Funding- a term fundamental to a budding entrepreneur’s thoughts, is a tricky path to traverse. Funding, the amount and method, can often be, a make-or-break scenario for a startup with funding being the reward of material validation.
The basis of funding regardless of the source remains the same – pitching and selling your idea, your team and your company to the investor and making them genuinely believe in you and the team, the goal and the way to reach the goal that you have laid out. Of course, this requires networking (through seminars, conferences, etc.) and social media apart from knowing the different funding sources available – very similar to sales-based work. With readily available data on the internet, it’s also essential to do thorough market research and have an expert’s advice.
Angels here refer to high net worth individuals with money and expertise. These individuals typically are entrepreneurs or corporate executives. While generally individuals, they can also come together to invest as a consortium of sorts. Investments range from a few lakhs from an individual to a few crores if a group or consortium comes together to provide the investment.
Angel investors generally tend to invest based on their gut feeling or instincts, making this one of the quickest ways to get cash in the bank to grow the company and provide value addition possibilities. Entrepreneurs should also note that the most significant factor investors consider is the entrepreneur’s passion for the idea and for growing the business.
There is the possibility of higher day-to-day inferences and hidden agendas by angel investors. With angels investing at early stages and taking a considerable risk, they tend to take a large percentage share in the company and get involved more in the decision-making. Many times, though, given their experience and expertise, their involvement is not only beneficial but also necessary to build a company.
Investors who give out such capital can be categorized into 3Fs – family, friends, and fools. In the very early stages of building a company from scratch, entrepreneurs tend to get support from family and friends, which may also be financial. In the coined term – 3Fs, fools stand for people who invest in a company without much knowledge about the company or the founders.
However, when accepting such a kind of capital, one must always remember the adage that mixing money and relationships is never a good idea. It can cause the relationship to go sour; hence, the pros and cons should be weighed well in advance before making such a decision.
Venture capitalists are organized institutional investors that can be both domestic and international. They invest many tens of crores in a startup targeting companies falling in the pre-series A, series A, and series B categories. The timeline below would help understand the idea of the series classification better.
The companies that VCs tend to look at are early-stage companies that have positive revenue and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). VCs sometimes fund startups even in the concept stage.
Along with the obvious benefit of more credibility, this form of capital helps in better valuation and value addition (partnerships, networking, etc.). Yet the flip side is that it can be hard to extract the value addition, and there may be differences with the board members on approach.
VCs can also be sector-biased, which one should keep in mind while approaching them.
1. Term Loans (CGTMSE- Credit Guarantee Funds Trust for Micro and Small Enterprises Scheme)
Generally given by banks, NBFCs (Non-Banking Financial Companies), RRBs, and SFCs (State Finance Corporations), this form of investment is given to early to late-stage startups with around a 3-year track record. Enterprises under MSME (Ministry of Small, Micro adn Medium Enterprises) can also avail of up to a two-crore free collateral loan.
It brings with it bank credibility, and like the idea of credit score, it can help get more funding quickly and scale the business rapidly. They are also schemes targeted at women entrepreneurs. But as with all red-tape bureaucracy, the release time of funds is long with the requirement of regular follow-ups and possible changes in decision-makers.
To keep track of such schemes, doing primary internet research followed by a crosscheck for validation with banks or other experienced people in the field is a good practice.
2. Technology Development Board
Offered by the Dept. of Science and Tech of the Government of India, This can be categorized into two categories – equity (25% of project cost) or long-term loans of around 8-10 years with three years of no simple interest (75% of project cost, 5% SI after three years). However, for projects of national importance, funding is given more in the form of grants.
This funding targets tech sector-based companies with three years of profitable sales (early to late stage).
As with term loans, here too, credibility increases, and additional funding is highly probable with a relation-based approach. The bureaucratic red tape causes the same issues of a longer time, regular follow-up, and change in decision makers.
Given by central government agencies, these funding sources have different departments that focus on companies from that sector (like the Department of Biotech through BIRAC(Biotechnology Industry Research Assistance Centre)). The criteria and amount would depend on each event, which presents a problem statement at times and targets early-stage companies (with initial revenue traction).
With the benefits of credibility and value addition, there is also no pressure to refund the grant amount. However, the growth approach will work on a milestone basis as well as current scenarios and changes in decision-makers can reflect in the plan.
We hope this gives clarity on the nuances of funding sources and practices to follow.
Stay tuned for more tips and takeaways for entrepreneurs to grow their cultural enterprises.
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Authored by Shreya Senapaty, a third year student pursuing her undergraduate studies at BITS Pilani. Hyderabad Campus.