FUNDING FOR BUSINESS

STAGES OF START UP FUNDING

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

•Determine product and market fit

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

•Finalise concept, product/market fit and processes to

Professional angel
scale
investors, venture funds
Series A •Optimise product
or VC firms specialising in
•Develop business model
early-stage
•Pay for salaries of key team members
•Scale and increase market share
Similar to Series A but •Grow team with quality talent
also venture capitalists •Build up business development, sales and marketing
Series B
that focus on later-stage teams
growth •Break even and have a net profit
•Make competitors give up
Private equity firms, VC •Increase market share, scale hard and fast
Series C, D, E funds, hedge funds, •Expand internationally
and onwards investment banks and •Undertake M&A activity
secondary market groups •Develop more products and services
 STAGES OF STARTUP FUNDING
• ANGEL ROUND
– 5 lakh-50 lakh $
• SEED ROUND
– 2 lakh-1 Mn $
• SERIES A
– 2lakh- 5 Mn $
• SERIES B
– 5 Lakh-10 Mn$
• SERIES C……
 1. Seed Investment

• It is a preliminary investment stage which is geared towards helping

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

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

• By the time Series B investment is being actively

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

• There is no technical limit to the number of

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

• Under the aegis of Pradhan Mantri MUDRA Yojana

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

• Venture funds typically provide equity and

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

• Early stage VCs seek smaller deals, typically in the US$ 1 - 3 million
range. However, they rarely go below the half million dollar mark,
where there is a strong appetite for financing, but very few
opportunities.
• Erasmic Venture Fund
• Seed Fund
• Infinity Venture
• IFI sponsored facilities such as Swiss Tech VCF
• SIDBI VC
• Gujarat VF.
• Possible sources of smaller investments are represented by local
public-sector facilities, business angels, business incubators funds,
and isolated cases of seed VCFs, such as the microventure schemes
like Aavishkaar India Micro Venture Capital Fund (AIMVCF).
 Angel Investors
• Angels are typically high net worth individuals
who wish to invest some of their surplus funds
in new ventures.
• They can prove to be a good source of capital
and advice at an early stage in the
development of the company.
• For the investor, they bring opportunity to
make high returns from investing at an early
stage in an MSME
 Angel investment networks
• TiE Entrepreneurship Acceleration Programme
• Indian Angel Network
 Indian Angel Network
• Network of Angel investors keen to invest in early stage businesses
• The members of the Network
– leaders in the Entrepreneurial Eco-System
– strong operational experience as CEOs
– background of creating new and successful ventures.
– They share a passion to create scale and value for startup ventures.
• Started in April 2006, the Indian Angel Network
– Money
– provides constant access to high quality mentoring
– vast networks
– inputs on strategy as well as execution
• The Network members, because of their background are better
able to assess the potential and risks at the early stage.
• The Network looks at investing upto USD 1 mn, with an
average of about USD 400-600K and exiting over a 3 to 5
year period through a strategic sale.
• The Network may consider investments over a million
dollars but is only likely to do so through syndication.
• Investment Criteria
The Network is likely to invest in startups that meet the
following criteria :
– High barriers to entry
– A complementary management team
– Scalable business
– Differentiated value proposition (a unique
product/service/process, either in concept or implementation)
 The Network looks at multiple sectors for investment
• Agriculture
• E-Commerce
• Education
• Financial Services
• Gaming
• Healthcare
• Hospitality
• Information Technology
• Internet
• Lifestyle
• Manufacturing
• Mobile
• Retail
• Semiconductor
• Services
• Social-Impact
• The Network looks at investing upto USD 1 mn, with an average of about USD 400-600K and
exiting over a 3 to 5 year period through a strategic sale. The Network may consider
investments over a million dollars but is only likely to do so through syndication.
 START UP INDIA
• Startup India campaign is based on an action plan aimed at
promoting bank financing for start-up ventures to boost
entrepreneurship and encourage start ups with jobs creation.
• The campaign was first announced by the Prime Minister in his
15th August, address from the Red Fort
– focused on to restrict role of States in policy domain and to get rid of
"license raj" and hindrances like in land permissions, foreign
investment proposal, environmental clearances.
– organized by Department of Industrial Policy and Promotion (DIPP).
• A startup is an entity that is headquartered in India which was
opened less than five years ago and have an annual turnover less
than ₹25 cr (US$3.7 million).
• The government has already launched PMMY, the MUDRA Bank,
a new institution set up for development and refinancing
activities relating to micro units with a refinance Fund of ₹200
billion(US$2.9 billion).
 Key points

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

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

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

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

NSTEDB provides financial assistance for creating state-of-art facilities in the identified
thrust areas. It also offers partial /full support for recurring/operational cost for a
period of five years.

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

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

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

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

1. Collateral Free Loans Under CGTMSE Scheme

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

6.1 Schemes for Women

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