Start-Up capital, rather that which is commonly called ‘seed money’ refers to the general expenses that a new business requires at the start. It may be required to cover a variety of requirements, such as the new office space, talented employees, hardware or even new gadgets and equipment. There are a variety of things to be bought or settled before a new business can be comfortably set-up, especially in the top cities like Tokyo, St. Petersburg, Silicon Valley, Abu Dhabi, Delhi, Beijing or Neom.
No entrepreneur can start have his dream business take off without the initial capital to invest in it. For most cases all the money necessary can’t come out of a single wallet, hence, the need for funding. Most of the start-ups across the world seek funding to establish themselves. The preliminary costs of building up a firm from scratch and then giving it a unique identity in the market is a challenging one indeed and more so economically, which is also good for job creation and employment. With proper funding to back them up, any business can have a good start and the mind to grow and soar high. With so many budding entrepreneurs in the world, it is hard to get the right people to invest in your dream out of all the rest of the competitors. There is option of startup business loan but it is not always easy.
The businesses have to first propose an impressive plan, which will convince the investors of a bright and profitable future of the firm. The investors are getting involved with the company with not just the hope of getting the investments back, but also of future returns once the company begins to earn well. The start-up plans are often well-presented before groups of prospective investors at Business Summits or conferences. The tools used include PowerPoint presentations and detailed financial plans for the start-ups. The whole process is called fundraising. If you are an entrepreneur looking for funds to help your start-up, it is important that you gain the trust and faith of your investors. They are about to put their cash into the business and they will not do it if they do not feel there is positivity and an ambition to grow in you. There is also an option as cryptocurrency loan but it is beneficial for online based startups, and is not always helpful as cryptocurrencies are not acceptable everywhere.
MAJOR SOURCES OF STARTUP FUNDING
Often, start-ups get more than one investor to fund them as they start off.
The investors or capital providers often become shareholders in the firm and thus receive their shares of any future profit the business will earn. This is in every way better than availing a loan because it does not entail monthly payments or interest rates. It is seen with start-ups that findings are needed several times, at various stages of its growth. There is usually an investor who leads the rest and who thus own the most shares. As time goes on, the number of investors may increase and the company will go more public as it gets enlarged. This may lessen the control of the founders over the firm but certainly increases its liquidity. These are the stages of a firm when it gains a board of directors, each of whom will be a significant shareholder in the company.
Investors are plenty in the market yet still the numbers are low compared to the number of start-ups themselves. Those who are willing to fund start-ups are usually looking for profitable investments that will fare well. Even if they do not grow so well, if they have performed well, the larger firms may buy them over. Thus, unless the business goes down altogether, the investors will almost always gain from the start-ups. It is one of the reasons why people are willing to take the risk of investments.
Startup incubators help startups. These are usually formed by government or by industries.
4 MAIN STAGES OF BUSINESS OR STARTUP INCUBATION
START UP INVESTMENT OR FUNDING CYCLE
ABOUT BUSINESS INCUBATION PROGRAM
Once entrepreneurs notice good opportunities they startup with whatever trifle amount they have and there are always opportunities of funding later. Throughout funding with self debt creation is also a good option rather than selling equity.
INCUBATION PROCESS DEFINED
Angels and VCs
Venture Capitals are investments that start-ups receive from bigger banks, well-to-do investors or similar parties towards its growth. These are mostly awarded only to those start-ups that have proven themselves in the markets and exhibit immense growth potential in terms of profits. In Venture Capitals, the company is divided into large chunks of shares and then sold to investors as they show interest. But these investments may not always be monetary. There have been technical support or similar aides provided by larger firms as investments. This has of late become a huge attraction to companies that have only been a few years in the markets and are unable to avail themselves bank loans. This however represents much risk to the investors.
The venture capitalists are attracted to the start-ups by submitting a proper business plan before them. If interested, the investors will then initiate the due diligence. It is a research conducted to analyze the growth and condition of the firm so far. It is important as the investors are putting in large amounts at a small firm. The investments hence made will admit them as shareholders in the business for a duration of five to six years. Then, the investors often sell out through mergers or IPOs.
Angle investments are another type of investment upon which the start-ups depend on. It is a name by which the High-Net-Worth Individuals are commonly addressed. The term originated from the Broadway, funnily enough, when the drama companies were kept up by wealthy individuals who gave money. These are investors who are willing pit in their money for the growth of small scale businesses. The up-coming start-ups in their early phases often depend on angle investors for their growth. Angle investors could be a single individual or a group of individuals. They may even be friends or family. They differ from venture capitalist is that the investments are made without aiming a greater return. Rather, it is meant to take the firm through its initial struggles. But to become an angle investor, one must meet the criteria set forth by the Securities Exchange Commission or the SEC. It dictates that one should have a net worth of at least $1 million and an annual income that amounts upto $200,000 to be accepted as an angel investor. Mostly these type of investors put in their own money into the funding or it may have its source in Limited Liability Companies or LLPs.
