Doing Business in India

Module 1
Opening Case:
Airbnb and the Ghost of Start-Ups Past

“You always had an entrepreneurial streak,” you tell yourself with a chuckle as you
reflect over a hot cappuccino at your favorite coffee shop. With an undergraduate degree in
computer engineering and a soon-to-be-granted master of management degree, a startup sounds
like a perfect way to jump back into the real world. While the global crisis during the last few
years has put the squeeze on venture funding, recent successes showed that good ideas still get
attention. Snap Inc. raised an astonishing $1.8 billion from heavy hitters like Sequoia Capital
and General Atlantic just one year before going public. The now “textbook case” Airbnb, after
totally disrupting an industry, in 8 years was able to raise $4.4 billion and be valued 10 times
more. And you cannot forget that Groupon received a buyout offer of $6 billion from Google
after a little more than two years in operation . . . and turned it down!

As you ponder the issue, you reflect on lessons from tech ventures of the past. One that
you know quite well is eBay, having been an avid buyer and a successful seller as a teen and
having followed the company over the years. In fact, you remember an interesting article from
back in 2004 drawing a parallel between eBay Inc. and Amazon.com. At the time, the two firms
were respectively 60th and 66th in BusinessWeek’s Top 100 Brands1 and were considered the
poster-children of eCommerce, having helped create the category: “EBay and Amazon.com, the
Internet’s top two eCommerce sites, are taking opposite approaches to growth. EBay raised its
prices this month for the fourth year in a row, while Amazon renewed its pledge to keep cutting
prices even if it means lower profits.”2 You recall Meg Whitman, at the time eBay’s chief
executive officer (CEO), saying, “The eBay marketplace is a powerhouse. [ . . . ] We continue to
enjoy ever-bigger, ever-faster cycles of success, fueled by the unlimited opportunity of our huge
addressable market.” At the time, eBay was reaching the peak of its financial achievement and
growth. You recall the same article quoting Amazon’s founder and CEO, Jeff Bezos: “We will,
for years and years and years, consistently give back the gains we get in lower operating costs to
our customers in the form of lower prices.” You also recall the numbers quoted in the article:
“eBay’s gross profit margin—its revenue minus the cost of sales—was 82 percent. That’s after
subtracting the cost of running its website, customer support and payment processing operations.
And eBay’s bottom-line profit stood at 22 percent of its revenue after subtracting all other
expenses, including the hefty $172 million that eBay forked over for marketing and sales
expenses. Amazon’s gross profit for the same quarter, by contrast, was 22 percent, and its
bottom-line profit was under 4 percent.”

Was Groupon applying some of eBay’s lessons? Was Alibaba? As you ponder your next move,
you cannot help but think that replicating eBay’s early and sustained success is predicated on
understanding these dynamics.
Doing Business in India

CHAPTER 1: The Startup Ecosystem

Startup, Supporting Organizations (Incubators, Accelerators, Mentors), Funding Organizations

(Angel Investors, Venture Capitalists/Private equity), Knowledge (Resources and Tools)

THE STARTUP ECO-SYSTEM

Introduction:

In today’s scenario startup is receiving much attention all over the world. Numerous
startups are still on rise and are now widely renowned as employment generating startup which
contributes in growth engines for the world. Through improvement, modernization and
ascendable technology, startups are spreading across the world and are responsible for the
transformation and development of India. Not only entrepreneurs but startup ecosystem consists
of shareholders incubators, accelerators, other investors, entities, research institutions etc. As per
the report, following are the factors that make Indian startup attractive:

 Effective cost of doing the business

 Size of marketplace

 Relationships with the customers

 Large consumer base

The rapid growth in the Indian startup ecosystem has increased to approx. 15% in 2018, while
the rise of the number of incubators, accelerators has increased to 11%. Remarkably, in previous
years the women entrepreneurs has also increased to a great extent. In 2019, Bangalore has been
ranked as the world’s rapidly growing startup city. We are in the era of 2020 and following a
new decade, the Indian startup ecosystem has much to look forward to, and there's a perceptible
sense of keenness and enthusiasm for the coming years. More significant aspect is the hi-tech
enhancement they bring to the country. Startups implicate dealing with new know-how which
generally lies at the uppermost end of value addition chain. Enterprises are recognizing the
potential under upcoming startups and thus investing and being in partner in them.
Doing Business in India

Overview of the Indian Startup Ecosystem

Revolution in technical and digitization oblige to startups and other corporate business
person to familiarize and create teams that can work with updation. In a world where more and
more routine jobs can be achieved with the help of technology, similarly learning, self-
development, and keeping up with the changes in today’s business environment are key
characteristics of upcoming personnel. To respond to the talent needs in india’s startup
ecosystem, five areas have been identified are,

 Discovery: To find the right talent.

 Holding: To create an attractive workplace.
 Governance: To firm the middle level management.
 Values: To create a positive environment.
 Proficiency- To help team to work along with technology.

