The money needed to launch and maintain a firm is referred to as funding. It is a monetary investment in a business for inventory, office space, sales & marketing, manufacturing, product development, and expansion. Many firms decide not to seek outside investment and are instead solely supported by their founders (to prevent debts and equity dilution). However, the majority of entrepreneurs do raise money, particularly as they expand and scale their businesses.
In order to receive a variety of tax incentives, simpler compliance, IPR fast-tracking, and other benefits under the Startup India initiative, qualifying businesses can apply to have DPIIT recognize them as startups. Find out more below about eligibility and benefits.
Startup India: What is it?
The Indian Government project of Startup India aims to create a strong startup ecosystem in the nation to foster innovation and give aspiring business owners opportunities.
On January 16, 2016, the Honorable Prime Minister launched a Startup India Action Plan with 19 action points. This Action Plan provided a plan for developing an ecosystem that is supportive of startups in India. Numerous initiatives have since been made to support startups. One such program, the Startup India Seed Fund Scheme (SISFS), aids enterprises in their early stages financially.
What is the Startup India Seed Fund Scheme?
For entrepreneurs in the early stages of an enterprise’s growth, easy access to cash is crucial. Startups can only receive funding from angel investors and venture capital firms if a proof of concept has been shown. Similarly, banks only lend money to applicants who can vouch for their assets. To enable firms with creative ideas to undergo proof of concept tests, early capital is crucial.
With an investment of INR 945 Crore, DPIIT established the Startup India Seed Fund Scheme (SISFS) to offer funding support to entrepreneurs for Proof of Concept, prototype development, product trials, market-entry, and commercialization. Over the following four years, it will provide help to 3,600 entrepreneurs via 300 incubators.
The SISFS's goals
The seed and “Proof of Concept” development stages of the Indian startup ecosystem lack sufficient finance. For companies with solid business concepts, the required funding can make or break their Startup.
Due to the lack of this crucial funding at an early stage needed for proof of concept, prototype development, product trials, market-entry, and commercialization, many innovative business concepts fail to take off.
Offering a seed fund to such promising situations might have a multiplier effect, validating the business plans of numerous firms and creating jobs.
Eligibility Criteria for Startups
- A DPIIT-recognized startup that was only two years old when the application was submitted. Visit to become DPIIT-recognized.
- The Startup needs a solid business plan before it can create a good-fitting product or service that can be scaled up.
- The Startup should incorporate technology into its main product or service, business plan, distribution strategy, or technique in order to address the issue at hand.
- Startups developing cutting-edge solutions in fields like social impact, waste management, water management, financial inclusion, the inclusion of underserved populations, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defense, space, railways, oil and gas, textiles, etc. would be given preference.
- In accordance with any other Central or State Government program, the Startup should not have had greater financial assistance than Rs 10 lakh. This excludes prize money from contests and big challenges, free workspace, a monthly founder allowance, access to labs, and access to prototype facilities.
- According to the SEBI (ICDR) Regulations of 2018 and the Companies Act of 2013, the Startup’s Indian promoters must own at least 51% of the company’s shares at the time they apply to the incubator for the program.
- According to the program’s rules, a startup applicant may receive seed funding once, each in the form of a grant and in the form of debt or convertible debentures.
The Need for Funding in Startups
For one, a few, or all of the following, a startup may need finance. Entrepreneurs must be clear about their goals when raising money. Before approaching investors, founders should have a comprehensive financial and business plan in place.
- Creation of prototypes
- Product Creation
- Group hiring
- Employing Money
- Advisory & Legal Services
- Raw materials and tools
- Regulations & Certifications
- Promoting and selling
- Office costs and admin fees
How to Raise Startup Funds
A successful fund-raising round requires the entrepreneur to be prepared to work hard and be patient. The following steps make up the fund-raising procedure:
1. Identifying the Funding Need
The Startup must determine why finance is needed and the appropriate quantity to be raised. The Startup should create a milestone-based plan with specific timetables for what it wants to accomplish over the following two, four, and ten years. Taking into account anticipated sales data, as well as market and economic variables, a financial forecast is a carefully crafted projection of firm performance over a specific time period. Costs associated with production, prototyping, research, manufacturing, and other activities should be carefully considered. The Startup can select what the next round of funding will be for based on this.