There are four major points in which the venture capitalists differ from angle investors.
While the venture capitalists often invest large amounts that are more than $2 million in start-ups. They thus focus on companies that have already earned a reputation for success and profits. Angel investors, not being the large firms, tend to invest only a maximum of $100,000 in any start-up.
Venture capitalists can be compared to the professional sportsmen who earn a living by it. Their main aim while investing any start-up is to gain huge returns overtime. On the other hand, the angle investors are true amateurs, are individuals who invest without solid profit motives. They may even be helping out a friend in need.
In case of venture capitalist, the source of the investments they make include pension funds, larger corporations and similar places. They angle investors on the contrary invest their own money. That is why they are called High-Net-Worth Individuals.
4. The venture capitalists may buy off a share in the company and take a seat among the board of directors for a few years. But the Angel investors do not make sufficiently huge investments to get them a place among the board of directors.
Global scenario of start-ups will be covered on the regional basis in posts in this site/blog. These days with massive global market the start-up hub is India where Walmart recently entered a deal buying an e-commerce company called Flipkart. There are several such companies cropping up for about a decade in this region. There is also tough competition in this region with Chinese goods and services.
FROM IDEA TO STARTUP
Government of India has been promoting start-ups since the introduction of the Start-Up India initiate in 2015. The campaign was launched by the Prime Minister or India during the Independence ceremony at the Red Fort. As part of the initiative, the Ministry of Human Resources and the Department of Science and Technology began the about 75 start up support hubs. They are centered around the NITs, IITs, IISERs and NIPERs. It offers a total of 10,000 crore startup funding pool for various start-ups in India. There are a large number of benefits that a start-up can benefit from if they could avail themselves the support of the government of India. The steps to enrol are simple and basic so everyone could do it without hassle. The initiative provides the following benefits for start-ups:
1. Lower patent registration fees.
2. Zero surprise inspection for a period of three years from the beginning of the start-ups.
3. Freedom from Capital Gain Tax for the first 3 years from the start.
4. Freedom from taxes for the initial three years of operation.
Individual states such as Kerala and Telangana also offers support for start-ups in these states. Kerala had launched the Kerala IT Mission which was intended to raise a total of $50 billion as investment towards start-ups in the state. Telangana introduced the T-Hub venture as part of promoting start-ups in the state and also started the Technological Research and Innovation Park that spreads over an expanse of 17,000 sq.ft. It was built as a research and development laboratory for start-ups.
In 2018, India came in 100thin the world index of ease of doing business in the country. It apparently took over 30 other world nations to reach the position. It is said that the government funding allocated to the start-ups made the nation more suitable for businesses and attracted more investors.
MUDRA stands for the Pradhan Mantri (Prime Minister) Micro Units Development and Refinance Agency LTD. It is an NBFC supporting the development of micro enterprise sector all over India. As per the MUDRA policy, it offers refinance support for banks and MFIs to lend money for micro units that will need loans upto 10 Lakh rupees. The refinance is provided under the title Pradhan Mantri MUDRA Yojana. There are three different funding schemes available for start-ups under the MUDRA. They are:
· Shishu, which covers loans upto 50,000/-
· Kishor, that facilitates loans above 50,000 and upto a maximum of 5,00,00/-
· Tarun, which covers loans above 5 Lakh and upto 10 Lakh.
The Shishu category is the major target of the MUDRA scheme and its primary focus is to find the micro units under the Shishu scheme.
The funding support from MUDRA are of four types:
Micro Credit schemes or MCS for loans that amount upto 100 thousand rupees through the MFIs. These are facilitated through the various Micro Finance Institutions in India. The delivery of these funding may be carried out through Self- help groups or the JLGs. But the loans are intended specifically for individuals for particular micro enterprise developments. The MFIs need to register themselves with MUDRA in order to avail the benefits for its members.
Scheme for Commercial Banks or Rural Banks or Scheduled Co-operative Banks is the second category of funds available with MUDRA. MUDRA helps these banks to finance micro enterprises. The refinance is available for term loans and working capital loans, to a maximum of 10 Lakh per unit. Registered banks can easily avail the refinance if they have lender loans under either of the Shishu, Kishore or Tarun categories.
These are mostly for the Regional or Rural Banks It also has funding schemes for women under the Women Enterprise program. It is aimed exclusively for enterprises that are run by women. It is a scheme that the government has put forth to empower women and bring more women into business. The banks who offer loans under this scheme can get a reduction of upto 25 bps in its interest rates. This is also applicable to the MFIs or NBFCs providing loans.
