Diverse Styles of Fundraising by a Startup

India has witnessed massive potential and growth in the startup ecosystem. The robust startup ecosystem in India is already the third largest and is likely to have a potential growth in its valuation to almost $1 Trillion by the year 2025.

The startup ecosystem in India is thriving with unicorns each passing year and tagging along, India’s economy is mounting at an exponential rate. In the last era, India was perceived to have more than 100 startups attaining the status of unicorn and there are many potential progressive unicorns in the queue.

The ingredient behind a successful startup is a collective mixture of planning, foresight, customer target and efficient funding from the investors. Start-up requires sustainable cash flow to grow and succeed. Majorly founders start from bootstrapping and after acquiring a certain revenue and marketplace, founders of the startup tend to seek funding from different avenues. These different avenues have different points of interest and explicit impediments.

Along with the legal compliance of incorporation and initial registrations, the founder of the startup is also required to invest significant efforts in selecting an effective source of financing. Any brilliant and innovative idea is just an idea without the right set of team and funds. Funding is an extremely important aspect of meeting the vision of a business. Funding and fundraising, both are fundamental modern business activities that support the growth of a startup.

Selecting the Investor

In order to raise the requisite amount of funds, the founders of the startups are required to possess profound insight into the financial requirements of the company. Not just the financial requirements but the founder shall also be able to contemplate upon the right kind of fund, and association with which not only provide the requisite financial assistance but also the right set of investors’ teams, which would help the founder grow its startup with the right branding and marketing skills.

The founder shall take absolute care while selecting the investor who would not just be investing as a financial investor in the company but would also add the brand image to its portfolio startup, by becoming a shareholder on the cap-table of the startup. Similarly, it is equally important for the investors to be well aware of the nature of the business of the startup, risks involved for the investors returns on the investment, the market growth of the respective sector, and the expertise of the founder in the growth of the business.

Key Funding Options for Raising Investment by the Startup

In this section, we have tried to explain the various methods of funding a startup, which is as follows:

1. Bootstrapping

Bootstrapping is the method of self-funding the startup through personal savings. In this mode, the founder generally either funds the startup initially through their personal savings or by procuring a small amount of funds from friends and family. The initial bootstrapped amount is to get the startup in force with momentum and to introduce the product to the ecosystem. The most important advantage to the founder in bootstrapping its startup is no loss or minimal dilution of its equity. Also, self-funding depicts the commitment of the founder to future investors for raising the funding rounds.

2. Angel Financing

Angel financing refers to early-stage investments raised by the startup either through friends and family or through angel investors. The term angel investors refers to investors who are generally high net-worth individuals or investors who have created their Alternative Investment Fund (AIF) by pooling in finances from multiple small investors and who are investing through the AIF. Angel investors can invest individually as well as in groups in return for equity in the startup and they often come on board the startup with their expertise which is not only financial assistance but in certain cases is also a strategic investment helping the startup to survive and boost the growth at an exponential rate. The most prominent and successful businesses that are initially financed by angel investors include brands like Google and Apple.

3. Venture Capital

Every step in the startup comes with different conduits of challenges that require operational capital. In order to fulfil huge capital requirements of the startup at the Series A/B level the investment by larger players such as registered venture capital investors comes into play. Investment is one of the fundamental ways for many startups to raise operating capital for the expansion and operations of the business. Venture capital or VC is a type of financing that investors provide to startups that investors anticipate is having long-term growth potential. Venture capital evaluation of any startup business is considered a litmus test for determining the direction of the business for future growth. It is an important milestone for any startup to achieve after attaining a certain bar of revenue on its balance charts. Venture capital firms come with expertise, mentorship and which also help the business evaluate the balance between tangents of sustainability and scalability. The venture capital method of raising capital for startups is most suitable for businesses that have attained market presence through their product and services and could exhibit their potential for limitless growth in the future.

4. Venture Debt

Venture debt is a type of loan provided by non-banking lenders to start-ups having high growth potential and sustainable product lines. The positive facet of choosing venture debt over equity is to avoid equity dilution of founders in their startups. The venture debt firms generally provide short-term loans to the company at the interest rate of 11-12% for a fixed term and for which the company issues convertible and non-convertible debentures with the option of conversion of such debt into equity.

Conclusion

The founder along with the growth and development of the startup is also responsible for keeping the startup well-funded, in order to expand and achieve the objectives of the vision of the business. The investment/ raise of capital by the startup helps it accelerate growth without any operational obstructions. The selection and right decision-making of the founder regarding the funding of the startup require the dire need of founders to interact with private equity experts, and business lawyers to understand the balanced contrast of different options of funding. In contrast, a non-funded startup will constantly face difficulties in operations which might create a holdup in the success of the startup. Therefore, an entrepreneur must make a calculative decision regarding the type of funding to select basis the stage and age of the startup.

Frequently Asked Questions (FAQs)

1. What would qualify as a “startup” under the Startup India scheme?

Any entity to fall under the purview of a startup has to fulfill the following conditions:

• The entity must be incorporated in India as a private company, a partnership firm, or a limited liability partnership.
• The Turnover of the entity should not exceed INR 100,00,00,000 (Indian Rupees One Hundred Crores only) in the past ten Financial Years since its incorporation.
• An entity formed as a result of splitting up or reconstruction of another entity shall not be considered a startup.
• The entity would be working towards the development or improvement of a product, process or service and have a business model of scalability with high potential for the creation of wealth & employment.

2. What are some of the Government schemes for startups?

Some of the schemes of the Government to support new emerging startups are:

• The Venture Capital Assistance Scheme: Venture Capital Assistance is financial support in the form of an interest-free loan provided by the Small Farmers Agribusiness Consortium to the qualifying projects to meet the shortfall in the capital requirement for the implementation of a project.
• Support for International Patent Protection in Electronics and & Information Technology (SIP-EIT): SIP-EIT is a scheme to provide financial support to the technological startup units for international patent filing to encourage innovation and recognize the value and capabilities of global intellectual property along with capturing growth opportunities in various sector
•  Stand-Up India for Financing SC/ST and/or Women Entrepreneurs: Stand Up India Scheme facilitates bank loans to emerging startups between Rupees 10 lakh to Rupees 1 crore to at least one scheduled caste or scheduled tribe borrower and at least one woman per bank branch for setting up a greenfield enterprise.
• High Risk - High Reward Research Program: High Risk and High Reward Research is a scheme catalyzing scientific discovery by supporting highly innovative research proposals and ideas expected to have a paradigm-shifting influence on Science and Technology. The budget limit in the said program is not provided, however, the grant provided under this program covers equipment, consumables, contingency, and travel.

3. What are some of the benefits available to startups under the Startup India scheme?

A few of the benefits that would be available to recognized startups under the Startup India scheme are:

• Startups shall be allowed to self-certify their compliance with 6 (six) labour laws and 3 (three) environmental laws through a nominal procedure.
• Startups shall be exempted from paying income tax for the period of 3 (three) years since their incorporation.
• Start-ups shall have the benefit of fast-tracking patent applications and there shall be a rebate of 80% in patent filing along with the facilitation cost which shall be bear by the government.

4. Is there any portal to register startups?

Startups shall get registered on the Startup India portal which is a unified formal platform for all stakeholders in the startup ecosystem. The ecosystem acts as a catalyst in providing the addition of values to the founders and the emerging startups. This ecosystem emerges to be an interactive sphere in which each acting capacity exchanges knowledge and forms successful partnerships in a highly dynamic environment.