Challenges for an Indian startup ecosystem

When founders and enterprise leaders recognize that a critical growth barrier lies within the
organization, they find the right talent, retaining them, firming the middle level administration,
creating a positive culture, building the subsequent generation leaders and improve working
environment. These are steps that they follow to overcome the challenge of growth. Interestingly,
India’s corporate sector struggles with a similar set of challenges.

Startup: The term startup refers to a company in the first stages of operations. Startups are
founded by one or more entrepreneurs who want to develop a product or service for which they
believe there is demand. These companies generally start with high costs and limited revenue,
which is why they look for capital from a variety of sources such as venture capitalists. A
startup is a young company established by one or more entrepreneurs to create unique and
irreplaceable products or services. It aims at bringing innovation and building ideas quickly.

“A startup is a human institution designed to deliver a new product or service under

conditions of extreme uncertainty.”

-Eric Ries, Author of the Lean Startup

“A startup is a temporary organization used to search for a repeatable and scalable

business model.”
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-Steve Blank
“A startup is a company designed to grow fast. Being newly founded does not in itself
make a company a startup. Nor is it necessary for a startup to work on technology, or take
venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else
we associate with startups follows from growth.”
-PaulGraham, Co-founder of Y-Combinator
““A ‘startup’ is a company that is confused about (1) what its product is, (2) who its
customers are, and (3) how to make money.”
- Dave McClure

Types of Startup:
In our modern world, where everyone strives to bring innovation, a good idea isn’t
enough to create a startup. To understand the features of different startups better, you need to
review the following six types.

 Scalable startups. Companies in a tech niche often belong to this group. Since
technology companies often have great potential, they can easily access the global
market. Tech businesses can receive financial support from investors and grow into
international companies. Examples of such startups include Google, Uber, Facebook, and
Doing Business in India

Twitter. These startups hire the best workers and search for investors to boost the
development of their ideas and scale.
 Small business startups. These businesses are created by regular people and are self-
funded. They grow at their own pace and usually have a good site but don’t have an app.
Grocery stores, hairdressers, bakers, and travel agents are the perfect examples.
 Lifestyle startups. People who have hobbies and are eager to work on their passion can
create a lifestyle startup. They can make a living by doing what they love. We can see a
lot of examples of lifestyle startups. Let’s take dancers, for instance. They actively open
online dance schools to teach children and adults to dance and earn money this way.
 Buyable startups. In the technology and software industry, some people design a startup
from scratch to sell it to a bigger company later. Giants like Amazon and Uber buy small
startups to develop them over time and receive benefits.
 Big business startups. Large companies have a finite lifespan since customers’
preferences, technologies, and competitors change over time. That’s why businesses
should be ready to adapt to new conditions. As a result, they design innovative products
that can satisfy the needs of modern customers.
 Social startups. These startups exist despite the general belief that the main aim of all
startups is to earn money. There are still companies designed to do good for other people,
and they are called social startups. Examples include charities and non-profit
organizations that exist thanks to donations. For instance, Code.org, a non-profit
organization, encourages school students in the US to learn computer science.
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Startup- advantages & Disadvantages

Advantages Disadvantages

More opportunities to learn Risk of failure

Increased responsibility Rising Capital

Flexibility High Stress

Workplace benefits Competitive Business environment

Innovation is encouraged Lack of Process

Flexible hours Lack of resources

Team couture & efficiency Poor market access

2.0 Supporting Organizations- Startups

Every business needs capital to grow, but most entrepreneurs have limited energy and
time reserves. Everyone wants to make sure that by choosing one type of financing or another
they end up with access to the best connections and opportunities. So where to start?

The dream of any startup is to be accepted into a top-tier program and have the opportunity to
pitch to the most prominent investors. But it’s worth understanding the two types of primary
funding options that provide such opportunities first: accelerators and incubators.

Business incubators and accelerators are programs designed to help entrepreneurs launch
their businesses. They provide mentorship, resources, and support to help startups grow. The
main difference between the two is that incubators provide longer-term assistance while
accelerators focus on shorter-term growth. Business incubators are typically funded by
government or private organizations, while accelerators are usually run by venture capitalists or
angel investors. Both types of programs offer a variety of services such as access to mentors,
networking opportunities, office space, and funding.

Business incubator Definition:

It is an organization that helps startup companies and individual entrepreneurs to develop

their businesses by providing a full-scale range of services starting with management
training and office space and ending with venture capital financing.
Doing Business in India

The National Business Incubation Association (NBIA) defines business incubators as a

catalyst tool for either regional or national economic development. NBIA categorizes its
members' incubators by the following five incubator types:

 Academic institutions
 Non-profit development corporations
 For-profit property development ventures
 Venture capital firms
 Combination of the above

Key Features of Incubation Labs:

Systemic Thinking
It is impossible to conceive of today’s innovation labs separately from the discourse on
systemic change. Incubation labs claim of “rethinking the system” or working to “transform
entire industries”.

