How To Fund A START-UP

Publication: The Times Of India Mumbai;Date: Feb 6, 2012;Section: Personal Finance;Page: 20

Shobhana Chadha

The signs are everywhere. Students, women, yuppies, the unemployed, those facing a mid-life crisis, and a whole lot of other categories have succumbed to the e-bug. Frankly, the environment has never been more conducive. Of course, the risks associated with start-ups remain, with more than 50% of all start-ups failing within the first five years. It’s just that landing funds to fuel your venture is easier than ever before. Venture Intelligence, a research firm focused on venture capital and private equity deals in India, says there are 43 angel networks, 111 venture capital investors and 37 incubators in the country. We have come a long way from the days when bootstrapping—falling back on savings, fixed assets, and money from friends and family—was the only option. Nonetheless, this is still the most preferred starting point for a majority of businesses. The trouble with bootstrapping is that it usually means scrimping on capital, which, in turn, curtails the start-up’s flexibility and ability to grow. There is also a very real risk of fledgling entrepreneurs overleveraging themselves. A less risky way to raise seed capital is to pool resources with a group of people who have shared interests and work together to escalate a business idea to at least a prototype. However, if you are sure of the scalability of your venture and are not obsessive about retaining independent control, private funding could be the best option. This comes in various forms, each typically catering to different stages of a start-up, such as the seed stage, early stage and growth stage. Here are some of the options. ANGEL INVESTORS These are high net worth individuals, who invest in a start-up in return for a minority share in the business. They are usually serial entrepreneurs or heads of major multinational firms. They can also be a group of individuals who pool in funds to invest. The key networks include Mumbai Angels, Indian Angel Network, Hyderabad Angels, Pune Tech Angels, Business Angel Network of Kerala and East Angels. How angel investing works Angels typically come into the picture at a start-up’s seed stage, when the business idea is just a concept. The business plan itself is very iffy. So what draws an angel’s attention? Business ideas that have the potential to generate solid returns, as well as the person behind it, but they are basically in it for altruistic reasons. 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. 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 angelbacked 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. However, as Nishant Verman, associate, Canaan Partners, stresses, easy funding is still difficult to come by. “India is no Silicon

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hence. cover options for the next round of investment. many firms. Nexus India Capital and Draper Fisher Jurvetson (DFJ). as in the case of Twitter. VENTURE DEBT This is a medium-term loan that is exclusively provided to companies backed by venture capital firms. Also. innovations in healthcare and rural entrepreneurship. along with an approximate exit valuation.” says Muthuraman. the company’s compounded annual growth should be over 25%. Valley. a boutique financial advisory firm. director. thereby.timesofindia. Instead.” he warns. “Unless an entrepreneur is very experienced. The basic purpose of any venture capital investor is to sell his stake for a profit after 4-5 years. Benefits This is practically the only option that gives entrepreneurs access to deep pockets at a time when they are trying to build the company. Hot sectors The most sought-after sectors by this segment are biotech. You also get expert help and access to the firm’s entire network. precious few are willing to back an idea at the concept stage. unlike angels. Also. How venture capital works They typically invest at an early stage of a start-up. “To meet the expectation. venture capital firms invest their shareholders’ money in start-ups in return for a minority share in the company. How venture debt works The USP here is that no collateral is required to be eligible. in the presentation. mobile value-added services and apps. Gujarat Venture Finance Ltd. be prepared to wait for 3-6 months to close a deal. typically from a private equity player. will be rejected outright. e-commerce. are increasingly willing to provide seed stage funding. This is when the fatter cheques of venture capitalists come into play. such as debentures and preference shares. VENTURE CAPITAL For the uninitiated.” advises Muthuraman. where a super angel like Mike Maples will invest in a product when it’s no more than a blueprint sketched on a notepad. Ncubate Capital. So. venture debt providers evaluate applicants on the basis of a startup’s fundamental enterprise value. Venture capital firms have been known to help start-ups organise the next round of funding as well. The safest bets are the ones where there is a business and professional connect. If the investment amount is higher. say industry insiders. a typical player expects an internal rate of return of 25% on the investment in 4-5 years. A business with low scalability may not be able to provide them with the desired returns on their investment and. it is risky if everything depends on one person. the venture capital firm may choose to take a minority stake and invest the balance in convertible Don’t balk. healthcare. You will also need to have an exit strategy. be prepared to answer questions on the kind of bond you share with your business partner or the rapport with your team. Sequoia Capital. IT-ITeS. such as Accel India Venture Fund. which provides venture capital to tech start-ups: “We like ventures where the product or service is established and the start-up requires funding for commercialisation or scaling up of operations. mobile value-added services.” says N Muthuraman. and green technology.asp?Style=OliveXL. It suits companies that have very high scalability and don’t need too much recurring capital. Hot sectors “Currently. Private equity’s fatter cheques are typically reserved for mature companies. RiverBridge Investment Advisors. these investors usually don’t believe in oneman shows. Drawbacks “Venture capital funds in India require proof of concept and decent revenue visibility before investing.How To Fund A START-UP http://epaper. but let us consider the thumb rules. Says Arvind Modi. each player will have sectoral preferences. Also. A typical player is willing to put $2-8 million ( 10-40 crore) in return for a 10-40% stake in the start-up.” says Modi. pegging its future cash flow and ability to repay 2 of 6 06-02-2012 11:56 . If you are planning to approach a venture capital firm. assessing how it will grow and.” adds Verman. angels are interested in funding education.” However. he won’t be able to deal with the challenges posed by a start-up single-handedly. “It is a highly dilutive way of raising capital.. In addition. education. associate vice-president (investments).. the possibility of an IPO or a potential buyer. Seedfund. Seeing their investment going down because of a silly feud between the core team members in a start-up is the last thing they want.