2. Investment Readiness Evaluation
While determining the need for funding is critical, it’s also crucial to ascertain whether the firm is prepared to raise money. If you can convince an investor of your revenue estimates and their returns, they will consider you seriously. The following traits are typically sought after by investors in potential investee startups:
- Increased revenue and market position
- satisfactory return on investment
- Time to profitability and break-even
- startup’s originality and competitive advantage
- The goal and future objectives of the business owners
- dependable, driven, and talented team
3. Creating a pitch deck
A pitch deck is a thorough presentation about the Startup that highlights all of its key features. It all comes down to creating a strong tale when developing an investor proposal. Your pitch should flow like a tale, linking each part to the next rather than being a collection of separate slides. Here are the elements your pitch deck must contain.
4. Investor Orientation
Every venture capital firm has an investment thesis, which is a plan the fund uses to make investments. The stage, region, investment emphasis, and corporate differentiation are all mentioned in the investment thesis. By carefully reading through the firm’s website, brochures, and fund description, you can determine the investment thesis of the company. Researching Investment Thesis, their prior investments in the market, and speaking with business owners who have successfully secured equity capital are all important in order to target the correct group of investors. You’ll benefit from this practice by:
- Track down active investors
- their preferred industries
- geographical area
- Average fundraising ticket size
- Level of involvement and mentoring offered to startup investors
- Pitching occasions present a beneficial chance to speak with possible investors face-to-face.
- Pitch decks can be sent to the contact email IDs of angel networks and venture capitalists.
5. An investigation by Potential Investors
Before concluding any equity deal, angel networks and VCs do a rigorous due diligence investigation of the Startup. They examine the Startup’s prior financial choices as well as the team’s credentials and experience. This is done to make sure that the Startup’s claims about market size and growth can be validated and to make sure that the investor can spot any questionable practices in advance. If the due diligence is successful, the funding is finalized and finished under conditions that are acceptable to both parties.
6. Term Sheet
During the initial phases of a deal, a venture capital firm will provide a “Non-binding” list of proposals. It enumerates the key tenets of the agreement between the Startup and the financing company/investor. The four structural provisions of a term sheet for a venture capital transaction in India are valuation, investment structure, management structure, and finally, adjustments to share capital.
What qualities do investors seek in startups?
- Problem-solving and objectivity: Any startup should differentiate its offering to address a particular consumer need or to address a particular customer problem. Patented concepts or goods provide investors with significant development potential.
- Administration & Team: In addition to all the previously listed characteristics, the founders and the management team’s drive, expertise, and talents to move the company ahead are equally important.
- Market Environment: Market size, attainable market share, rate of product adoption, historical and projected market growth rates, and macroeconomic factors influencing the market you intend to target.
- Sustainability & Scalability: Startups should demonstrate their ability to grow quickly, paired with a solid and viable business plan. They should also think about expansion goals, growth rate, imitation costs, and obstacles to entry.
- Clients and Suppliers: Clearly, state who your suppliers and customers are. Take into account your product’s stickiness with customers, vendor agreements, and current vendors.
- Competitive Research: The competition and other market participants who are working on related projects should be accurately depicted. Although it is impossible to compare apples to apples, it is crucial to highlight the service or product offers of competitors in the same industry. Consider…
- Selling and marketing: No matter how amazing your product or service is, if there is no market for it, it is useless. A sales estimate, targeted audiences, product mix, conversion and retention rates, etc., are a few things to think about.
- Financial Evaluation: A thorough financial business plan that shows cash flows over time, investments needed to reach important milestones, break-even points, and growth rates. At this point, assumptions should be acceptable and explicitly stated.
- Avenues of exit: A startup showing prospective buyers or allies becomes an important consideration for the investor. Initial public offerings, purchases, and additional investment rounds are a few examples of exit strategies.
What motivates investors to fund startups?
With their investment, investors basically acquire a stake in the business. They are investing money in exchange for equity, which includes a stake in the firm and the right to share in any future earnings. They enter into a partnership with the companies they choose to engage in; if the business is profitable, investors receive returns based on the equity they own; otherwise, they forfeit their investment.
Through a variety of exit strategies, investors obtain their return on investment from companies. Ideally, the various exit possibilities should be discussed between the VC company and the entrepreneur from the outset of the investment negotiations. An effective management system and organizational procedures increase the likelihood that a high-growth, high-performing Startup will be ready for an exit sooner than other startups. Before the conclusion of the fund’s tenure, venture capital and private equity funds must exit all of their investments.