FUNDING FOR BUSINESS

STAGES OF START UP
FUNDING
• Phase1. Creating a team
– Founding team
– Bootstrapping
• Phase 2. Build a minimum viable product-
– Angel investing
• Phase 3. Product market fit- early product market fit-
demonstrate that your solution fits the problem-demonstrate
initial traction
– Seed funding (HNI’s, VC’s, Seed Funds)
• Phase 4. Product market fit - scalability
– SERIES FUNDING- A
• Phase 5: Growth of business (series B-D rounds)
– Series A-C: venture capital
– Series D and beyond : Private equity
Round Who Invests? Goals for Company

•Determine product and market fit

Angel investors, •Employ first few employees
Seed
early-stage VCs •Build and launch early product
•Get traction

Professional angel •Finalise concept, product/market fit and processes to scale

investors, venture funds •Optimise product
Series A
or VC firms specialising in•Develop business model
early-stage •Pay for salaries of key team members

•Scale and increase market share

Similar to Series A but
•Grow team with quality talent
also venture capitalists
Series B •Build up business development, sales and marketing teams
that focus on later-stage
•Break even and have a net profit
growth
•Make competitors give up

Private equity firms, VC •Increase market share, scale hard and fast
Series C, D, E funds, hedge funds, •Expand internationally
and onwards investment banks and •Undertake M&A activity
secondary market groups•Develop more products and services
 STAGES OF STARTUP
FUNDING
• ANGEL ROUND
– 5 lakh-50 lakh $
• SEED ROUND
– 2 lakh-1 Mn $
• SERIES A
– 2lakh- 5 Mn $
• SERIES B
– 5 Lakh-10 Mn$
• SERIES C……
 1. Seed Investment

• It is a preliminary investment stage which is geared towards

helping a startup founder establish the direction and goals of
their business.
• The seed stage of any organization is clearly embryonic and
is therefore more speculative than other rounds of
investment. It is there to establish the startup as a going
concern, in many cases going as far as to bring a product to
market.
• A seed investment should aim to achieve one of the
following:
– Product Identification:
– Marketplace Orientation:
– Demographic Targeting
– Team Creation:
 2. Series A Investment

•
• This type of investment is often the first encountered
when the seed stage does not require outside funding.
At this juncture most startups have a strong defined
idea of what the central goal is behind any product or
service and may even have launched them
commercially.
• Series A investments should achieve one of the
following:
• Optimizing Distribution
• New Markets:
• Shortfall: Series A investment can also be used to
make up for a shortfall in capital.
 3. Series B Investment

• By the time Series B investment is being actively

pursued a startup is usually well on its way to
being a truly established business.
• Production is well managed, advertising in in full
flow, and customers or users are actively
purchasing an associated product or service as
planned.
• While scalability is a factor in Series A investment,
here it is the main focus.
• This includes:
– Team Expansion:
– Globalization:
– Acquisitions
4. Series C Investment and Beyond

• There is no technical limit to the number of

investment rounds a startup can pursue.
• This depends heavily on any anti-dilution
agreements previous investors have acquired,
ensuring that their stake is never watered
down.
• As each investment round progresses more
and more equity from the company is
released, so they are normally not entered
into lightly from both investor and founder
perspectives.
• Financing is necessary at every
stage of a business life cycle. It is
required to set up business and
expand the operations, and to
develop new products.
• India has a well developed
financial system, comprising
– Banks & Financial institutions
– Non banking financial companies
– Venture capital companies
 Sources of Short Term Capital
• Trade Credit
• Factoring
• Discounting Bills of Exchange
• Bank Overdraft and Cash Credit
 Sources of Long Term Capital
• Loans from Commercial Banks / Financial
Institutions
• Crowd funding
• Risk Capital-
– Venture Capital, Angel Investment
• Issue of Shares
• Issue of Debentures
 What is MUDRA loan?
• Loans given to non-farm income generating enterprises in
manufacturing, trading and services whose credit needs are
below Rs.10 lakh under the Pradhan Mantri MUDRA Yojana
(PMMY).
• MUDRA has enrolled
– 27 Public Sector Banks
– 17 Private Sector Banks
– 27 Regional Rural Banks
– 25 Micro Finance Institutions (MFIs - list as per Annexure
I) as partner institutions for channelizing assistance to the
ultimate borrower
 What are the offerings of MUDRA? How will MUDRA
function?

