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How to fund a start up

Shobhana Chadha |
Feb 6, 2012, 05.16A M IST

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There has never been a better time to start your own business. Here's a ready reckoner on where and how to find the money for your entrepreneurial dream


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crisis, and a whole lot of other categories have succumbed to the e-bug . Frankly, the environment has never been more conducive . Of course, the risks associated withLife start-ups HDFC Term remain, with more than 50% of all start-ups failing within the first five years. It's Policy just that funds to fuel your venture is easier than ever before.

Venture Intelligence, a research firm focused on venture capital and private atequity Rs. deals in India, 2000/year.Save says there are 43 angel networks, 111 venture capital investors and 37 incubators in the country. Tax Buyfixed We have come a long way from the days when bootstrappingfalling back on 80C. savings, Online Now! assets, and money from friends and familywas the only option. Nonetheless, this is still the most preferred starting point for a majority of businesses. The trouble with bootstrapping is that it usually means scrimping on capital, which, in turn, curtails the start-up's flexibility and ability to grow. There is also a very real risk of fledgling entrepreneurs overleveraging themselves. A less risky way to raise seed capital is to pool resources with a group of people who have shared interests and work together to escalate a business idea to at least a prototype. However, if you are sure of the scalability of your venture and are not obsessive about retaining independent control, private funding could be the best option. This comes in various forms, each typically catering to different stages of a start-up, such as the seed stage, early stage and growth stage. Here are some of the options.
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ANGEL INVESTORS These are high net worth individuals , who invest in a start-up in return for a minority share in the business. They are usually serial entrepreneurs or heads of major multinational firms. They can also be a group of individuals who pool in funds to invest. The key networks include Mumbai Angels, Indian Angel Network, Hyderabad Angels, Pune Tech Angels, Business Angel Network of Kerala and East Angels. How angel investing works Angels typically come into the picture at a start-up's seed stage, when the business idea is just a concept. The business plan itself is very iffy. So what draws an angel's attention? Business ideas that have the potential to generate solid returns, as well as the person behind it, but they are basically in it for altruistic reasons.

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Since all start-ups are risky propositions at this stage, angels typically don't put in a huge sum. "We invest in start-ups that are unlikely to draw the interest of venture capitalists since the size of investment is rather small, from 50 lakh to 5 crore, depending on the angel approached and the Indian startups device sees pre-order ... business idea. Only in special circumstances will the deal size stretch to 10 crore," says Saurabh Srivastava, co-founder , Indian Angel Network. In return, they take a 20-30 % stake in your firm. 1/8
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How to fund a start up - The Times of India

Angels are patient investors; they typically remain invested for 7-8 years. They review the progress regularly and are even willing to go back to the drawing board, if required . No wonder Sasha Mirchandani , co-founder of Mumbai Angels, claims that angel-backed companies tend to do better than the ones that directly approach venture capital investors. Y ou can also expect quick access to funds. It can take anywhere between a day and three months to close a deal. Drawbacks
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The concept of angel funding is still at a nascent stage in India, so they are difficult to find. Y ou need to boast the right contacts/professional network to bag such funding , besides having the right credentials . Says Srivastava: "Factors like the entrepreneur's reputation, integrity, clarity of mind and his response to feedback are important for me. He should also be a good listener." Mirchandani, on the other hand, is more concerned with the capital efficiency of a business idea. This is why so many IT start-ups , typically both capital-efficient and easily scalable, find favour with angel investors. However, as Nishant Verman, associate, Canaan Partners, stresses , easy funding is still difficult to come by. "India is no Silicon Valley , where a super angel like Mike Maples will invest in a product when it's no more than a blueprint sketched on a notepad, as in the case of Twitter," he warns. Apple: Cracked the Indian Market? Political Potpourri Leadership Mantra Hot sectors "Currently, angels are interested in funding education, mobile value-added services and apps, innovations in healthcare and rural entrepreneurship ," says N Muthuraman , director, RiverBridge Investment Advisors, a boutique financial advisory firm. VENTURE CAPITAL For the uninitiated, venture capital firms invest their shareholders' money in start-ups in return for a minority share in the company.

