Investors need not make large bets on a few startups. Instead, they can make tiny bets on many startups, thus diversifying the risk and increasing the probability of handsome investment returns.

Last but not the least, equity crowdfunding in principle is Sharia-compliant as investors purchase a share in the company, participating in gains and losses.

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