Creating a

Successful
Financial Plan
 Financial Planning
• One-third of entrepreneurs run their
companies without any kind of financial
plan!
• Only 11 percent of small business owners
analyze their companies’ financial
statements.
 Basic Financial Reports
 Balance Sheet - estimates the firm's worth on a
given date; built on the accounting equation:
Assets = Liabilities + Owner's Equity
 Income Statement - compares the firm's expenses
against its revenue over a period of time to show
its net income (or loss):
Net Income = Sales Revenue - Expenses
 Statement of Cash Flows - shows the change in the
firm's working capital over a period of time by
listing the sources of funds and the uses of these
funds.
Determining Financial Needs
 Type of capital
• Fixed Capital
• Working Capital
• Growth Capital
 Understanding Capital Needs
• Under Capitalization
• Over Capitalization
• Phased Financing

PROBLEM AREAS
 Venture’s Life Cycle and Financing
• Early stage Financing
– Seed Capital

– Start Up capital/ First stage Financing

(organization and operational)

• Expansion or Development Financing

– Second Stage Financing
( initial w.cap that supports first commercial sales)

– Third stage financing

(to lead towards breakeven point , firm still in hands of founders)

– Fourth stage Financing / mezzanine

(stage till it goes public)
 Key terms
• Initial/Seed Capital - Small amount of capital provided to the entrepreneur
for concept testing.
• First Stage - Funds raised to initiate commercial manufacturing and sales,
after initial capital runs out.
• Second Stage - Usually to fund working capital for initial expansion.
• Third Stage - Funds provided for major growth plans, generally used for
capacity expansion, marketing and working capital.
• Follow-on/Later Stage - Subsequent investment made by an investor
who already has an exposure in the company.
• Buyout - Funds provided to enable acquisitions.
• Secondary Purchase - Purchase of already issued company shares from
an existing shareholder.
• Bridge/Mezzanine - Financing a company just before its IPO.
• IPO/Initial Public Offering - A company's first offering of stock to the
public..
• Secondary Public Offering - Any offering subsequent to IPO.
• Venture Capital - Capital with which investors fund early stage, more risk
oriented businesses, on the basic premise of high risk, high return.
• Angels - High networth individuals who provide seed money.
 Financing Options
• Debt Financing : Obtaining Borrowed
funds
• Equity Financing : Obtaining funds for
the company in exchange of ownership
• Internal funds : internally generated from
several sources within the company
• External funds : self, friends and family ,
commercial banks , govt agencies etc.
 Sources of Finance
• Self
• Family and friends
• Suppliers and trade credit
• Commercial Banks
• Asset Based lenders
• Institutional companies
• Angels
• Venture capital
• Private equity placement
• Govt. programs
Long term and short term
finance options
• 1) Bootstrapping your startup business:

• Self-funding, also known as bootstrapping, is an effective way of startup

financing, specially when you are just starting your business. First-time
entrepreneurs often have trouble getting funding without first showing some
traction and a plan for potential success. You can invest from your own savings
or can get your family and friends to contribute. This will be easy to raise due
to less formalities/compliances, plus less costs of raising. In most situations,
family and friends are flexible with the interest rate.
• Self-funding or bootstrapping should be considered as a first funding option
because of its advantages. When you have your own money, you are tied to
business. On a later stage, investors consider this as a good point. But this is
suitable only if the initial requirement is small. Some businesses need money
right from the day-1 and for such businesses, bootstrapping may not be a good
option.
• Bootstrapping is also about stretching resources – both financial and otherwise
– as far as they can.
• 2) Crowdfunding As A Funding Option:

• Crowdfunding is one of the newer ways of funding a startup that has been gaining lot of
popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one
person at the same time.
• This is how crowdfunding works – An entrepreneur will put up a detailed description of his business on
a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much
funding he needs and for what reasons, etc. and then consumers can read about the business and
give money if they like the idea. Those giving money will make online pledges with the promise of pre-
buying the product or giving a donation. Anyone can contribute money toward helping a business that
they really believe in.

• Why you should consider Crowdfunding as a funding option for your business:
The best thing about crowd funding is that it can also generate interest and hence helps in marketing
the product alongside financing. It is also a boon if you are not sue if there will be any demand for the
product you are working on. This process can cut out professional investors and brokers by putting
funding in the hands of common people. It also might attract venture-capital investment down the line if
a company has a particularly successful campaign.