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salaries were a pittance in 1970s. I thought popular phones through bundled offers on restricting opinion polls during elections, its board, it became the 6th co back an idea at the concept stage. This is when the fatter cheques of venture capitalists come into as an entrepreneur, I could earn much Nov 1 and 2. Airtel has sought additional saying random surveys are "erroneous" draft her as an independent d more than the paltry Rs 1,800/month at TAS, says Burman. Indian startup device Gecko sees preorder surge How Umesh Rao started Vector Projects stocks, and is awaiting Apple's response.

They typically invest at an early stage of a start-up ; unlike angels, precious few are willing to

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play. Venture capital firms have been known to help start-ups organise the next round of funding and could be "manipulated" by vested of these six cos & that's a spa as well.

established and the start-up requires funding for commercialisation or scaling up of operations."
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However, many firms, such as Accel India Venture Fund, Sequoia Capital, Seedfund, Ncubate Capital , Nexus India Capital and Draper Fisher Jurvetson (DFJ), are increasingly willing to provide seed stage funding, but let us consider the thumb rules. A typical player is willing to put $2-8 million ( 10-40 crore) in return for a 10-40 % stake in the start-up , say industry insiders. If the investment amount is higher, the venture capital firm may choose to take a minority stake and invest the balance in convertible instruments , such as debentures and preference shares. If you are planning to approach a venture capital firm, be prepared to answer questions on the kind of bond you share with your business partner or the rapport with your team. Don't balk. Seeing their investment going down because of a silly feud between the core team members in a start-up is the last thing they want. Also, these investors usually don't believe in oneman shows; it is risky if everything depends on one person. "Unless an entrepreneur is very experienced, he won't be able to deal with the challenges posed by a start-up single-handedly ," adds Verman. Y ou will also need to have an exit strategy. The basic purpose of any venture capital investor is to sell his stake for a profit after 4-5 years. So, cover options for the next round of investment, typically from a private equity player, the possibility of an IPO or a potential buyer, along with an approximate exit valuation, in the presentation. 2/8



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How to fund a start up - The Times of India

approximate exit valuation, in the presentation. Benefits

This is practically the only option that gives entrepreneurs access to deep pockets at a time when they are trying to build the company. Private equity's fatter cheques are typically reserved for mature companies . Y ou also get expert help and access to the firm's entire network. Drawbacks "Venture capital funds in India require proof of concept and decent revenue visibility before investing ," says Muthuraman. In addition , each player will have sectoral preferences. Also, a typical player expects an internal rate of return of 25% on the investment in 4-5 years. "To meet the expectation, the company's compounded annual growth should be over 25%," says Modi. A business with low scalability may not be able to provide them with the desired returns on their investment and, hence, will be rejected outright. The safest bets are the ones where there is a business and professional connect. "It is a highly dilutive way of raising capital. It suits companies that have very high scalability and don't need too much recurring capital," advises Muthuraman. Also, be prepared to wait for 3-6 months to close a deal.
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Hot sectors The most sought-after sectors by this segment are biotech, mobile value-added services, education, healthcare, e-commerce , IT-ITeS , and green technology. VENTURE DEBT This is a medium-term loan that is exclusively provided to companies backed by venture capital firms. How venture debt works The USP here is that no collateral is required to be eligible. Instead, venture debt providers evaluate applicants on the basis of a startup's fundamental enterprise value , assessing how it will grow and, thereby, pegging its future cash flow and ability to repay the loan. Y ou can expect funding of 2.5-20 crore, depending on the growth stage of company and the nature of requirement. Says Ajay Hattangdi, managing director, SVB India Finance: "An experienced founding team, a credible business plan and a solid venture capital investor base are some factors that we would consider in our assessment." He adds that the interest rates are fixed for the tenure of the loan and are competitive compared with rates that SME clients can usually obtain from banks. Benefits Venture debt financing is structured specifically to support seed and early-stage start-ups . Hence, it understands that a venture is prone to volatility early in life and, consequently , provides more flexibility to entrepreneurs. According to Muthuraman, this is a useful tool for an entrepreneur wanting to minimise his equity dilution early on as it can bridge the gap between the funds provided by the venture capitalist and his actual requirement. These funds come with the least amount of restrictions and can be utilised for any business initiative, from basic operations and working capital to supporting capital expenditures and making acquisitions. Drawbacks Apart from the interest on the loan, venture debt providers typically require an equity kicker, or shares of your company, to compensate for the higher risk taken. "The kicker enables us to get a share in the upside if the company does well. It also enables us to keep our loan interest rate down to a minimum ," says Hattangdi. LOANS FROM NBFCs AND BANKS