The final funding scheme of MUDRA is the Securitisation of Loan Portfolio. This is explained under the MUDRA scheme as, “raising funds for financing micro enterprises by participating in securitisation of their loan assets against micro enterprise portfolio, by providing second loss default guarantee, for credit enhancement and also participating in investment of Pass Through Certificate (PTCs) either as Senior or Junior investor.”
MUDRA was launched with the intent of providing support to all the cottage industries in India. It was to give business loans for vendors, shopkeepers and others engaged in similar sectors. It involves transport vehicle loans to buy two wheelers, three wheelers, e-rickshaws, passenger cars and taxis etc. as part of MUDRA loans. It is also for the food products sector, textiles industry and agricultural activities. They are mainly for developing the villages in India by providing funding for enterprises therein.
The MUDRA card is an innovative product which is similar to debit cards. It provides capital to the lenders through the card. The card issued against the MUDRA loan account to the borrowers. It is also meant to further the digitalisation process on-going all around India. The card will allow the borrower to withdraw the amount in multiple steps. It can be used for cash withdrawals from ATMs all over India.
The Credit Guarantee Fund Trust for Micro and Small Enterprises is one of the government-funded schemes for the promotion of MSMEs or Micro, Small and Medium enterprises. It singly aims the backing of the small industries and enterprises all around the nation which will not flourish without proper financial back up and care. The government believed these industries form the backbone of Indian economy. The assistance the CGTMSE provides requires no third party guarantee or collateral. It also assures the lenders so they can give the money to those who require it without worry. It provides a guarantee cover so even if there is a default, it gets resolved. A loan of upto 200 lakhs can be provided to various MSMEs according to this scheme. It covers even the states of Sikkim and Jammu and Kashmir which is otherwise exempted from schemes such as this.
CGTMSE charges a fee of 1% p.a. of the amount any company gets sanctioned through the scheme. The guarantee of getting the loan sanctioned varies for amounts you may require. For loan upto 5 Lakh rupees towards micro enterprises, the percentage of availing loan for sure is about 85%. For enterprises owned and operated by women entrepreneurs, the cover for any default may amount upto 80% of the amount loaned. This is also applicable for any loans given within the state of Sikkim. The groups that can avail the CGTMSE include existing or budding Micro, Small and Medium enterprises such as Manufacturing units and service providers. It excludes retail traders, educational institutions, self-help groups and training institutions from its scope.
The reach of the scheme is wide spread with a large number of banks working with it. It has under the scheme 26 public sector banks, 21 private sector banks, 73 regional rural banks and 4 foreign banks among a vast number of others all over India.
One can avail the CGTMSE loan by preparing a detailed business plan initially. It is then submitted to the intended bank. The bank will then research upon the plan and the proposal. It verifies the facts provided and then send it over to the CGTMSE fund. The final decision to sanction the loan or not will be made by the CGTMSE fund who scrutinises the plan for a last time.
According to Investopedia, Fund of Funds, otherwise called multi-manager investment,” is an investment strategy in which a fund invests in other kinds of funds”.“This strategy invests in a portfolio that contains different underlying assets instead of investing directly in bonds, stocks and other types of securities”. This is a plan that most suits the small investors who do not want to take up big risks investing in start-ups. Here the investments get diversified and thus the variety of fund categories are all brought together as a single fund.
Fund of Fund has several advantage compared other funding. It helps the investors by providing access to professional finance management services.
As part of the Government of India plan to support start-ups, they launched the Fund of Funds for start-ups. On June 22nd2016, the press release given out by the Government of India read that the. Fund of Funds for Start-UPS will be launched along with the Small Industries Development Bank of India or the SIDBI. It will be used for making contributions towards the Alternative Investment Funds or AIF registered with Securities and Exchange Board of India. As of now , a sum of around 1100 crore rupees has been provided to the FFS in a move to support the start-ups in India. It is expected to improve entrepreneurship in India by proving aides to all those who come up with good business plans and strategies but are not able to realise dreams due to lack of funds.
Reports say that around $ 92 million of the total amount of the FFS has been used to fund 75 start-ups from 17 AIFS in India. One good factor is that there is no minimum investment limit prescribed. This is a move to support a maximum number of smaller industries in India so they can grow and help the economy grow in turn. Among the 75 start-ups that received the FFS funding, 62are still active. Sadly 5 of these have actually been closed down and another 5 have no information available on their progress. E commerce sector was the biggest benefactor of the FFS so far and is closely followed by Real Estate industry, Healthtech, Logistics and Consumer Services. Some of these include companies likes Atomberg, which developed smart appliances; Azuro, a real state enterprise; Bizongo, the B2B and packaging material marketplace; Blowhirn, the logistics enterprise and Boxx.ai, an Artifucail Intelligence and Analytics developer, to name a few of the more successful ventures.
