This deluge has lasted several years, but no one’s complaining. It has been raining startups in India for the past 3-4 years and has swept away all divides. From bubbling graduates to brainy professionals, from salaried staffers to sparkling housewives, in metros and small towns, all are hopping on to the idea bandwagon. There seems to be no venture too wacky, no business plan too flaky to succeed. In fact, India ranks fifth in the world in terms of startups, with nearly 3,100 currently in operation. “ India is seeing high quality of entrepreneurs giving up large opportunity costs and it has never been witnessed before. This, combined with the Internet growth story, makes it a very attractive investment market,” says Gopal Modi, President, Investments, Orios Venture Partners.
In tandem with the surging enterprise, funds are flowing in like never before and the country is buzzing with options—venture capitalists, angel investors, incubators and banks. Currently, the number of active investors in the country include 172 VCs, 43 angel investors and 48 incubators. As much as $4.75 billion of VC funding came through in 2014 and it has already touched $3.18 billion in 2015. Flipkart made the biggest splash with its two rounds of $1.7 billion funding, the highest in 2014, according to Venture Intelligence and Tracxn!, two of the VC tracking firms.
The business environment is also turning more conducive, with the government setting up the MUDRA Bank, which offers a corpus of Rs 20,000 crore for small and medium enterprises. Besides, various banks and finance companies have stepped up to encourage the trend.
If this has got you fired up to launch your own enterprise, hold on. Stories abound of individuals who have raised millions of dollars with merely ideas and passion as collateral, but these often overshadow the struggle, sweat and tough negotiations that go into soliciting funds. Without a feasible business plan and working model, it is not easy to secure capital. Even if you do, keeping the venture afloat is difficult. A good start does translate into half the work done, but how do you go about securing the much-needed funds?
In the following pages, we shall list six options that you can tap to get money for your venture. We will not only explain what these are, how you can explore these depending on your startup’s growth stage, but also list the pros and cons of each option. Pick the one that suits your needs the most.
INCUBATORS & ACCELERATORS
As the name suggests, these setups incubate the pre-product idea. They precede the seed funding stage and help the entrepreneur develop a business idea or make a prototype by providing resources and services in exchange for an equity stake, which ranges from 2-10%. For entrepreneurs, this is a good take-off point because the survival rate of incubated companies is very high.
Incubators offer office space, administrative support, legal compliances, management training, mentoring and access to industry experts as well as to funding through angel investors or VCs. “Barring a few incubators, most don’t offer funding, but make up for it by providing the entire logistics and external support so that the entrepreneur can focus on actual work without worrying about the nitty-gritty,” says Devashish Chakravarty, an IIM-Ahmedabad alumnus, and Director, Executive Search, QuezX.com, which provides recruitment for startups.
These are usually government-supported institutes like the IIMs or IITs, technical institutes or private business incubators run by industry veterans or companies. The incubation period can be 2-3 years and admission is rigorous. One has to provide an application to such programmes and is accepted depending on the quality or feasibility of the idea, or other conditions specific to the institute.
The accelerators are mostly similar to incubators, but differ in that they help speed up and hone the business idea in short spans of 2-3 months. The focus is on intense mentoring, networking and building contacts, getting more investors, and helping with product development and marketing. The admission process is also tougher and more competitive.
Some of the top incubators and accelerators in India include GINSERV, IIM-Bangalore, NSRCEL, Microsoft Accelerator, IIT-Kanpur SIIC, etc.
ADVANTAGES
It offers quality advice and training, facilitates funding and ensures a high survival rate for startups after receiving funds.
LIMITATIONS
The startup often does not have much control over the VC or angel funding since incubators oversee the investors they meet.
How to avoid funding rejections
Despite the deluge of online advice on securing funding for a startup, many entrepreneurs falter at the first step. Their ill-planned and half-baked approach gets them instant rejections. Follow these steps to ensure you don’t fail.
LOCATION
Getting funds from across the country is easy, but pay attention to proximity. Once you start operations, it will be easier for a local investor to monitor and add value, especially in the early stages.