How to fund a start up - The Times of India LOANS FROM NBFCs AND BANKS

This is a standard option for entrepreneurs but not for seed-stage start-ups . Says Sushil Munhot, chairman and managing director, Small Industries Development Bank of India (SIDBI): "One should look at bank funding only after the product has gone through seed or venture cycle and one wants to commercialise it further." How bank loans work Usually banks and finance companies fund up to 80-90 % of the loan-to-value ratio (borrowed amount divided by the asset value you are purchasing or refinancing), depending on the credit history of the borrower and the collateral put up, be it property, machinery or marketable securities. Bank loans can be availed of for short or long term, but the latter is usually given to established start-ups . However, Muthuraman says banks now give importance to cash flow rather than the primary security or additional collateral. Recognising the fact that the collateral requirement deters many a start-up , particularly in the early stages, the government and SIDBI have set up a Credit Guarantee Fund Trust for Micro and Small Enterprises. The scheme lends up to 1 crore to small enterprises for working capital and capital expenditure without collateral. Incidentally, finance companies also offer collateral-free working capital loans to small enterprises with at least three years of operations . These are available at interest rates of 16-20 %, while loans against property cost 12-18 %. Benefits It is usually the cheapest source of funding and helps in controlling costs. Besides, if a start-up maintains a healthy credit track record while servicing the loan, access to all other sources becomes easier.

Drawbacks Such loans typically go to existing small businesses which have shown over three years of profitability and credit history. Ultimately, the key to landing smart funding is to never lose hope. If you are convinced that you have identified a genuine market need and that you can actually implement your innovation, just put together a convincing business plan and start scouting for suitors. This is one area where the more the cooks, the better the broth. Sooner or later , someone is sure to say 'I will' . With inputs from Milan Sharma

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True North (Yorkshire, UK) 273 days ago

True North Productions are looking for couples and families for a brand new Channel 4 series who want to make changes to their lives and start running their own business. We are looking for people who are ready to make these changes but need some expert help to identify the right opportunity. It's a perfect chance for people who dream of a new life, but until now just haven't had the expertise or head space to go for it! If this sounds like something you might be interested in then please contact us with a little bit of information about yourself and your current situation. Ideally you should be in a position to make some big decisions in 2013.

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Basu (Mumbai) 273 days ago

Sir, I am professional with 15years Sales & Marketing exp with Wipro,IBM,HP . Now planning to encash on my experience and start my own venture into IT System Integration & Services Business. I have the requisite tie-ups and contacts already in place with Distri, Channel & End customers for a smooth go-to-market strategy for my endevour. Also have own office in Mumbai. I am looking for a 70Lakh-1crore funding partner/Investor in my

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How to fund a start up - The Times of India

Mumbai. I am looking for a 70Lakh-1crore funding partner/Investor in my venture.If any businessman/Investor is keen to invest in a start-up venture please do contact.

neville france (south africa) replies to True North 179 days ago

would be keen ... quite prepared to relocate to uk please advise contact email in order to forward further details

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vijay (Mumbai) 277 days ago

Need capital investment upto Rs. 15 lakh. This is for an online education initiative. Investor can start expecting returns from third month, and consistently beyond that. Contact me at vpaturar at gmail dot com.

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Krishna Sharm a (assam) 46 Follow ers 285 days ago Gold: 14.5K

great article!

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Prianka Shah (Nagpur) 2 Follow ers 287 days ago Bronze: 186

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Com m unal (Tokyo) 140 Follow ers 290 days ago Platinum : 50K

Indian education system is designed to create employees, not employers.