• Under the aegis of Pradhan Mantri MUDRA

Yojana (PMMY), MUDRA has already created its
initial products / schemes.
– The interventions have been named ‘Shishu’, ‘Kishor’
and ‘Tarun’
• The financial limit for these schemes are :-
– a. Shishu : covering loans upto 50,000/-
– b. Kishor : covering loans above 50,000/- and
upto 5 lakh
– c. Tarun : covering loans above 5 lakh to 10 lakh
• Who are the target clients of MUDRA/ What
kind of borrowers are eligible for assistance
from MUDRA?
– Non–Corporate Small Business Segment (NCSB)
comprising of millions of proprietorship / partnership
firms running as
• small manufacturing units
• service sector units
• Shopkeepers
• fruits / vegetable vendors
• truck operators
• food-service units
• repair shops
• machine operators
• small industries
• Artisans
• Non availability of timely and adequate funds at reasonable cost
is one of the most important problems faced by the MSME
sector.
• Some of the major causes for low availability of bank finance to
this sector are the
– High risk perception
– Inadequate data and usage of external credit rating,
– Weak corporate financial systems,
– Early stage high transaction cost for small loans and high costs of the
banks in lending to MSMEs.
– The lack of adequate collateral further hampers availability of funds to
the sector.
• In such conditions, making various risk capital options available
to the MSME sector is essential.
 Risk Capital
• Risk Capital is an important instrument for not
only startups and innovative / fast growing
companies but is also critical to those companies
looking at growth.
• However the sources of risk capital are limited in
developing countries.
• The non corporate structure and small size of the
majority of MSMEs in India makes the venture
capitalists and other risk capital providers
reluctant to investing in them due to higher
transaction costs and difficulties in exits out of
such investments.
 Venture Capital

• Venture funds typically provide equity and

may or may not provide debt.
• Good quality venture funding can improve
the credit rating of the company allowing it
to access commercial loans or other forms
of finance.
• Traditionally, Venture Capitalists in India have shied from the
MSME sector.
– The non-corporate structure and small size of majority of MSMEs
in India makes the Venture Capitalists and Private Equity Players
reluctant to investing in them
– higher transaction costs
– difficulties in exits out of such investments.
• However, the VC scenario in India is rapidly changing.
Alternative funding like VC is picking up in the India,
including in the MSME sector.
• Moreover, the VCs are expanding their reach into areas
besides the traditional VC sectors like Information
Technology (IT); nowadays interest in sectors like clean
energy, healthcare, pharmaceuticals, retail, media, etc. is
also growing.
 Venture Capital Funds in India
• Promoted by the Central Government controlled development finance institutions,
for example:
– SIDBI Venture Capital Limited (SVCL)
– IFCI Venture Capital Funds Limited (IVCF)
• Promoted by State Government controlled development finance institutions, for
example:
– Gujarat Venture Finance Limited (GVFL)
– Kerala Venture Capital Fund Pvt Ltd.
– Punjab Infotech Venture Fund
– Hyderabad Information Technology Venture Enterprises Limited (HITVEL)
• Promoted by public banks, for example:
– Canbank Venture Capital Fund
– SBI Capital Markets Limited
• Promoted by private sector companies, for example:
– IL&FS Trust Company Limited
– Infinity Venture India Fund
• Overseas venture capital fund, for example:
– Walden International Investment Group
– SEAF India Investment & Growth Fund
– BTS India Private Equity Fund Limited
• The Small Industries Development Bank of India
(SIDBI) is the main public financial institution
involved in VC funding operations.
• SIDBI operates through wholly owned subsidiary,
SIDBI Venture Capital Limited (SVCL).
• It co-finances state-level funds, and sometimes
co-invests with private sector VCs on a
case-by-case basis.
 Early stage financing