• Also keep in mind that crowdfunding is a competitive place to earn funding, so unless your business is
absolutely rock solid and can gain the attention of the average consumers through just a description
and some images online, you may not find crowdfunding to work for you in the end.
• Some of the popular crowdfunding sites in India
are Indiegogo, Wishberry, Ketto, Fundlined and Catapooolt.
• In US, Kickstarter, RocketHub, Dreamfunded, Onevest and GoFundMe are popular crowdfunding
platforms.
• 3) Get Angel Investment In Your Startup:

• Angel investors are individuals with surplus cash and a keen interest to
invest in upcoming startups. They also work in groups of networks to
collectively screen the proposals before investing. They can also offer
mentoring or advice alongside capital.
• Angel investors have helped to start up many prominent companies,
including Google, Yahoo and Alibaba. This alternative form of investing
generally occurs in a company’s early stages of growth, with investors
expecting a upto 30% equity. They prefer to take more risks in
investment for higher returns.
• Angel Investment as a funding option has its shortcomings too. Angel
investors invest lesser amounts than venture capitalists (covered in next
point).
• Here is a list of popular Angel Investors in India – Indian Angel
Network, Mumbai Angels, Hyderabad Angels.
Also check out the list of individual Angel Investors in India, some of
these active angel investors have invested in many successful startups.
• 4) Get Venture Capital For Your Business:

• This is where you make the big bets. Venture capitals are
professionally managed funds who invest in companies that have huge
potential. They usually invest in a business against equity and exit when there is
an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus
test of where the organisation is going, evaluating the business from the
sustainability and scalability point of view.
• A venture capital investment may be appropriate for small businesses that are
beyond the startup phase and already generating revenues. Fast-growth
companies like Flipkart, Uber, etc with an exit strategy already in place can gain
up to tens of millions of dollars that can be used to invest, network and grow their
company quickly.
• However, there are a few downsides to Venture Capitalists as a funding option.
VCs have a short leash when it comes to company loyalty and often look to
recover their investment within a three- to five-year time window. If you have a
product that is taking longer than that to get to market, then venture-capital
investors may not be very interested in you.
• They typically look for larger opportunities that are a little bit more stable,
companies having a strong team of people and a good traction. You also have to
be flexible with your business and sometimes give up a little bit more control, so if
you’re not interested in too much mentorship or compromise, this might not be
your best option.
• 5) Get Funding From Business Incubators & Accelerators:

• Early stage businesses can consider Incubator and Accelerator programs as a funding
option. Found in almost every major city, these programs assist hundreds of startup
businesses every year.
• Though used interchangeably, there are few fundamental differences between the two
terms. Incubators are like a parent to to a child, who nurture the business providing
shelter tools and training and network to a business. Accelerators so more or less the
same thing, but an incubator helps/assists/nurtures a business to walk,
while accelerator helps to run/take a giant leap.
• These programs normally run for 4-8 months and require time commitment from the
business owners. You will also be able to make good connections with mentors,
investors and other fellow startups using this platform.
• In US, companies like Dropbox and Airbnb started with an accelerator – Y
Combinator. Here is a list of top 10 incubators & accelerators in US.
• In India, popular names are Amity Innovation Incubator, AngelPrime, CIIE, IAN
Business Incubator, Villgro, Startup Village and TLabs.
• Popular business accounting software – ProfitBooks is also a part of Washington
based accelerator Village Capital.
•
• 7) Raise Money Through Bank Loans:
• Normally, banks is the first place that entrepreneurs go when thinking about
funding.
• The bank provides two kinds of financing for businesses. One is working
capital loan, and other is funding. Working Capital loan is the loan required to
run one complete cycle of revenue generating operations, and the limit is
usually decided by hypothecating stocks and debtors. Funding from bank
would involve the usual process of sharing the business plan and the
valuation details, along with the project report, based on which the loan is
sanctioned.
• Almost every bank in India offers SME finance through various programs. For
instance, leading Indian banks – Bank Of
Baroda, HDFC, ICICI and Axis banks have more than 7-8 different options to
offer collateral free business loans. Check out the respective bank sites for
more details.
• In US, sites like Kabbage can help you get working capital loan online in
minutes. Unlike traditional lenders, Kabbage approve small business loans by
looking at real-life data, not just a credit score.
Get Business Loans From Microfinance Providers or NBFCs