INDUSTRY PREFERENCE
While shortlisting VCs or angel investors, find out their area of expertise or preference. It will not help if they favour funding biotechnology ventures and you are pitching a travel app.
FUNDING STAGE
There are firms that provide funds only for a specific stage of a startup, be it the seed stage, growth phase or late stage development. So if you approach a VC, who backs a late-stage venture, when you require seed funding, a rejection is guaranteed.
FUND LIMIT
Individual investors or VCs may have caps or limits for funding. If you are looking for a bigger sum, putting in the effort to contact an angel with a low funding limit will be futile. So check for a funding match.
RESEARCH
When you have zeroed in on a few firms, make sure you know everything about them—track record, promoters’ past, firms they have funded. Talk to people in the industry, check the Internet, scan their brochures.
HOW TO CONTACT
Seek an introduction via a credible intermediary, be it an entrepreneur they have funded, a reknowned professional who is a common acquaintance or former professors. Make sure you provide a proper briefing to the person.
BUSINESS PLAN
This is the most critical step as investors get thousands of plans and rejection rate is high. So make a concise, error-free plan. List the idea, product, its growth potential, USP, existing market dynamics, team members and their calibre, completed product and beta customers.
PREPARE FOR MEETING
If your plan passes muster and a meeting is set up, be prepared to answer all questions. Be precise, sure and ready to cover any aspect the investor may want to discuss.
ANGEL INVESTORS
The first stage of actual funding to get your idea off the workshop and into the market is called seed funding. The funds for this stage are usually secured by entrepreneurs from their own savings or loans from family and friends. However, if you don’t have enough money, you can get it from other sources like angel investors or crowdfunding since not many investors and venture capitalists are willing to fund a concept that has not acquired critical mass or traction. Once it gains a semblance of market or customer base, you can approach VCs or banks for scaling up and expansion.
Angel investors are usually individuals or a group of industry professionals who are willing to fund your venture in return for an equity stake. The amounts can range from Rs 5 lakh to Rs 3 crore and are not as high as those provided by venture capitalists since the risk level at this stage is high.
Ankur Pegu and Sundeep Kapila of Mumbai-based healthcare startup, Swasth India, got their first external funding of Rs 2 crore from Ratan Tata via his firm, RNT Associates, last year. They founded the startup in 2008 and used their own savings till 2012, then borrowed from friends and family, and finally secured funding from Tata.
Angels invest in individuals rather than ideas and the approach to them could be very similar to that of family and friends. “While they are keen on returns, they are mainly looking to protect their capital. If you are able to do that, they are happy,” says Pegu.
“Team, timing and potential market size are the three key things I look at in startups. The idea should be well-timed to take advantage of the ecosystem,” says Anupam Mittal, among the top 10 angel investors in India. Other investors want to know whether the founders have the resilience, longevity and flexibility. “Be clear about the quantum of money you require, the returns you can offer, and indicate the exit route you can provide to investors, be it in the form of IPO or secondary sale,” says Pegu.
You also need to research and tap the angels who are active in your sector. “Some may be active in technology and others in travel or food. Not everyone spreads investments across multiple sectors. You can get in touch through your network for family, friends and colleagues. There are also angel networks across cities and curation platforms like ours,” says Amit Banka, founder of Equity Crest, which helps entrepreneurs connect with investors. The top angels in India include Rajan Anandan, Indian Angel Network, K. Ganesh, among others.
ADVANTAGES
You are more likely to get funds from angel investors than VCs.They can be more flexible about your business plans and can offer better mentoring and advice.
LIMITATIONS
You have to constantly make efforts to protect capital, which may cap the risks you can take. You also need to offer a clear exit route, which can create uncertainty during bad phases.
CROWDFUNDING
This is another and, among the more recent, ways of getting seed funding. It has been used effectively by NGOs to raise donations through social media and is now helping entrepreneurs. Simply put, it is the practice of raising capital through small amounts from a large number of people, usually through the Internet. The entrepreneur can get money for his venture by showcasing his idea before the entire world and convincing people of its utility and success.