• Early stage VCs seek smaller deals, typically in the US$ 1 - 3

million range. However, they rarely go below the half million
dollar mark, where there is a strong appetite for financing,
but very few opportunities.
• Erasmic Venture Fund
• Seed Fund
• Infinity Venture
• IFI sponsored facilities such as Swiss Tech VCF
• SIDBI VC
• Gujarat VF.
• Possible sources of smaller investments are represented by
local public-sector facilities, business angels, business
incubators funds, and isolated cases of seed VCFs, such as
the microventure schemes like Aavishkaar India Micro
Venture Capital Fund (AIMVCF).
 Angel Investors
• Angels are typically high net worth
individuals who wish to invest some of
their surplus funds in new ventures.
• They can prove to be a good source of
capital and advice at an early stage in the
development of the company.
• For the investor, they bring opportunity to
make high returns from investing at an
early stage in an MSME
 Angel investment networks
• TiE Entrepreneurship Acceleration
Programme
• Indian Angel Network
 Indian Angel Network
• Network of Angel investors keen to invest in early stage
businesses
• The members of the Network
– leaders in the Entrepreneurial Eco-System
– strong operational experience as CEOs
– background of creating new and successful ventures.
– They share a passion to create scale and value for startup
ventures.
• Started in April 2006, the Indian Angel Network
– Money
– provides constant access to high quality mentoring
– vast networks
– inputs on strategy as well as execution
• The Network members, because of their background are
better able to assess the potential and risks at the early
stage.
• The Network looks at investing upto USD 1 mn, with an
average of about USD 400-600K and exiting over a 3
to 5 year period through a strategic sale.
• The Network may consider investments over a million
dollars but is only likely to do so through syndication.
• Investment Criteria
The Network is likely to invest in startups that meet
the following criteria :
– High barriers to entry
– A complementary management team
– Scalable business
– Differentiated value proposition (a unique
product/service/process, either in concept or
implementation)
 The Network looks at multiple sectors for
investment
• Agriculture
• E-Commerce
• Education
• Financial Services
• Gaming
• Healthcare
• Hospitality
• Information Technology
• Internet
• Lifestyle
• Manufacturing
• Mobile
• Retail
• Semiconductor
• Services
• Social-Impact
• The Network looks at investing upto USD 1 mn, with an average of about USD
400-600K and exiting over a 3 to 5 year period through a strategic sale. The Network
may consider investments over a million dollars but is only likely to do so through
syndication.
 START UP INDIA
• Startup India campaign is based on an action plan aimed
at promoting bank financing for start-up ventures to boost
entrepreneurship and encourage start ups with jobs
creation.
• The campaign was first announced by the Prime Minister in
his 15th August, address from the Red Fort
– focused on to restrict role of States in policy domain and to get
rid of "license raj" and hindrances like in land permissions,
foreign investment proposal, environmental clearances.
– organized by Department of Industrial Policy and Promotion
(DIPP).
• A startup is an entity that is headquartered in India which
was opened less than five years ago and have an annual
turnover less than ₹25 cr (US$3.7 million).
• The government has already launched PMMY, the MUDRA
Bank, a new institution set up for development and
refinancing activities relating to micro units with a refinance
 Key points

• Single Window Clearance even with the help of a mobile application

• 10,000 crore fund of funds
• 80% reduction in patent registration fee
• Modified and more friendly Bankruptcy Code to ensure 90-day exit
window
• Freedom from mystifying inspections for 3 years
• Freedom from Capital Gain Tax for 3 years
• Freedom from tax in profits for 3 years
• Eliminating red tape
• Self-certification compliance
• Innovation hub under Atal Innovation Mission
• Starting with 5 lakh schools to target 10 lakh children for innovation
programme
• new schemes to provide IPR protection to start-ups and new firms
 Incubators
• Incubators are support programs designed to accelerate
the successful development of entrepreneurial
companies through a range of business support
resources and services.
• These resources/services may be offered either in the
incubator or through its network of contacts. Unlike
research and technology parks incubators are dedicated
towards startup and early stage companies.
• Incubators help in many different ways; apart from
helping the potential entrepreneur in the early stages,
they also introduce the potential entrepreneur to the
networks, commercial mindset, mentoring, etc.
1. National Small Industries Corporation (NSIC) – Training cum Incubation
Centers
• NSIC Training-cum-Incubation Centres (NSIC –TIC) are operated at various
locations across the country. It provide an opportunity for first generation
entrepreneurs to acquire skill on basic technical trades and gain exposure in
all areas of business operations such as business skills development,
identification of appropriate technology, hands on experience on working
projects, project / product selection, opportunity guidance including
commercial aspects of business.
• In order to expand its reach and impart such training to large number of
unemployed people, NSIC plans to set up a number of franchise NSIC-TICs
under Public-Private Partnership (PPP) mode in the country.