What do you do when you can’t qualify for a bank loan? There is still an option.
Microfinance is basically access of financial services to those who would not have
access to conventional banking services. It is increasingly becoming popular for
those whose requirements are limited and credit ratings not favoured by bank.
Similarly, NBFCs are Non Banking Financial Corporations are corporations that
provide Banking services without meeting legal requirement/definition of a bank.
Check MicroFinance Institute Network for more details. Here is a list of top
MicroFinance companies in India.
Govt Programs That Offer Startup Capital:
The Government of India has launched 10,000 Crore Startup Fund in Union
budget 2014-15 to improve startup ecosystem in India. In order to boost
innovative product companies, Government has launched ‘Bank Of Ideas and
Innovations’ program.
Government backed ‘Pradhan Mantri Micro Units Development and
Refinance Agency Limited (MUDRA)‘ starts with an initial corpus of Rs. 20,000
crore to extend benefits to around 10 lakhs SMEs. You are supposed to submit
your business plan and once approved, the loan gets sanctioned. You get a
MUDRA Card, which is like a credit card, which you can use to purchase raw
materials, other expenses etc. Shishu, Kishor and Tarun are three categories of
loans available under the promising scheme. Learn more about MUDRA.
Also, different states have come up different programs like Kerala State Self
Entrepreneur Development Mission (KSSEDM), Maharashtra Centre for
Entrepreneurship Development, Rajasthan Startup Fest, etc to encourage small
businesses.
SIDBI – Small Industries Development Bank Of India also offer business loans to
MSME sector.
In US, there is a small business lending fund and dedicated portal
for Government grants available for local businesses.
If you comply with the eligibility criteria, Government grants as a funding option
could be one of the best. You just need to make yourself aware of the various
Government initiatives.
Read about Indian government’s Startup India Action Plan.
10) Quick Ways To Raise Money For Your Business
There are few more ways to raise funds for your business. However, these
might not work for everyone. Still, check them out if you need quick funds.
Product Pre-sale: Selling your products before they launch is an often-
overlooked and highly effective way to raise the money needed for financing
your business. Remember how Apple & Samsung start pre-orders of their
products well ahead of the official launch? Its a great way to improve
cashflow and prepare yourself for the consumer demand.
Selling Assets: This might sound like a tough step to take but it can help you
meet your short term fund requirements. Once you overcome the crisis
situation, you can again buy back the assets.
Credit Cards: Business credit cards are among the most readily available ways
to finance a startup and can be a quick way to get instant money. If you are a
new business and don’t have a tons of expenses, you can use a credit card and
keep paying the minimum payment. However, keep in mind that the interest
rates and costs on the cards can build very quickly, and carrying that debt can
be detrimental to a business owner’s credit.
 Two Popular Modes
• Angel Investors
• Venture capitalists
 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
1. Mumbai Angels,
2. Indian Angel Network,
3. Hyderabad Angels,
4. Pune Tech Angels,
5. Business Angel Network of Kerala and East Angels.
 Angel Investors

• High Net Worth Individuals

• Successful serial entrepreneurs (also
parallel entrepreneurs)
• Good knowledge of technology and
business acumen
• Have country-specific preferences
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 raw.
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.

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 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.
Investors look at a variety of factors when it comes to selecting and funding a
startup, like:

• Whether the startup is based on an innovative and unique concept

• Whether it is built on a scalable technology-based business model
• The background and qualifications of the founder, and his/her passion
• The sector the startup falls in. Startups in the areas of artificial intelligence,
fin-tech, healthcare and e-commerce tend to be favoured by investors at
present
• Whether similar startups have done well in other parts of the world
• Whether subsequent rounds of funding will be easily available
• The intellectual property owned by the startup
• Whether the startup has a good mentor on board.
• An investor will refuse to put his money in a startup which is ill-equipped or
inadequately prepared.
Some of the essentials for a startup seeking a seed
investment include:
• Business Model: The business model of a startup should be highly
scalable so that the investor can foresee the expansion of the business and
the returns for his investment. It is beneficial for a startup to have a
business model which can easily be scaled up to various locations and
geographies. This is one of the major attractions for the investor. From past
trends, it is observed that the preference of the investor is the technology-
based asset light model. The investors would be more interested in such
startups, which are technology-driven and do not follow the traditional office
setup. Good backward and forward logistics integration is also essential.
• Product or Service: The special or distinguishing factor of the product or
service must be highlighted. Easy accessibility of the product or service for
the consumer through mobile and other movable devices also plays an
important role. Startups should know how to package and market their
products. Even an average product that is represented in a more
appealing, attractive and unique way will have an advantage over its
competitors. This may seem to be superfluous, but it does affect the buying
preferences of customers.
• Dynamic and Skilled Team: An efficient team can very well be the main
attraction for the investors. A marvelous idea might be no good if it is not being
worked upon by a great team. Every person in the team has a role to play and
certain goals to achieve. The key professionals of the startup play an important
role in this regard. The founders should be able to put across to the investors the
skills and expertise of such key professionals and the benefits that the business
will get from hiring such persons.
• Market Strategy: The team should have a clear idea of the target market, the
possibilities in that domain, the possible obstacles in that market, any existing or
prospective competition, and the finances that work in that market. The
opportunities in the target market should be assessed and understood. The
startup should also try to adopt a controlled budget and a high impact market
strategy.
• Financial and Legal Knowledge: A clear projection of investment required and
return expected after a specified period of time (say three or five years) on the
basis of rational sales assumptions or background is essential. The business
model and such projections should be in sync. The amount of investment should
not be more than that which would be sensibly required by the business.
Overinvestment might not be a good thing as it will only increase the burden of
money that will have to be repaid in the long term.
• Benefits