Applied Orientation
Labs intend to develop tangible solutions, not just ideas, and therefore seek to remain
active throughout the whole innovation process, going beyond the ideation stage where possible.

Expectation of Breakthrough Solutions

Innovation labs pursue disruptive innovations and are called to “imagine the
impossible”. Rather than settling for incremental improvements.

Heterogeneous Participants
Innovation labs engage a wide range of participants, cutting across the boundaries of
industries, professions, and cultures; they bring together “an unusual bunch” of people to work
together.

Focus on Experimentation
They encourage participants to try things out on a small scale, take risks, prototype, test
and accept failure as part of progress, re-inventing their own methods and approaches as they go
along.

Long-term Perspectives
Innovation labs are often framed as vehicles for discovering the future. Such freedom
from immediate results creates space for blue-sky thinking and activities such as horizon
scanning, foresight scenarios, strategic planning, and emergent signal analysis.

Rich Innovation Toolbox

Innovation labs apply a wide range of methods and tools to stimulate creativity, guide
discussions, moderate collaboration, as well as develop, prototype, and experiment solutions.
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Advantages of business incubators:

1. Physical facility support: Business incubators provide a) Physical facility eg. Rental
space, electricity, high speed internet access, market research facilities, conference hall
facilities.
2. Service support: Business incubation as business support services like

 They provide Marketing assistance.

 Providing access to bank loans, loan funds and guarantee.
 Incubators help with presentation skills.
 They link to higher education resources.
 They link to strategic partners.
 They provide Access to angel investors or venture capital.
 They organise comprehensive business training programmes.
 They act as Advisory boards and mentors.
 They help in Management team identification.
 They help with business etiquette.
 They provide technology commercialization assistance.
 They help with regulatory compliance.
 They provide Intellectual property management.
 Incubators help in accounting facilities/financial management
 Incubators help in Market Research

3. Networking facilities: Business incubators provide networking facilities to the members.

It encompasses a set of relationships with various agents or organisations. Building
networks shortens and accelerates the firms’ learning process.

What is a startup accelerator?

A startup accelerator is an organization that offers mentorship, capital, and connections to

investors and business partners. It’s designed for select startups with promising MVPs and
founders, as a way to rapidly scale growth.

A startup accelerator, sometimes referred to as a seed accelerator, is a business program

that supports early-stage, growth-driven companies through education, mentorship and
financing.

Startups typically enter accelerators for a fixed period of time and as part of a cohort of
companies. While accelerator programs can provide beneficial resources to organizations at all
stages of development, most focus on those that are pre-revenue.
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The most popular sectors for startup accelerators include

 Tech hardware,
 AI
 Biotech

Startups that want to join an accelerator submit an application and are often admitted in
batches split up throughout the year. Once accepted, the startup accelerator will provide
resources and services such as guest speakers, advising hours, a negotiated amount of capital and
sometimes a shared co-working space. Term periods average around 3-4 months and require
anywhere around 3-8% ownership of the startup. The assistance of an accelerator ends with a
"graduation" or demo day, when startups present their work and proceed independently.

How Long Do Startup Accelerators Last?

A typical startup accelerator program lasts from 3-6 months. During this time, startup founders
are often relocated to the program’s base, which may be in Silicon Valley or another global tech
hub. While California naturally has one of the largest offerings of startup accelerators, there are
programs all over the world. Some programs even split time between different locations,
allowing for greater exposure to different global networks and expanded learning.
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History of startup accelerators

The first independent startup accelerator was Y Combinator, which was originally
started in Cambridge, Massachusetts but then moved to Silicon Valley. After this business model
was proven successful, seed accelerator programs began growing rapidly across the United
States and Europe. By 2015, it was observed that around one-third of startups that achieved
funding went through an accelerator.

In addition to independent startup accelerators, large corporations have begun to create their own
accelerator programs that follow similar principles but are usually focused on more specific
categories.

Accelerators are also helping to expand startup activity beyond tech hubs such as Silicon Valley
and the Boston-Washington corridor.

Why Startup Accelerators

Accelerators have clearly taken hold in recent years. But accelerators do that makes them
so different from other early stage investors and support organizations that are apparently falling
over each other to be in their ranks.

1. Comprehensive support
Operating a startup can be lonely and challenging. That's where an accelerator can help. When
you work within an accelerator, you get support from mentors and those sponsoring you. Besides
emotional support, they can provide direction, experience and knowledge. Plus, you have the
support of other founders in the accelerator program with you.

2. A full roster of activities

While an accelerator program may seem like a short time, those few months are jam-packed with
activities that benefit you and your startup. Although accelerator programs do vary, a typical
program includes meetings with mentors, feedback sessions, "demo day" presentations,
networking and social activities. There is a lot of information to glean from these events and
even more to apply directly to your startup.