To know more on the NSIC’s incubation centres, go to

http://www.nsic.co.in/incubator.asp
2. Incubation Support by DST: National Science & Technology
Entrepreneurship Development Board (NSTEDB), Department of Science &
Technology
• NSTEDB is an institutional mechanism to help promote knowledge driven and
technology intensive enterprises. It has several schemes and Technology
Business Incubators (TBI) is one of such unique initiatives.
• TBIs, besides providing a host of services to new enterprises (and also to
existing SMEs in the region), also facilitate an atmosphere congenial for their
survival and growth.
• The essential feature of a TBI is that the tenant companies leave the incubator
space within 2-3 years.
• Each TBI focuses on not more than 2-3 thrust areas.
• Regarding legal status of new TBIs, they have to be registered as an
autonomous body functioning as a society registered under societies act of
1860/or as a non profit making section 25 company.
• Each TBI is expected to become self sufficient within a period of five years from
the date of sanction of the project.

NSTEDB provides financial assistance for creating state-of-art facilities in the

identified thrust areas. It also offers partial /full support for recurring/operational
cost for a period of five years.

To know more on incubation centres of NSTEDB, go to http://www.nstedb.com/

3. SIDBI Innovation and Incubation Centre (SIIC)
• SIDBI Innovation and Incubation Centre (SIIC) has
been set up at Indian Institute of Technology, Kanpur
carrying the objective of fostering entrepreneurship
and developing industries in knowledge and
technology-based areas, particularly for small
enterprises.
• As on March 31, 2008, while four companies had
graduated from the centre, another seven companies
were working as incubatees in the diverse areas of
state-of-art technologies and software development,
etc. As on November 30, 2008, eight units had
graduated from the centre.
 What Banks Need To Know About
You?
• General Credentials
• Letters of Introduction
• Your Profile
• Brochure of Your Business
• Bank and Other References
• Proof of Company Ownership or
Registration
• Financial Situation
 Financial Situation

• Balance Sheet, Profit-and-Loss Account, and

Cash-Flow Statement
• Budget for the Current or Coming Year
• Commercial Information Details of Orders Booked
• Business Plan
• Feasibility Study
• Guarantees or Collateral You can Offer
• Other Fixed Assets can also Serve as Security
• Financial Institutions Rarely Lend the Full Value of
the Security Taken
 Bank's Lending Criteria
• Good Cash Flow
• Adequate Shareholders' Funds
• Adequate Security
• Experience in Trading
• Good Reputation
• Rating Parameters
• Management
– Background
– Industry experience and knowledge
– Past conduct of borrower with banks
– Qualifications
– Background and Capability of the Promotors
– Organisation's Preparedness for meeting
Challenges
– Combined net worth of promoters
– Associate concerns
• Financial
– Current ratio
– Debt equity ratio
– Average turnover
– Net profits
– Income growth
– Net cash accruals
– Financial Projects and Debt Servicing Capabilities
– Provision of security for proposed assistance
– Quality of collateral security
• Operational
– Proximity to branch
– Location of unit
– Borrowers proximity to market
– Type of technology
– Equipment supplier
– Quality certifications
• Industry
– Nature of industry – cyclical/ seasonal
– Eligibility under assistance scheme, if any
– Competitive advantage
– Branding of product
– Number of applications of product/ machinery
• Past Loan Performance
– Repayment
– history
– Missed installments
– Revision in interest rates/ period
– Prepayments
– Defaults: Month of default
– Amount of default
– Reason of default, if provided
– Security resale
– value
– Capital loss to bank
 SCHEMES FOR PROMOTION OF MSME’S IN
INDIA