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Suneel (india) 9 Follow ers 290 days ago Silver: 3243

why everybody is seeking an investor but no investor here is seeking an entrepreneur

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Mohan (Vijayaw ada) 290 days ago

I have an Idea for startup of Organic agro business, any information on how to approach an angel investor will be appreciated.

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Bakul Bhatt (Rajkot) 219 Follow ers 290 days ago Gold: 17.8K

Start Funding?

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Am it Kum ar (GZB) 41 Follow ers

291 days ago

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How to fund a start up - The Times of India

291 days ago Gold: 16.3K Agree (0) Disagree (0) Recommend (0) Offensive

Initially you have to start with your own capital and if somebody thinks it has a future they will invest into your venture. Simple. So get some scale into your business asap if you want venture funding but discuss it first thoroughly because you can loose the control of your firm.

Ruhee (B'lore) 291 days ago

Search Google..COmpare My of d gr8st startup looking for VC ....jst check it guys

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Rajneesh Kum ar (New Delhi) 321 days ago

Hi, Ca Rajneesh Kumar from New Delhi here. I'm a full time Arbitrager in commodity futures. I'm looking for an investor for 5-20 Lakh on partnership basis. Expected returns are in the range of 5%-7% per month. Investor may have account in his own name with an agreement for management of account by me for equal sharing of profits. You may contant me on 08447940949

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sriram (hyderabad) 362 days ago

Hi There(Das from Hyderabad) 3 months old venture a unique service delivery platform for any individual investor to invest up to 5 CR in 2 installment in the company called "Indigo ac clinick MS Pvt Ltd" who is eying to set up a BPO kind of operations in the field of Air conditioning to cater from an installation to annual maintenance to a retail client with multibrand outfit an USP to an ONE HOUR service turn around time and has built a system where in next 1 year we have a technical team of 1K and are placed in companies like LG,Samsung etc..For investor we have designed a 30% ROI and an exit of 3 years time line and post which 25% of company bottom line sharing for next 3 years..investors please connect us

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Dinesh (Hyderabad) 382 days ago

All said and done Article sounds pretty fair with the information and guidelines but the actual fact is different most of the times. How hard you work on putting together your project report and with one of the best & most innovative as well beneficial project, none of the above groups do wish to fund until or unless you give major stake or otherwise give you head in their hands. The money and time invested on the proposal will be eventually implemented or utilized by other party that belongs to the group and we will end up loosing the project helplessly

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Saurabh (Mumbai) replies to Rajneesh Kum ar 287 days ago

It seems that you really are looking for customer for your service rather than investor.

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SM Ram (Chennai) 390 days ago

Looking for private equity investors for product marketing start up ranging from 5 lacs to 1 crore . Lock up period 3 years. ROI 10% - 12% per annum ( acutals ) please email investors interested email chemsales.enggatgmaildotcom or cell # 0091 - 9677028930 - valid from 10/10/2012 to 31/12/2012

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sharan (hyderabad) replies to sriram 286 days ago

please call me at 91 9676360706

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How to fund a start up - The Times of India

Recommend (0) Offensive Bernard w illson (New delhi) 405 days ago

realy its an hope to become a successfull man in our own dream n with out any family support.thanks very much

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Bernard w illson (New delhi) 405 days ago

Sir its an unbelivable opportunity for a start-up,i have a vision to start an international film production company n international music production as well,i am from orissa but i am living in newdelhi its been 9months and looking for a fund but not found yet by the grace of GOD THE ALLMIGHTY i found your firm,if you please make my dream come true then please help me sir.i will ever remain greatfull to you,please help me start,anyway thanks for giving me a hope to live a great life.thanks thanks thanks thanks a lot.

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Indranil (Kolkata) replies to Dinesh 337 days ago

Do you have any example to quantify your point that they steal your ideas? One should never approach them in that case.

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Chandra (Hyderabad) 585 days ago

Great information. Very useful for budding aspirants.

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sudhakar (hyderabad) 637 days ago

excellent article to give the correct information at a right time to get funding for a START-UP.

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