Following the example set by the Government of India, the Government of Kerala launched a $ 78 million scheme in Fund of Funds to support young budding business men in the state. It is still in the developmental stages with a span of three more years to be fully ready to be availed. KSUM acts as the manager of the programs on behalf of the Kerala government and is undertaken following the success of the likes of Technopark and Infopark technology hubs.
Being a newcomer into the world of business, you might not always be able to secure funding initially. There is no doubt that gaining the trust and funds from investors is a tough and challenging task. Still there are ways to get your business on its feet without having to find investors. The one way is boot strapping. It is another name for funding the company on your own, that is, form your own pockets. Although it might not be the possible in the long run, bootstrapping, as it is called, is a good means to get your business started and working.
Then there is the option of getting funding from family and friends. This is one of the easiest ways if you cannot secure funds from investors as such. Being family, they will definitely know you well to give you Funds for the business. This is actually what supports most entrepreneurs in the early stages. They support, both mental and economical, is absolutely necessary for a budding businessman or business woman.
Another way of raising funds is crowd funding. You bring together a number of individual, each of whom will invest various amounts in the business you will undertake. These funds, which are small amounts when considered individually, will be enough to support a business when pooled. However, it is more challenging than any other form of fundraising because you will have to go around meeting a large number of people and then convince them to find your business. It requires a lot of time, confidence and patience from your side.
Micro financing is also an option but only if you have run out of every other options. Clearly, this is the last choice for many. Micro financiers are numerous in the country but the interest rate they charge and the limited period of time given to pay back the amount makes it unattractive for the borrowers. They will soon come under the pressure to start paying back the amount, not to mention the never ending interests. They also normally ask for assets and third party guarantees before they will give the loans.
This type of funding is never secure and might be not enough to run any business. These are certainly never an option when you want to take your company to the next level. The kind of amount you need when you decide to expand can never be raised through crowd funding or from family and friends. Borrowing such large sums from micro financiers is highly risky and pressurising. That is why most start-ups prefer the government funding as opposed to the private ones. They even opt the venture capitalists or angle investors rather than the private funding options. In case of government funding, the way you spend the allotted amount will be highly monitored and regulated by those banks who lend the amount. The same is more liberal when it comes to private funding. However, the MUDRA scheme is a proof of the changing attitude of the government towards the entrepreneurs.
The whole process of availing government funding is quite simple. These procedures are set up to easily avail funds and other benefits to the entrepreneurs. These policies promote business and start-ups in India. The benefits of government funding are as follows:
The start-ups can now easily register for their funding with the government from home. The government has launched special apps and sophisticated website pages for the very purpose, simplifying the procedure to a bare minimum. They can fill up a simple form online and then upload scanned copies of certain documents to complete the process of registration.
As said earlier, the government will allow zero tax benefits and lower interest rates under the MUDRA plans for upto three years from the beginning. It eases the whole process of getting patents and trademarks. This gives better Intellectual Property right services for the budding entrepreneurs of India. As a result of these schemes, the government will take care of all the facilitator fees and the beginners will only have to pay the statutory fees.
With facilities such as the MUDRA card and a 100, 000 million rupees fund for the entrepreneurs as venture capital, the government facilitates better access to funds for start-ups. The government provides guarantees to the lenders so people can easily avail loans for their businesses.
The start-ups in India have the opportunity to apply for tenders, unlike other fresh businesses. They do not have to have so many years of prior experience or turnover or similar criteria that are applicable for normal companies.
These Start-ups in India will have access to the Research and Development facilities set up as part of the start-up initiative. Thousands of acres of research facilities have been made available for these start-ups by the government.
There are no time consuming compliance for the start-ups in India. They are all simplified to save time and money for the businessmen. They can certify themselves by going through a few steps in a mobile app, with 9 labour laws and 3 environment laws. This applicable for white industries.
These start-up, set up according to the Indian Start-up initiatives will have the complete freedom to choose their own investors. They have the options of various venture capitalists to choose the best investor(s) for themselves.
In case you ever want to quit, a start-up can wrap it up and close down the whole business within a time period of 90 days from the date when you apply for closure or wind up.
To create opportunities for the entrepreneurs to meet each other and learn through interactions, the government organizes start-up rests, business meet ups and summits on national and international level. Select start-ups that have been performing well since their beginnings and successful business men both attend these function so they can mutually benefit from the summits. It is a very good opponent for the start-ups to get further funding and know future developmental options.
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Originally published at 786barqat.com on September 21, 2018.