1. Collateral Free Loans Under CGTMSE

Scheme
– The Government approved the Credit Guarantee
Fund Scheme for Small Industries on 19th May,
2000 with the objective of making available credit to
SSI units, particularly tiny units, for loans up to Rs.
10 lakhs without collateral/third party guarantees
(This is at present applicable for loans upto Rs 100
lakhs)
• The main objective is that the lender should
give importance to project viability and secure
the credit facility purely on the primary security
of the assets financed.
• The other objective is that the lender availing
guarantee facility should endeavor to give
composite credit to the borrowers so that the
borrowers obtain both term loan and working
capital facilities from a single agency.
2. Scheme of Interest Subsidy Eligibility Certification
(ISEC)
– Under the ISEC Scheme, credit at the concessional
rate of interest of 4 per cent per annum for capital
expenditure as well as working capital is given as
per the requirement of the institutions.
– The difference between the actual lending rate and
4 per cent is paid by the Central Government
through KVIC to the lending bank and funds for this
purpose are provided under the khadi grant head to
KVIC.
3. Small Industries Development Bank of India
– Direct Credit Scheme
– Marketing of SSI products
– Scheme of Cleaner Production (CP) Measures
– Scheme for Energy Saving Projects in MSME
Sector
4. National Small Industries Corporation
– Bank Credit Facilitation Scheme
– Bill Discounting Scheme
5. Subsidy Schemes
• Subsidy Schemes for Specific Industries
– Textile Industry Technology Upgradation Fund Scheme (TUFS)
– Food Processing Industry Scheme for Technology Upgradation/
Establishment/ Modernization for Food Processing Industries
– Leather Industry – Integrated Development of Leather Sector
(IDLS)
– Rejuvenation, Modernization and Technology Upgradation of the
Coir Industry
• Other Subsidy Schemes of the Central Government
– Credit Linked Capital Subsidy Scheme for Technology Upgradation
(CLCSS)
– Quality Upgradation/Environment management for small scale
sector through incentive for ISO 9000 /ISO 14001 /HACCP
Certifications
– Market Development Assistance Scheme for Micro, Small &
Medium Enterprises
– Financial Assistance on Bar Code
– Subsidy Schemes of NSIC
– Raw Material Assistance
 6. Women, Minorities and Weaker Sections

6.1 Schemes for Women

• Rashtriya Mahila Kosh
– The National Credit Fund for Women (NCFW)
commonly known as Rashtriya Mahila Kosh (RMK)
was set up by Government of India in 1993 to meet
the credit needs of the poor and asset needs of the
women in the informal sector. RMK extends micro
credit through MFIs for various activities including
setting up of micro enterprises
• Trade Related Entrepreneurship Assistance and
Development Scheme for Women (TREAD)
– The Scheme envisages economic empowerment of
women through the development of their
entrepreneurial skills in nonfarm activities
• Prime Minister’s Employment Generation Programme for
Women
• Credit Guarantee Fund Trust for Micro and Small Enterprises
(CGTMSE)
• Promotional & Developmental Assistance
• Marketing Assistance
6.2 Schemes for Minorities
• National Minorities Development & Finance
Corporation (NMDFC) was set up by the
Government in 1994. The Corporation promotes
the development of backward sections amongst
the Minorities through various schemes.
– Term loan
– Margin Money Loan scheme
– Educational Loan Scheme
– Scheme of Micro Credit
– Scheme of Interest Free Loan to NGO
– Mahila Samridhi Yojana.
6.3 Schemes for Schedule Castes and Tribes (SC/ST)
• National SC Finance and Development Corporation
(NSFDC) is the apex institution for financing, facilitating
and mobilising funds from other sources and promoting
the economic development activities of the persons
belonging to the Scheduled Castes living below double
the poverty line.
• Term Loan
• Micro Credit Finance
• Shilpi Samriddhi Yojana
• Mahila Samriddhi Yojana
• Mahila Kisan Yojana
• 6.3 Schemes for Other Backward Castes (OBCs)
• National Backward Classes Finance & Development
Corporation (NBCFDC), a government undertaking,
provides financial assistance through State
Channelising Agencies (SCAs) and Micro Financing
through SCAs/ Self Help Groups (SHGs)
• Term Loans/ margin Money Loans
– New Swarnima Special Scheme for Women
– Educational Loan Scheme “New Akanksha”
– Swayam Saksham
• Micro Finance Schemes
– Mahila Samriddhi Yojana