The scheme lends up to 1 crore to small enterprises for working capital and capital expenditure without collateral. Recognising the fact that the collateral requirement deters many a start-up. Besides. depending on the growth stage of company and the nature of the government and SIDBI have set up a Credit Guarantee Fund Trust for Micro and Small Enterprises. venture debt providers typically require an equity kicker. finance companies also offer collateral-free working capital loans to small enterprises with at least three years of operations. Muthuraman says banks now give importance to cash flow rather than the primary security or additional collateral. managing director. Drawbacks Apart from the interest on the loan.” He adds that the interest rates are fixed for the tenure of the loan and are competitive compared with rates that SME clients can usually obtain from banks. access to all other sources becomes easier. the key to landing smart funding is to never lose hope. this is a useful tool for an entrepreneur wanting to minimise his equity dilution early on as it can bridge the gap between the funds provided by the venture capitalist and his actual requirement. the better the broth. or shares of your company.” How bank loans work Usually banks and finance companies fund up to 80-90% of the loan-to-value ratio (borrowed amount divided by the asset value you are purchasing or refinancing).5-20 crore. Ultimately.. Incidentally. be it property. According to Muthuraman. It also enables us to keep our loan interest rate down to a minimum. Says Sushil Munhot. provides more flexibility to entrepreneurs.” says Hattangdi. but the latter is usually given to established start-ups. the loan. particularly in the early stages. Small Industries Development Bank of India (SIDBI): “One should look at bank funding only after the product has gone through seed or venture cycle and one wants to commercialise it further. Hence. Sooner or later. it understands that a venture is prone to volatility early in life and. depending on the credit history of the borrower and the collateral put up. a credible business plan and a solid venture capital investor base are some factors that we would consider in our assessment. SVB India Finance: “An experienced founding team. However. Benefits Venture debt financing is structured specifically to support seed and early-stage start-ups. These funds come with the least amount of restrictions and can be utilised for any business initiative. if a start-up maintains a healthy credit track record while servicing the loan.timesofindia. chairman and managing director.How To Fund A START-UP http://epaper. while loans against property cost 12-18%. machinery or marketable securities. Bank loans can be availed of for short or long term.. Benefits It is usually the cheapest source of funding and helps in controlling costs. 10 TIPS TO BECOME YOUR OWN BOSS Essential lessons when you embark on the entrepreneurial journey —With inputs from Milan Sharma 3 of 6 06-02-2012 11:56 . Drawbacks Such loans typically go to existing small businesses which have shown over three years of profitability and credit history.asp?Style=OliveXL. You can expect funding of 2. from basic operations and working capital to supporting capital expenditures and making acquisitions. This is one area where the more the cooks. Says Ajay Hattangdi. These are available at interest rates of 16-20%. If you are convinced that you have identified a genuine market need and that you can actually implement your innovation. just put together a convincing business plan and start scouting for suitors. someone is sure to say ‘I will’. “The kicker enables us to get a share in the upside if the company does well. to compensate for the higher risk taken. LOANS FROM NBFCs AND BANKS This is a standard option for entrepreneurs but not for seed-stage start-ups. consequently.

. you are accustomed to other people doing things for you. you have to take care of everything yourself—from operational expenses to food bills.” – Rivi BELIEVE IN YOURSELF “Belief in one’s idea can take you a long way. so you need to plan your family’s finances accordingly. Dream Theatre LEARN TO COPE WITH FAILURE “I met 15 VCs before one agreed to fund 4 of 6 06-02-2012 11:56 .timesofindia. Fetise.” – Chetan Bafna.How To Fund A START-UP http://epaper. I would return to a job.” – Jiggy George. which was acquired by a bigger website. A capital cushion is essential to ensure that your family lives comfortably. An entrepreneur must look into his area of core competence and use it to devise a strong plan. Snapdeal HAVE A PLAN THAT IS UNIQUE “The business plan should be unique and clutter-free. he spent an hour trying to convince me to go back to my job.” – Kunal Bahl.” – Ashutosh Garg. PREPARE YOUR FAMILY “My wife wasn’t too comfortable with my entrepreneurial zeal.asp?Style=OliveXL. but I didn’t give up on my vision.” – Kavindra Mishra. One investor rejected my proposal within five minutes of a presentation. Customer XPs PLAN YOUR FINANCES “You might not earn anything in the first 2-3 years. so we agreed to give it a year. Just Dial INTERACT WITH LIKE-MINDED “My partner Abhishek was running an ecommerce portal. there were people who ridiculed the idea. I had the last laugh. In a start-up. Guardian Lifecare FORGET THE JOB PERKS “As a manager in a company. He expressed interest in working with me and we launched our site. If I failed to zero in on something within this period. Our concept was ahead of its time. At every step..” – VSS Mani. Instead.

this is the best time. the margins were quite low.asp?Style=OliveXL. After teaching more than 600 students for eight years.” – Rahul Anand. GAIN ENOUGH EXPERIENCE “I used to teach at a diving centre in Lakshadweep.How To Fund A START-UP http://epaper. This was the time we concluded that it was better to focus on products.timesofindia. I decided to float my own diving company. we realised that service was not our core competence.. Besides. Flipkart HAVE A PLAN ‘B’ READY “After the first few months. Orca Dive Club DON’T TAKE TOO MUCH DEBT “If you are thinking of starting up. You can never get out of it.” – Anees” – Binny Bansal. Happily Unmarried 5 of 6 06-02-2012 11:56 . But don’t take a home loan since it kills entrepreneurship.

.com/Repository/getFiles.timesofindia.How To Fund A START-UP http://epaper. 6 of 6 06-02-2012 11:56 .asp?Style=OliveXL..

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