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. You can also expect quick access to
funds. It can take anywhere between a day and three months to close a deal.

Drawbacks

The concept of angel funding is still at a nascent stage in India, so they are
difficult to find. You 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.
Venture Capital
 What is Venture Capital?

Venture capital is a means of financing fast-

growing private companies. Finance may be
required for the startup, development/expansion
or purchase of a company via a mechanism such
as in a management buyout .
 What are the advantages of Venture Capital ?
Venture capital has a number of advantages over other forms of finance, such
as:
·Finance - The venture capitalist injects long-term equity finance, which
provides a solid capital base for future growth. The venture capitalist may also
be capable of providing additional rounds of funding should it be required to
finance growth.
· Business Partner - The venture capitalist is a business partner, sharing the
risks and rewards. Venture capitalists are rewarded by business success and
the capital gain.
· Mentoring - The venture capitalist is able to provide strategic, operational and
financial advice to the company based on past experience with other companies
in similar situations.
· Alliances - The venture capitalist also has a network of contacts in many
areas that can add value to the company, such as in recruiting key personnel,
providing contacts in international markets, introductions to strategic partners
and, if needed, co-investments with other venture capital firms when additional
rounds of financing are required.
· Facilitation - The venture capitalist is experienced in the process of preparing
a company for an initial public offering (IPO) and facilitating in trade sales.
 How does VC Industry work
• Venture capital firms typically invest in a venture capital fund for a
period of up to ten years.
To compensate for the long term commitment and lack of both security
and liquidity, investment institutions expect to receive very high returns
on their investment.
• Therefore venture capitalists invest in either companies with high
growth potential where they are able to exit through either an IPO or a
merger/acquisition.
• Although the venture capitalist may receive some return through
dividends, their primary return on investment comes from capital gains
when they eventually sell their shares in the company, typically
between three to five years after the investment.
Venture capitalists are therefore in the business of promoting growth in
the companies they invest in and managing the associated risk to
protect and enhance their investors' capital.
 Venture capital is not suitable for all businesses, as a venture capitalist
typically seeks :

Superior Businesses

Venture capitalists look for companies with superior products or services targeted at
large, fast growing or untapped markets with a defensible strategic position such as
intellectual property or patents.

Quality and Depth of Management

Venture capitalists must be confident that the firm has the quality and depth in the
management team to achieve its aspirations. Venture capitalists seldom seek
managerial control, rather they want to add value to the investment where they have
particular skills including fund raising, mergers and acquisitions, international
marketing, product development, and networks.
Appropriate Investment Structure
• As well as the requirement of being an attractive business opportunity, the venture
capitalist will also seek to structure a deal to produce the anticipated financial returns
to investors. This includes making an investment at a reasonable price per share
(valuation).

Exit Opportunity
• Lastly, venture capitalists look for the clear exit opportunity for their investment such
as public listing or a third party acquisition of the investee company.

Once a short list of appropriate venture capitalists has been selected, the entrepreneur can
proceed to identify which investors match their funding requirements.
1. At this point, the entrepreneur should contact the venture capital firm and identify an
investment manager as an initial contact point.
2. The venture capital firm will ask prospective investee companies for information
concerning the product or service, the market analysis, how the company operates,
the investment required and how it is to be used, financial projections, and
importantly questions about the management team.
In reality, all of the above questions should be answered in the Business Plan.
Assuming the venture capitalist expresses interest in the investment opportunity, a
good business plan is a pre-requisite.