Looking For Funding?
India has long been seen by entrepreneurs and investors alike as an excellent opportunity from a business perspective, however in the past some investors have held back from doing business in India due to worries over corruption and fraud, therefore some companies have suffered and have not been able to get adequate business funding. Whilst some issues remain, India has moved to the forefront in many market sectors and with foreign investment putting money into businesses in India, the marketplace as a whole has become more professional.
Entrepreneurs looking to start up a business in India have a wealth of opportunities, however to attract business funding there are a few market sectors in India that are more likely to attract investors. If investors believe a business has a better chance of success then of course they are more likely to invest, and if there is already an established track record of businesses operating successfully in a certain sector and market, then it becomes clear business funding is more likely achieved. Whilst investors are always looking for that ‘golden opportunity’, such opportunities are relatively rare and instead they look for companies run by people with a solid track record or following a business plan that is proven.
Entrepreneurs therefore who are looking for business funding and cannot go to the bank for a loan, nor quality for venture capital money would do well to look at the current Indian marketplace and aim to follow the trends of what businesses are successful in India, to help temp an angel investor to invest money into their venture. For example entrepreneurs looking for business funding could explore opportunities in the online marketplace, Software, IT Support, Customer Service or Data Services. Each of these sectors has been successful for entrepreneurs and investors alike and will likely to be so again for other people who are willing to invest in India.
‘Funding’ refers to the money required to start and run a business. It is a financial investment in a company for product development, manufacturing, expansion, sales and marketing, office spaces, and inventory. Many startups choose to not raise funding from third parties and are funded by their founders only (to prevent debts and equity dilution). However, most startups do raise funding, especially as they grow larger and scale their operations. If you are an entrepreneur seeking to understand why funding is needed, types of funding available, and how to raise funding, then read on to find answers to these important questions.
Why is Funding Required?
A startup might require funding for one, a few, or all of the following purposes. It is important that you, as an entrepreneur, are clear about why you are raising funds. You should have a detailed financial and business plan before you approach investors.
- Prototype creation, product development, website/app development
- Team hiring
- Legal and consulting services for your startup
- Raw materials and equipment
- Licenses and certifications.
- Working capital
- Marketing and Sales
- Office space and other admin expenses
Types of Funding
|Characteristics of Investment||Equity Financing||Debt Financing||Grants|
|Nature||There is no component of repayment of the invested funds.||Invested Funds to be repaid within a stipulated time frame with interest||There is no component of repayment of the invested funds|
|Risk||Risk factor for the investor is higher as he has no guarantee against his investment||Risk Factor for the investor is lower as he generally has collateral against his investment||There is no risk factor for the startup as no collateral is involved|
|Pressure for Repayment||Less pressure for startups to adhere to a repayment timeline but added pressure from investors to achieve growth targets||More pressure for startups to adhere to repayment timeline and as a result more pressure to generate cash flows to meet interest repayments||No pressure for repayment as grants are a form of monetary support provided for a specific purpose|
|Return to Investor||Capital growth for investors||Interest payments||No Return|
|Involvement in Decisions||Equity Fund Investors usually prefer to involve themselves in decision making process||Debt Fund have very less involvement in decision making||No direct involvement in decision making|
|Sources||Angel Investors, Self-financing, Family and Friends, Venture Capitalists, Crowd Funding, Incubators/Accelerators||Banks, Non-Banking Financial Institutions, Government Loan Schemes (CGTMSE, Mudra Loan, Standup India)||Central Government, State Governments, Corporate Challenges, Grant Programs of Private Entities|
Stages of Startups and Sources of Funding & Ideation/Pre-Seed Stage
Bootstrapping a startup means growing your business with little or no venture capital or outside investment. It means relying on your own savings and revenue to operate and expand. This is the first recourse for most entrepreneurs as there is no pressure to pay back the funds or dilute control of your startup.