3. Investor access
While accelerator programs don't tend to give out much in funding, what they do is connect you
directly to interested investors who are drawn to accelerators in the hopes of discovering the next
big thing. During an accelerator's "demo days," many investors are invited to watch the
presentations.
Doing Business in India

There is also time to meet and mingle with investors. This opportunity can open the door to
additional funding offers, especially when the investors see that the accelerator program has
helped you further develop your startup into something that shows the potential for return.

4. Accelerated knowledge
An accelerator program packs in so much information from the years of experience and skills
that each mentor or accelerator manager has amassed. This concentrated form of information
allows you to speed up what you are doing with your startup. Instead of reinventing the wheel,
you are leveraging their years of accumulated wisdom to launch your startup in a more
calculated, strategic way. Clearly, this can improve your chances of success.

5. A gateway to future customers

Accelerators are now including target audience members at demo days so they can hear about
what you are doing as you share more about your project. This can create an early buzz about
your startup. The advance publicity can also help you validate what you are doing and give you a
timeline to work toward so you keep those future customers ready and waiting for your launch.
The prospects you interact with during demo days or via other channels can form the start of an
important database of leads, as well as give you a head start on brand development and
recognition.

6. Skills development
An accelerator program focuses on teaching you the skills that are essential for running a
business, including sales and marketing, communications, finance and even some technical
skills.

7. Risk management
The risk of failure is on the mind of every startup founder. It can feel as though the cards are
stacked against you, and there is risk in everything you are taking on. This includes the market
you are entering, the product you are offering and the concept that you are selling.

An accelerator can identify the risks within your concept and help you work on minimizing
them. Also, those within the program can provide you with direction in proactively taking on risk
and managing it effectively.

8. A bigger-picture, long-term view

As a founder, especially a first-timer, it can seem impossible to look beyond the first six months
to a year. However, it is vital to work toward a much longer view and outcome. Accelerators
stand outside the trees that are blocking you from seeing the forest.

Mentors in accelerator programs can help you see the complexity that will develop in time and
steer you in the right direction to deal with it. They can ask the questions that get you thinking of
Doing Business in India

the bigger picture and what it should look like. Then these mentors can suggest the tools and
tactics to get you there.

9. A springboard
An accelerator can work for startups in all phases of their growth. Even those that are much
closer to becoming an actual business should consider one. You may have encountered a
problem or reached a growth plateau. An accelerator can be that personal trainer who kicks you
to the next level that you couldn't figure out how to get to on your own. This might include using
the accelerator and the expertise within it to launch a more diversified offering or expand into a
new market.

10. An accelerator for everyone

Accelerators don't offer one model or format. The growth in accelerator programs means that
there is one that most likely addresses your growth stage, location, industry or niche, desired
level of oversight and involvement, planned outcome or any other factors that are critical to what
you want to accomplish. The result is an encouraging environment that will help you thrive.

11. Motivation and morale

The collective and collaborative environment found in accelerators is sure to keep you going and
moving forward. Interaction with other founders is a powerful motivating force. When you hear
about their own self-doubts and challenges, it resonates with you. Plus, it reminds all of you that
it is possible to overcome those doubts and work together to clear your respective hurdles.

12. Continued support long after the program ends

Just because the accelerator program ends in a few months doesn't mean the support does. Long-
time relationships develop at accelerators. Plus, the alumni network is always there to tap into --
to inquire about talent, seek investors, or get feedback -- as you continue with your startup or
take on any other projects in the future.

Benefits of an Accelerator

The benefits that come with putting a group of talented startups, investors, and business decision-makers
in one campus are clear:

 One-of-a-kind networking opportunities. Get access to opportunities with well-established

companies and influencers.

 Personalized guidance from serial founders and investors. Accelerators work with angels, VCs,
and seasoned founders — they may even end up investing in accelerated startups at the
program’s end.
Doing Business in India

 Collaboration and partnerships with innovative startups. Most startups are facing similar
customer acquisition or team management issues — accelerators give you a chance to learn how
to overcome early challenges together.

4-Cs framework is a best practice from successful accelerators

The 4-Cs framework is a best practice from successful accelerators around the world:

Coaching (or mentoring) the founding teams on the product, go-to-market, etc., using
frameworks like the Lean Startups and Startup Maturity Model while providing a safe
environment for founders to develop their personal leadership skills.

Community: Building a vibrant e-community of peers and connecting entrepreneurs to the vast
ecosystem of experts and mentors is a critical offering for accelerators.

Customers: Most (deep-tech) startups struggle with disciplined approaches for acquiring and
servicing customers. Accelerators can not only help startups develop related talent and processes
but open the doors to a global base of potential customers (especially relevant for corporate
accelerators).

Capital: Accelerators help founders connect to angel investors and VCs who are aligned with
the venture’s vision, and can add strategic non-financial value.