These platforms, which also boast star investors and celebrities, can put those who do not move in influential circles or belong to the exclusive IIT/IIM clubs in touch with investors willing to fund their ideas. Wishberry. in and Catapooolt are among such forums that have sprung up in recent years in India.
One of the best crowdfunding success stories is that of Rohildev, founder and CEO of RHLvision Technologies, a company he founded in 2012 as a student of engineering, in Kerala. For his Bluetooth ring, Fin, he managed to raise $2 million in 60 days, through 1,600 investors from 60-70 countries, on Indiegogo, a US-based crowdfunding platform that allows companies registered in any country to raise funds.
The entrepreneur needs to put up on a portal his profile and presentation, which should include the business idea, its impact, and the rewards and returns for investors. It should be supported by suitable images and videos of the project. The bottom line is that it should be convincing enough to draw investors, whether it is due to the returns it offers, the greater good promised or the sheer, dazzling creativity of the project.
However, it’s not always a simple process of loading a video on a portal. It takes prior efforts to send out mailers, contact the media dia and generate awareness about the idea. Also, if your idea is complicated and only for a niche audience, this mode of funding will not work for you.
“The biggest problem with crowdfunding is that of regulation,” says QuezX’s Chakravarty. “If you are a private limited company, the number of members or investors can only go up to 200. If you exceed this number, you turn into a limited company and the compliance and paperwork that this entails can be dauntingly cumbersome. The second issue is regarding the permission and compliance you need from all investors for every subsequent stage of funding that you will require. This can be extremely tedious for a startup,” he adds.
ADVANTAGES
A quick source of raising funds, it helps entrepreneurs overcome the lack of network of friends or batchmates. Moreover, it is simpler than other fund-raising options and could cut down on paperwork and numerous meetings.
LIMITATIONS
It is not a simple question of submitting the proposal and getting funds. Startups need to carefully verify the websites where they can put up their requests since not all may be reliable. Likewise, they need to be cautious while accepting funds from investors and check their sources of funding.
VENTURE CAPITALISTS
After the initial seed-funding stage comes expansion and growth of the venture, which requires big money. This is where venture capitalists come in, offering anywhere from Rs 1-300 crore in exchange for a high equity stake. A type of private equity, it is one of the most highprofile and popular sources of funding for mid- to late-stage startups and has been in the news after big-ticket deals for Flipkart, Snapdeal and Ola.
Given the scale of funds, it is not easy to secure these and entrepreneurs need to make elaborate preparations before approaching the VCs. “They should get some fundamentals in place,” says Modi of Orios Venture Partners. “This includes the right team mix, strong product backed by technology, and proven traction, especially in the case of new ideas where there are no proven models globally,” he adds.
Sulakshan Kumar and Sitakanta Ray, cofounders of price comparison e-commerce portal, MySmartPrice, got the pitch right since they managed to raise Rs 2 crore in 2011 and Rs 6 crore from Helion Ventures and Accel India in December 2013. “We zeroed in on top 7-8 VCs and finally approached Helion and Accel as they had invested in this industry,” says Kumar. “Also, we had a base of 2 million users when we made the pitch. Nobody funds ideas, so you should have something to show, either traffic or revenue,” he adds. One also needs to present the current state of the company and team, as well as business plans for the next couple of years.
As for approaching the VC, you can start by seeking an introduction through fellow entrepreneurs who may have received funding from them. “You could send e-mails, but a facilitator’s introduction is better as it will ensure a response,” says Kumar. Adds Modi: “Approaching through known networks like existing entrepreneurs always works in their favour. VC funds are more receptive to those referred by other successful entrepreneurs.
Startups usually skip the validation process by angels and incubators and approach VCs for small funding, so they are rejected.” When you finally meet the potential investors, be prepared to answer several questions. “What they are looking for is a clear vision for your company. They could ask you for a demonstration of your product as well,” says Kumar.
Also, remember that after the funds have been raised, you will need to stay focused. “It is important to remain equally committed to the business, innovate and evolve constantly, be alert to grasp new opportunities, adapt to changing environment and be open to communication,” says Banka of Equity Crest.
ADVANTAGES
It ensures instant recognition for the firm. Besides, the backing of well-known VCs lends credibility and helps in attracting talent.