Friends and Family
This is also a commonly utilized channel of funding by entrepreneurs still in the early stages. The major benefit of this source of investment is that there is an inherent level of trust between the entrepreneurs and the investors
Business Plan/Pitching Events
This is the prize money/grants/financial benefits that is provided by institutes or organizations that conduct business plan competitions and challenges. Even though the quantum of money is not generally large, it is usually enough at idea stage. What makes the difference at these events is having a good business plan. Click Here to Access Resources
This is the stage where your startup has a prototype ready and you need to validate the potential demand for your startup’s product/service. This is called conducting a ‘Proof of Concept (PoC)’, after which comes the big market launch. To do this, the startup will need to conduct field trials, test the product on a few potential customers, onboard mentors, and build a formal team. Common funding sources utilized by startups in this stage are:
Incubators are organizations set-up with the specific goal of assisting entrepreneurs with building and launching their startups. Not only do incubators offer a lot of value-added services (office space, utilities, admin & legal assistance, etc.), they often also make grants/debt/equity investments
Government Loan Schemes
The government has initiated a few loan schemes to provide collateral-free debt to aspiring entrepreneurs and help them gain access to low-cost capital. Some such schemes include CGTMSE, MUDRA, and Stand-up India.
Angel investors are individuals who invest their money into high potential startups in return for equity. Reach out to angel networks such as Indian Angel Network, Mumbai Angels, Lead Angels, Chennai Angels, etc. or relevant industrialists for this.
Crowdfunding refers to raising money from a large number of people who each contribute a relatively small amount. This is typically done via online crowdfunding platforms.
Early Traction/Series A Stage
This is the stage where your startup’s products or services have been launched in the market. Key performance indicators such as customer base, revenue, app downloads, etc. become important at this stage. Funds are raised at this stage to further grow user base, product offerings, expand to new geographies, etc. Common funding sources utilized by startups in this stage are:
Venture Capital Funds
Venture capital (VC) funds are professionally managed investment funds that invest exclusively in high-growth startups. Each VC fund has its own investment thesis – preferred sectors, stage of startup, and funding amount – which should align with your startup. VCs take startup equity in return for their investments and actively engage in mentorship of their investee startups.
Formal debt can be raised from banks and NBFCs at this stage as the startup can show market traction and revenue to validate their ability to finance interest payment obligations. This is especially applicable for working capital. Some entrepreneurs might prefer debt over equity as they debt funding does not dilute equity stake
Venture Debt Funds
Venture Debt funds are private investment funds that invest money in startups primarily in the form of debt. Debt funds typically invest along with an angel or VC round.
To decrease the financing concerns faced by MSMEs in India, RBI introduced the concept of TReDS in 2014, an institutional mechanism for financing trade receivables on a secure digital platform. Trade Receivable Exchanges such as M1xchange, standardizes the process of funding MSMEs via Invoice Discounting. TReDS addresses the gaps in MSME industry as enterprises face challenges in getting their payments on time, thus creating working capital discrepancies. TReDS is a timely and effective solution to drive the MSME sector to the next phase of Indian economy.
Scaling/Series B & Above Stage
At this stage, the startup is experiencing fast rate of market growth and increasing revenues. Common funding sources utilized by startups in this stage are:
Venture Capital Funds
VC funds with larger ticket size in their investment thesis provide funding for late stage startups. It is recommended to approach these funds only after the startup has generated significant market traction. A pool of VCs may come together and fund a startup as well.
Private Equity/Investment Firms
Private equity/Investment firms generally do not fund startups however, lately some private equity and investment firms have been providing funds for fast-growing late-stage startups who have maintained a consistent growth record.
Startup India – State Policies
There are various initiatives by the respective states that are taken to help accelerate the growth of startups in various states. They proactively work towards helping the startups and the entrepreneurs in their ventures by giving them relaxation in building Angel Network, State funded grants, Matching Loans, Success Fee for fundraising. Various initiatives have been taken by States like Karnataka for setting up Idea2POC and Rajasthan for setting up Istart etc. The following are some initiatives by the states:
Government of Karnataka provides seed funding under the ‘Idea2PoC’ scheme of Startup Policy of Karnataka 2015-20. Idea2POC is given in the form of Grant-in-aid but limited to a one-time grant of up to INR 50 lakhs. Aspiring entrepreneurs can apply for the scheme incentive during call for proposal through an online portal. The website also mentions the required eligibility criteria.
State Government provides seed funding to startups in the form of Sustenance Allowance, Product Development Assistance and Marketing Assistance. An amount of INR 10 Lacs is provided as seed funding
Jammu and Kashmir
Government of J&K has launched Seed Capital Fund Scheme under which Seed Money up to maximum INR 10 Lacs the project cost is provided to eligible prospective entrepreneurs to kickstart their ventures
Government of Rajasthan provides seed funding in form of monthly sustenance allowance under the ‘Assistance for Startup at Idea or prototype stage’ of Rajasthan Startup Policy 2015. All eligible startups can apply for seed funding through their iStart Startup dashboard.