Role of Incubators and Accelerators in the Startup eco system

Startup incubators/accelerators support early-stage, growth-driven companies through capacity-

building sessions and mentorship,

1. Provides an ecosystem of support

Accelerators often come with additional support systems such as law firms, patent attorneys, key
industry experts, advisors, regulatory experts, and CFO services interested in advising early-
stage startups. These services are often rendered free of cost or at a reduced price. The founding
team also gets to interact and learn from other startups in the cohort facing challenges unique to
the industry.

2. Develop skills for the founding team

Accelerators help founding teams build critical strategy documents such as a business
plan, financial forecast, sales and marketing strategy, organization culture, team-building, and a
technology roadmap. Accelerators also help the founding team identify gaps in critical skill sets
and build a hiring strategy.

3. Helps build the first iteration of your startup

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Most accelerators end with a “Demo Day” where participating startups pitch for follow-on
investments from local or global VCs. The founders and the first few employees come together
to define a target customer; identify their pain points, and a potential solution.

4. De-risks future investors

Angel investors feel that “graduating” from an accelerator de-risks the business plan, sales and
marketing strategy, and technology roadmap. It raises the credibility of the founding team as they
have spent three to six months in an accelerator and can show that they can work together
towards a common goal.

Benefits of Startup Accelerators

1) Networking Opportunities

One of the biggest benefits of joining a startup accelerator is the access it gives you to
one-of-a-kind networking opportunities. Established accelerator programs are really
communities of like-minded investors, program alumni, mentors, and other founders. Being able
to make so many connections through a shared program can really come in handy, especially
down the road when you’re looking for investors, partners, or team members to boost your
business even more.

2) Personalized Guidance and Mentoring

Another huge benefit of startup accelerators is the personalized, often one-on-one, and
mentoring and guidance provided to founders. This mentorship is usually given by serial
entrepreneurs, founders, and investors, who have the knowledge and skills it takes to drive a new
company to success. These individuals work closely with chosen startups on skill development,
help them overcome early-stage challenges, and prepare them for raising seed investment down
the road, among other things. The mentors who work with an accelerator program may even
invest in startups who graduate from the program themselves!

3) Opportunities for Collaboration and Partnerships

Since startups are selected for accelerator programs in batches, you’ll also have the
chance to meet and connect with other early-stage founders. This can present opportunities to
learn from each other and share knowledge about how to face certain common challenges that all
startups face. It can also provide chances for collaboration and even business partnerships. For
example, you might meet another founder who is developing something that could be integrated
into your product or service and decide to start working together.

4) Initial Venture Capital

Of course, the nice sum of money provided by a startup accelerator is an enticing part of
the deal for any founder. Though $20,000-$150,000 isn’t a huge amount in the world of startups,
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this initial venture capital can be used to hire new team members, rent office space, and pay for
other key resources. It can be just what you need to keep bootstrapping your startup until you
achieve major profitability.

5) Increased Chances to Raise Seed Funding

While startup accelerators themselves only provide a set amount of funding to their
graduates, they place a large emphasis on preparing founders to raise further capital through seed
funding. According to statistics, approximately 38% of startups that pass through accelerator
programs raise Series A funding, and accelerated companies are 50% more likely to raise seed
funding than non-accelerated companies.

Mentoring
A mentor is a seasoned professional who informally guides a less experienced person in
their professional endeavors

(OR)
A startup mentor is someone who caters specifically to the needs of startup employees.
They offer guidance and support, helping startup workers to develop their skills, grow their
networks, and achieve their professional goals.

(OR)

”Mentoring is protected relationship in which learning and experimentation can occur,

potential skills can be developed, and in which results can be measured in terms of competencies
gained rather than curricular territory covered”

:-Bisk 2002
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Why mentoring?
Starting a new business can be difficult. It often requires gathering information and
attaining specialized knowledge, as well as developing new skills and connecting to a variety of
individuals and resources. Mentorship is widely seen as a way to support entrepreneurs by
connecting them with the information, resources, and networks they need, including partners,
customers, and investors. Mentors can provide feedback, reassurance, and motivation to help
entrepreneurs solve problems and navigate the challenges of starting and growing a business.
They can also serve as role models for entrepreneurs.

Mentors don’t necessarily have to be experienced entrepreneurs. They can be industry

experts, investors, individuals with experience relevant to the entrepreneur’s business, or
others who have familiarity with some aspect of the entrepreneurial process. Mentors may
have experience working with startups, for example, or they could have expertise in a specific
region, industry, type of business, or business process

Benefits of mentoring
Mentors can inspire curiosity, challenge assumptions and expectations, guide by asking probing
questions, and learn alongside the entrepreneur. Mentors can provide valuable knowledge and
advice based on their own experiences, as well as access to additional resources and networks.
Employees have role models to look up to

One of the biggest benefits of having mentors is that employees have someone to look up to. A
good mentor is a role model, an advisor, and a friend all rolled into one. They can provide
guidance when needed and offer support during difficult times.
There's a support system employees can trust

In addition to having someone to look up to, employees also need a support system they can
trust. This is especially important in the early stages of a startup when things are constantly
changing and employees are under a lot of pressure. A good mentor can provide that sense of
stability and offer encouragement when things get tough.
Employees have access to career guidance

Another benefit of having employee mentors is immediate access to career guidance, advice, and
insight. Experienced mentors have a lot of knowledge to share and can help employees navigate
their way through tricky career decisions.
Mentors expand employees' professional networks

In the startup space, visibility is everything. The more people you know, the more opportunities
will come your way. This is where mentors really shine. By expanding an employee's
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professional network, a mentor can help them connect with other professionals in their field and
open up new opportunities for growth and collaboration.

