Who Will Foot the Bill?
Who Will Foot the Bill?
In your entrepreneurship journey there will come a time when you will try to raise funds for your business. When you try to investigate the options available to you, you will be hit by a barrage of terms such as Venture Capital, Bank Loans, Self Funding, Angel Groups, Seed Funds and Friends & Family and so on. You will come across articles that talk of 6 stages of investment while some describe the 5 phases.
All pretty confusing when all that you are looking for is some money to sustain you till your business is self-sustaining. Instead of getting bogged down with types of financial institutions and stages of funding, you should concentrate more of what are the fund avenues available to you and when you will need it.
“I started Shutterstock without any outside funding; I believe in creating a lean startup. By not taking outside investors early, I was forced to use every dollar I had as efficiently as possible. And I was able to keep a large part of the company”. Jon Oringer
There is nothing to beat generating your own revenue to fund your business. Regrettably, at the initial stages of your startup you may not be earning any revenue to be able to run your startup. Moreover, when you do start earning some revenue it will, by itself, turn out to be insufficient to cover the startup costs of a business. Furthermore, revenue flow cannot be scheduled according to your fund requirements.
The next good option is putting your own money into your startup. Self funding or ‘bootstrapping’ is generally done at the initial stage before resorting to raising funds from other sources. Again the amount of money involved is typically low and lasts for a short period of time.
For most first-time entrepreneurs’ family and friends are a reliable source of funds. This is one group of people who know you and your potential and you do not need to spend too much effort to convince them. On the other hand, they may have unrealistic expectations with respect to repayment. This source can be tapped at any time although most entrepreneurs invoke this option at the initial stages of their startup.
You may participate in contests with the aim of winning some grant or prize. Entrepreneurs are invited to give a presentation on their idea. If your idea wins a prize, you get a grant that may not be very substantial considering the effort you put in across multiple rounds of competition. You may attempt this at any time in the course of your startup journey.
Nowadays one hears a lot about crowdfunding and the fillip it has given to entrepreneurs in India. Crowdfunding is an old concept but has obtained a more professional reputation with the advent of crowdfunding platforms that pool the resources by a group of people for a common goal. Depending on the type of funding the funding can range from $1,000 to $1 million. Crowdfunding can be of many different types of which there are three primary types:
Donation-based crowdfunding is that where contributors provide funds without any financial returns. Funds that are raised for disaster relief, charities etc. come under this category.
Rewards-based crowdfunding is that where the contributors are offered some form of reward as incentive for the funds provided.
Equity-based crowdfunding is that where the contributors become part-owners of your company. You provide equity shares in exchange for capital
You would go in for crowdfunding after you have exhausted the sources mentioned above. You may not yet have a definitive product or service to show but your initial activities of research and survey have been completed and you have finalized the product or service that you are going to create. Although in a nascent stage, crowdfunding sites in India include BitGiving, Milaap, Ketto and Wishberry.
At an early stage of your startup you can look at angel investors as a source of financial support. Usually, angel investors are high net-worth individuals (HNIs) who are investing in high potential startups and have deep pockets. Many of them have their own businesses and would prefer to invest in sectors they are familiar with. Angels invest between $50,000 and $5 million and look for an exit in 1 to2 years. Some players in India include YourNest, Hyderabad Angels and SiliconIndia. Sometimes several angels, usually 10 to 20, team up to form an angel group with a combined investment capacity ranging from $100,000 to $20 million.
Once you have a product and have reached the stage where you need to grow, your requirement for heavy funding assumes disturbing proportions. This is where support from a venture capitalist becomes fundamental to your survival. Venture capital investment can start from $500,000 and go up to $100 million. Venture capital firms include names such as Helion Venture Partners, Accel Partners, Sequoia Capital India and SAIF Partners. In a major shift many venture capital firms have been moving into the angel investment space and providing finance at the initial stages of a startup.
With a running business after several years of reliable profits you can go in for a bank loan. You may also approach a bank for a personal loan and provide your personal assets as security. With 9 out of 10 startups failing, taking this route would be quite risky. This is a seldom explored path and most startups have not ventured into this option.
“I would like to see additional funding for entrepreneurial development programs”. Steve Chabot
To facilitate funding for startups many public banks have set up venture capitalist funds such as SBI Capital Markets Ltd. (SBICAP) and Canbank Venture Capital Fund Ltd. (CVCFL). The Government of India is also extending support through the development finance institutions that come directly or indirectly under its control. These institutions are promoting several venture capital funds through firms such as IFCI Venture Capital Funds Ltd. (IFCI Venture) and SIDBI Venture Capital Limited (SVCL). On similar lines State Government Controlled development finance institutions have launched companies like Hyderabad Information Technology Venture Enterprises Limited (HITVEL) and Punjab Venture Capital Limited.
It appears as if there is no dearth of investors whatever the stage of your startup. There is no set of rules that specifies from whom, when and how much capital you can raise. There is also no restriction on the number of sources from where you can generate funds. But do not assume that they will fall over each other in their eagerness to fund you. All these investors come with vast experience in entrepreneurship and in financing entrepreneurs and you may come to the realization that they are more aware about your business than you are. It is only through your pitch that you can stimulate them and get them excited about your idea. Be very careful when you create your pitch, if necessary take professional help. Currently, there is a TV serial on Colors Infinity channel named ‘Shark Tank’. Watch a few episodes of this serial to learn what an entrepreneur has to go through to get a buy-in from investors.
Unitus Seed Fund. Seed Capital Options. 2015. http://usf.vc/get-funded/seed-capital-options-for-entrepreneurs-in-india/#comment-2419415989
thebinnews.com. Crowdfunding sites in India – Opportunities and facts. 2015 http://www.myonlineca.in/startup-blog/crowdfunding-sites-in-india-opportunities-and-facts
Team Inc42. The Top 37 Most Active Angel Investors Of India For Startups. 2015. http://inc42.com/startup-101/top-37-angel-investors-india/
Team Inc42. Top 47 Most Active Venture Capital Firms In India For Startups. 2014. http://inc42.com/resources/top-47-active-venture-capital-firms-india-startups/
Kirti Sharma. 13 Govt. Venture Capital Firms for Startups In India. 2015. http://www.indianweb2.com/2015/01/14/13-govt-venture-capital-firms-startups-india/