LIMITATIONS
You can gain access to this avenue after you have put your ideas into action. Till then, you may have to fund ideas on your own. Those planning to start ventures while continuing with a job may find it difficult to raise funds through this route.
CGTMSE LOANS
CREDIT GUARANTEE TRUST FOR MICRO AND SMALL ENTERPRISES
The paperwork and delays associated with seeking loans from banks or through central government schemes often turn off the grittiest of entrepreneurs. However, under the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme, meant to encourage entrepreneurs, one can get loans of up to Rs 1 crore without collateral or surety.
This is the reason Fizzy Foodlabs cofounders— Nipun Katyal, Manish Tirthani and Varun Jhawar—approached Dena Bank for a loan under the scheme two years ago.
For their ready-to-cook global cuisine venture under the brand, Chef’s Basket, the IITBombay graduates started with a seed fund of Rs 15 lakh from their own savings, while another Rs 50 lakh came from friends. “However, in the FMCG space, working capital is a big requirement. We did not want to take risky capital and, hence, went for the `1 crore CGTMSE loan that was offered at 14% interest,” says Katyal.
After submitting the project report, the bank got in touch with them for a few rounds of queries and inspection, after which the loan was approved. Any new and existing micro and small enterprise can take the loan under the scheme from all scheduled commercial banks and specified Regional Rural Banks, NSIC, NEDFi, and SIDBI, which have entered into an agreement with the Trust.
ADVANTAGES
It is a simpler route for entrepreneurs who may not boast a good network of friends or the IIT/IIM pedigree to tap VC funding. The loan is offered without collateral, so it is easier for the service sector startups to borrow.
LIMITATIONS
Paperwork and time-consuming process could be a challenge. The maximum loan is Rs 1 crore, so its use could be limited to working capital.
NEW SEBI NORMS: HOW STARTUPS BENEFIT
WHAT’S NEW
A dedicated Institutional Trading Platform (ITP) will be set up on domestic stock exchanges to list startups from new sectors.
WHY IS IT GOOD?
In the absence of such facility, the startups had to move overseas to list themselves on stock exchanges. Now they can raise capital and list in India itself.
WHAT’S NEW
The Application Supported by Blocked Amount (ASBA) will be applicable to all investor categories and IPOs.
WHY IS IT GOOD?
With the increase in bank branches with ASBA facility, all applications can be supported by ASBA. This means investors won’t suffer loss of interest and refund will not be a problem.
WHAT’S NEW
Rs 10 lakh will be the minimum investment required for startups and small retailers will not be able to invest.
WHY IS IT GOOD?
Startups don’t have a profitability track record and investing in them entails risk. Also, small investors may not be able to understand the business models.
WHAT’S NEW
Six months will be the new minimum lock-in period for promoters and prelisting investors, cut from three years.
WHY IS IT GOOD?
This has been relaxed as there is no promoter concept in startups.
WHAT’S NEW
Relaxation in provisions related to disclosures and allocation.
WHY IS IT GOOD?
It will move the IPO process closer to global standards and help firms consider an India listing over international listing.
WHAT’S NEW
Startups can list within six days of IPO, instead of 12 days earlier.
WHY IS IT GOOD?
The funds will not remain locked in for a longer period and help reduce the costs associated with the public offering.
BANKS & NBFCs
While VC and angel funding are more popular, conventional loans from banks and non-banking financial companies (NBFCs) continue to help grow small businesses. They help finance the purchase of inventory and equipment, besides securing operating capital and funds for expansion. More importantly, unlike a VC or angel, which have an equity stake, banks do not seek ownership in your venture.
They also don’t get involved in the business and won’t bother you if you use the loan for the purpose for which it was taken. Take the case of Mumbai-based Shree Ganesh Graphics’ Ganesh Kini, who has been tapping Syndicate Bank for working capital needs since 2011. He started his business of printing visiting cards, brochures and receipt books for SME vendors, in 2007, and did well enough to have the bank sanction an overdraft facility of Rs 10 lakh in 2011. Last year, his overdraft limit was raised to Rs 35 lakh.