Employees learn from their mentors' mistakes

Finally, having a good mentor is that employees learn from their mentors' mistakes. Experienced
mentors have been down the road before and know what to avoid. They can help employees
make better decisions and avoid common pitfalls.

So, there you have it – the great reasons why you should consider hiring mentors for your
employees.

Funding organizations
Funding refers to the money required to start and run a business. It is a 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. This page shall be your virtual guide to
Startup funding.

What Is an Angel Investor?

Angel investors are wealthy private investors focused on financing small business
ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund,
angels use their own net worth. Compared to venture capitalists, angels may also be more patient
with entrepreneurs and open to providing smaller dollar amounts for a longer time period. But
they do want to see an exit strategy at some point where they can pocket their profits, typically
through a public offering or an acquisition.

The Advantages of Angel Investors

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 Asset diversification: Angel investing allows you to diversify into a high-risk, high-
reward asset class.

 Professional variety: It’s very intellectually stimulating working with a variety of

startups, as it gives you a variety from my day job and allows you to develop new skills.
 Entrepreneurial community: By working with startups and founders you can tap into a
whole ecosystem of support and camaraderie that isn’t usually available in the corporate
world.
 Networking opportunities: You can access a whole network of other founders,
investors, partners, lawyers, and a huge tech community.
 Monetizing your expertise: Your founders may ask for your help and advice (if you
have relevant skills) and this could lead to more angel deals or potentially paid work.
 Startup education: You gain an insight into the joy and pain of running a startup. In
short, you’ll gain lessons and education that money can’t buy.
 See the latest trends: Startups allow you to stay up to date on the latest trends and
technologies. They give you a reason to research and learn about new markets and new
businesses which keep your mind active.
 Huge potential returns. If you manage to hit a home run and back a winner, there is a
huge financial upside. You could double down and then get a great exit.

Disadvantages of Angel Investors

Despite all the advantages I mentioned, there are a few downsides and risks involved with this
type of investing:
 You could lose a lot of money: Most of your investments will fail, and if that happens –
your value in a company could become worthless overnight. That is why you should only
invest a small portion of your wealth into angel investing.

 Return periods can be very long: As we have mentioned before there is very little
liquidity in angel investing so it can take many years before you actually get cash in the
bank from your investment winners. This is a long game, not a get rich quick scheme.

 It is a journey into the unknown: Your decision is more judgment than deep analysis
and evidence. At the angel investment stage, the level of information and certainty you
have is very low, so this is not for people that do not like the unknown.
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 One big disadvantage is that angel investors typically want 10% to 50% of your company
in exchange for funding. That means business owners could lose control of their business
if the angel investors

Sources of Angel Investing

Since angel investors are typically wealthy individuals, it’s not uncommon for business owners
to want to seek them out for funding. So, how do you find angel investors? A few sources of
funding include:

 Angel List: An online platform that helps business owners find investors.
 Angel Investment Network: An online network with over 279,000 investors. Business
owners can create a profile and promote their business. If there are interested angels,
they’ll invest.
 LinkedIn: Professional social networks, like LinkedIn, can give you a direct way to
contact an angel investor.
 Local business groups or schools: Check local business schools or organizations in your
area to see if they can put you in touch with an angel investor.

Angel investors could be:

 Family and friends who want to support the startup

 Professionals: such as doctors, lawyers, and bankers.
 Business executives who are experienced in running large companies.
 Entrepreneurs who have run their own startups.
 Professional angels who make their living from angel investing.
 Angel syndicates: this being a group of investors, who work together on deals.
 Crowd funders: raising funds from a large group who make a small investment.

Roles that Angel Investor:

 Source of Capital: You invest some money and do nothing else. This is not advisable –
but it does happen.

 Advisor: Working ad hoc with the founding team, providing business advice, stress
testing products, and propositions or being a shoulder to cry on. In short, you provide an
external point of view and a fresh pair of eyes.

 Networker: If you have connections in the areas your startup needs then you could
leverage your network to get customers. Many professional investors are very well
connected and know a lot of profiles in their area.

 Recruiter: Startups often need to scale up and grow quickly. With that, hiring can be a
serious block to progression. Investors often refer people who they have worked with in
the past to shortcut the hiring process.
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 PR and Marketing Buzz: Many startups have great products but very few know how to
market and sell them. Some angels use their personal platform to create some buzz, as
this is a very cost-effective way to gain early interest.

 Technical Expert: If you have relevant experience, then you could provide assurance,
advice, or expertise into the startup’s product development.

 Board Member: The board is responsible for making the critical company decisions,
such as whether to raise capital, whether to be acquired, and whether to hire or fire senior
management. So, who is on the board is a big responsibility and can make a huge
difference to the company.

Venture Capital

What do you mean by Venture Capital?

Entrepreneurs need investments for their start-up companies. The investments or the
capital that these entrepreneurs receive from wealthy investors is called Venture Capital and the
investors are called Venture Capitalists.
VC firms reduce the risk of investments by co-investing with other VC firms. Usually, there will
be the main investor called the ‘lead investor’ and other investors will be called ‘followers’.

How does Venture Capital Fund work?

1. Venture Capital Fund is made up of investments from wealthy individuals or companies

who give their money to a VC firm to manage their investment portfolios for them and to
invest in high-risk start-ups in exchange for equity.
2. The basic idea is to invest in a company’s balance sheet and infrastructure.
3. Venture Capitalist nurtures the idea of an entrepreneur for a short period of time and exits
with the help of an investment banker.
4. In a start-up company, VC will receive an equity partnership in exchange for investments
in the start-up company.
5. VC’s receive liquidation preference; it means in the worst-case scenario where the
company fails, VCs are given the first claim to all the company’s assets and technology.
It also offers voting rights over key decisions like Initial Public Offer (IPO) or even sale
of the company.
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Types of Venture Capital funding

As per the ideation stage, age of start-up company and its performance over the years,
venture capital funding can be categorised into different types.

Below table gives a list of the types of venture capital funding and their features

Type of
Objective & Amount of Funding
Funding

1. Pre-seed funding is in the range of $100,000 – $200,000

Pre-seed 2. Funding provided when a startup is less than a year old.
funding 3. Supports R&D, Market Research.
4. Recruit new members.

1. Funding will be in the range of $ 1million – $ 2 million

Seed Capital 2. Start-up company will need a product that will be viable in the market

1. Funding will range in between $ 2 million – $ 15 million

Series A
2. The start-up company needs to have a market-proven product that will help in
funding scaling up fast.

1. Funding can range between $ 7 million – $ 20 million.

Series B
2. This round is considered to be less risky.
funding 3. Funding is used for Business Development, advertising.

Series C 1. Funds for developing more products and services, acquiring another company
funding 2. Funding received is usually in the range of $ 25 million.

1. Few start-ups reach this stage.

2. Positive reasons could be the company wants to stay private for some more time
Series D or they need to go for more expansion before going for IPO.
funding 3. The negative reason could be the company did not hit the expected growth
plans.
4. This is down round funding as trust in the companies abilities has been eroded.

Each letter corresponds to the development stage of the start-up that has received funding.
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Advantages of Venture Capital

1. Banks usually prefer to finance a new business which has hard assets. In the current
information-based economy, new start-ups hardly have any hard asset. Venture
Capitalists step in under these circumstances.
2. They can provide more insights into the market.
3. Can help in strategy formulation.
4. Can help in developing strategic networks

Venture Capital (VC) Fund Structur

Currently, the fund structure is similar to what it was 40 to 50 years back.

1. The partnership is a combination of limited and general partners.

2. The life of the fund ranges from 7 years to 10 years.
3. The VC fund investments take place over the course of the first two to three years and the
returns are usually obtained over the last 2 or 3 years.
4. In today’s scenario, the average fund managed and the number of investments managed is
much more than what it used to be in the past.

Importance of Venture Capital

Venture Capital industry in the USA is considered as an engine of economic growth. The
modern-day computer industry in the USA was created partly due to the capital made available
by early venture capitalists like Tom Perkins, Tommy Davis, Eugene Kleiner, Arthur Rock.
Innovation and entrepreneurship are the kernels of a capitalist economy. New businesses,
however, are often highly-risky and cost-intensive ventures. As a result, external capital is often
sought to spread the risk of failure. In return for taking on this risk through investment, investors
in new companies are able to obtain equity and voting rights for cents on the potential dollar.
Venture capital, therefore, allows startups to get off the ground and founders to fulfill their
vision.

How do Venture Capital firms work?

1. Venture capital funds usually go into a particular industry in a particular time period. For
example, in the 1980s in the US, Venture Capital (VC) funds majorly went into the
energy industry, later on, it shifted into genetic engineering, telecom industry and
software companies. In the next stage, VC funds concentrated more on the Internet-based
industry.
2. One can safely conclude that VC funding is guided more by the growth potential in a
particular industry rather than the potential and skills of individual entrepreneurs.

How is Venture Capital different from an angel investor?

While both provide money to startup companies, venture capitalists are typically professional
investors who invest in a broad portfolio of new companies and provide hands-on guidance and
leverage their professional networks to help the new firm. Angel investors, on the other hand,
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tend to be wealthy individuals who like to invest in new companies more as a hobby or side-
project and may not provide the same expert guidance. Angel investors also tend to invest first
and are later followed by VCs.