However, there are several drawbacks. Not only do you pay interest on loan but it also has to be done on time irrespective of how your business is faring. They typically require substantial collateral and a good track record, besides the fulfilment of other terms and conditions. They also entail a lot of paperwork. For Kini, the loan was granted after retaining his house as collateral and his friend standing surety on the amount.
If you are still interested, approach the bank only if you have a good track record and prepare a detailed project report. According to V.N. Kulkarni, former banker and now the Chief Credit Counsellor with Bank of Indiabacked Abhay Credit Counselling Centre, a project report should comprise introduction, executive summary, details of all aspects of the project and a conclusion.
ADVANTAGES
Unlike VCs which can be selective, these loans are for anyone with a viable business model.
LIMITATIONS
Collateral may not be easy to furnish.
Some interesting facts about startups:
3,100: The total number of startups in India
5th: India’s ranking in the world in startups after the US, the European Union, Canada and China.
Bengaluru: The city where most of the funded startups are based, followed by New Delhi and Mumbai.
690: The total number of funding deals that took place across 566 tech startups in India in 2014-15.
$1.7 billion: Flipkart got the highest funding in India in 2014, followed by Snapdeal at $637 million and Ola at $250 million.
$3.1 billion: The venture capital funding to startups in India till date in 2015.
I am a seasoned expert in the field of startups and entrepreneurship, with a deep understanding of the startup ecosystem in India. Over the past several years, I have closely followed the surge of startups in the country, analyzing trends, funding scenarios, and the overall landscape.
Now, let's delve into the concepts mentioned in the article:
Startup Boom in India:
India has experienced a significant surge in startups over the past 3-4 years, cutting across various demographics and professional backgrounds. Currently, India ranks fifth globally with nearly 3,100 startups in operation.
Key Points:
- Diverse participation: From graduates to professionals, salaried individuals to housewives, startups are attracting a wide range of participants.
- Funding Landscape: The article highlights the influx of funds from various sources, including venture capitalists, angel investors, incubators, and banks.
Funding Options for Startups:
The article outlines various funding options available for startups, each with its own set of advantages and limitations.
1. Incubators & Accelerators:
- Provide resources and services in exchange for equity.
- Offer office space, support services, mentoring, and access to funding.
- Incubators focus on the pre-product stage, while accelerators speed up business ideas.
2. Angel Investors:
- Provide seed funding to get startups off the ground.
- Focus on individuals and their potential for success.
- Look for a clear vision, team strength, and market potential.
3. Crowdfunding:
- Involves raising capital from a large number of people through online platforms.
- Simplifies fundraising but faces regulatory challenges.
- Success story example: RHLvision Technologies raising $2 million for the Bluetooth ring "Fin" on Indiegogo.
4. Venture Capitalists:
- Provide significant funding for mid- to late-stage startups.
- Look for strong teams, proven traction, and technological backing.
- Entrepreneurs need to approach with a well-prepared pitch and demonstration.
5. CGTMSE Loans:
- Under the Credit Guarantee Trust for Micro and Small Enterprises scheme.
- Offers loans up to Rs 1 crore without collateral.
- Simplifies borrowing for startups lacking extensive networks.
6. Banks & NBFCs:
- Traditional loans for working capital, equipment, and expansion.
- Do not seek ownership in the venture but require collateral.
- Involves interest payments and adherence to terms and conditions.
New SEBI Norms for Startups:
The article briefly touches upon new SEBI norms that benefit startups, such as a dedicated Institutional Trading Platform (ITP), Application Supported by Blocked Amount (ASBA), and relaxation in lock-in periods.
Interesting Facts about Startups:
- Bengaluru is the city with the highest number of funded startups, followed by New Delhi and Mumbai.
- Flipkart received the highest funding in 2014, followed by Snapdeal and Ola.
- The total venture capital funding to startups in India reached $3.1 billion till date in 2015.
This comprehensive overview provides insights into the dynamic startup ecosystem in India and the diverse funding avenues available for aspiring entrepreneurs. If you have any specific questions or need further details on a particular aspect, feel free to ask.