What is the difference between venture capital and private equity?

Venture capital is a subset of private equity. In addition to VC, private equity also includes
leveraged buyouts, mezzanine financing, and private placements.

Resources and Tools for Start-up

Some of the best business resources & tools you can have in your toolkit for a startup. These
include more general skills, as well as more specific business skills that you can leverage to
make your new business a success. Some of these skills you may already have – but building on
and improving them will help you succeed in your day-to-day operations.

General skills for startups (and how to build them)

Here we’ll take a look at some of the more general skills required for your startup. These
include soft skills which are skills that come through via your general experiences and previous
employment. Of course, it’s always worth looking to expand and build upon these skills if you
can, as it will further your potential for success.

Curiosity
Real innovation comes from thinking outside the box. Curiosity can often get overlooked, but
when it comes to your startup, learning, exploring, and thinking are essential to finding the best
solution to any problems you might face. Being curious about the world around you can trigger
other people to follow suit and express their own curiosity as well.

Effective communication
Communication and interpersonal skills at work ensure clear expectations and will improve
relationships between co-workers as well. Effective written communication, as well as verbal,
will assist you in building solid relationships with your clients, customers and suppliers. How
you communicate should be a reflection of the startup and the image you’re looking to project.

Resilience
With such a high rate of failure for new businesses and startups, having resilience at work is
incredibly important. You will certainly meet resistance in many different forms as you continue
down the road to startup success, but don’t let this knock you down.
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Creativity
All startups must try and be different from what has come before. If your product or service
is the same as other things in the market, why would anyone want your product or service? This
is where creativity steps in.

Business skills for startups (and how to build them)

Once you’ve aced those general skills, and have brushed up on your previous knowledge and
understanding of each area, you can start to consider more business-focused skills that will help
your startup. These include hard skills – for instance, coding for the web, or SEO marketing.

Web development
It is likely that a customer’s first interaction with your startup will be via your website. In
addition, the events of 2020 and the COVID-19 pandemic have forced companies to focus on
their online presence, and as a result, reliance on web development has taken the lead. This new
tech-driven world is set to stay, so having some technical knowledge is vital. It is worth
familiarising yourself with what the different coding and programming languages are used for, as
well as getting to grips with CSS and HTML which will give you the building blocks necessary
to create an engaging and intuitive website. You can even take this a step further and consider
the uses of UX and UI in your web design, for a really slick visitor experience.

Financial skills
Not only do you need financial backing to start your business, but you also need to maintain
a stream of finances to stay in business. And while you don’t need to be a financial professional,
it’s well worth your while familiarising yourself with the fundamentals of business finance. This
will help you understand your budgets and financial performance. As your startup grows, you
might hire someone with a much better understanding of finances to focus on that aspect of the
business. Nonetheless, it’s worth having an understanding of all things money. Planning,
budgeting, and forecasting are essential aspects of financial analysis, and understanding these
things will give you a much better overview of the startup.

Project planning and strategising

Starting your own business will mean you have to juggle multiple different projects
simultaneously. Knowing the fundamentals of project planning, and then going on to
successfully manage them, is a really important skill to have when starting a new business.
Delegating different tasks to others will get the job done much quicker as well.

Digital marketing
Growing your startup is one of the main goals, and the most effective way of doing this is by
focusing your efforts on digital marketing. Before taking the plunge into the world of digital
marketing, you’ll want to make sure you have an understanding of marketing basics as well. This
will introduce you to more traditional marketing methods, which can be applied to digital
marketing as well..
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Managerial and leadership experience

Leadership and properly managing people is one of the most important skills required for
your startup to be a success. Good leaders can have a huge impact on business, so knowing what
makes a good leader is vital. . Motivating your teammates and coworkers will help them achieve
their goals and therefore improve the success of your startup.

Networking
Building good relationships with others will help your business get the support it needs
and encourage growth too. Networking is the best method of doing this. Effective
networking can help you share knowledge, grab new opportunities, and build your reputation as
well. You can also meet other small businesses and startups, and help each other out.

Question Bank for Module 1

SECTION A (5 MARKS)

1. What is a startup and explain types of startups in detail.

2. Explain the advantages and disadvantages of startups
3. What do you mean by Business incubator, explain with example?
4. How startup accelerator validate the startup business model
5. What are the differences between Incubators and accelerators
6. Explain the role of mentoring in startups
7. Benefits of Angel investor
8. What is the main focus of venture capital in a startup?

SECTION B (9 MARKS)

1. Startup Ecosystem in India is really helping the startup? Explain in detail.

2. How business Incubators are helping in order to scale up the startups?
3. Why Startup accelerator for Startups, explain in detail
4. Why would an angel investor invest in a startup?
5. What are the types of venture capital funding
6. What kind of skills an individual needed to starts his/her own startup business?