Comprehensive Guide for Starts-up on Fundraising

1. INTRODUCTION

India’s startup ecosystem is undergoing a substantial surge. A startup in this context refers to a business entity, which could be a company, Limited Liability Partnership (LLP), or firm, that has been established for less than a decade and maintains an annual turnover of less than Rs. 100 crore within a financial year. These startups are typically focused on innovating and enhancing processes, products, or services. Securing financial resources is a fundamental requirement for these startups to facilitate their growth. In this article, we delve into the realm of startup funding, exploring the strategies and techniques employed to obtain essential capital for startup development.

2. STARTUP FUNDING: A VITAL DRIVER OF GROWTH

Startup funding represents the financial resources that a nascent business secures to either bolster its operations or establish its presence in the market. This financial infusion serves as a fundamental cornerstone in the growth journey of a startup. Newly founded startups typically allocate these funds toward covering critical expenses such as marketing initiatives and operational costs, which are essential for launching their business.

For established startups, securing additional funding becomes pivotal as it augments their capital base, enabling the pursuit of innovative ideas and the formulation of strategic plans for business expansion and growth. Furthermore, this funding plays a crucial role in helping startup founders build a robust network of connections and collaborations. Consequently, startup funding emerges as an indispensable asset throughout the various stages of a startup’s evolution.

3. UNDERSTANDING THE MECHANICS OF STARTUP FUNDING

The process of startup funding involves investors providing financial resources to a startup in exchange for a portion of ownership or equity shares within the company. Consequently, these investors acquire the entitlement to claim a share of the startup’s profits. Therefore, when the startup generates revenue, investors reap returns proportionate to their ownership stake. However, it’s essential to acknowledge that there is inherent risk involved, particularly if the startup does not achieve the expected profitability.

The journey of startup funding is characterized by various stages. Typically, startups or companies seeking investment embark on this journey by initiating a seed round. Subsequently, they progress through Series A, B, and C funding rounds to secure additional capital. However, a critical prerequisite for pursuing startup funding is conducting a comprehensive company valuation. This evaluation process takes into account factors such as management expertise, historical performance, market potential, risk assessment, and profit projections. Only after this valuation is complete can startups confidently enter into a funding round.

4. STARTUP FUNDING STAGES

Startups are established with a business idea, which goes through many stages to become a profitable venture. Startup funding is the backbone of its growth. The various stages of startup and funding are as follows:

4.1 PRE-SEED STAGE:

Laying the Foundation During the pre-seed stage, entrepreneurs and founders are at the initial conceptualization phase of their startup journey. At this point, the financial requirements are typically minimal and quite limited. Startups in this phase often rely on informal funding channels, which encompass the following methods:

• Bootstrapping: Bootstrapping involves the establishment and operation of a business with minimal capital and limited external investment. Entrepreneurs in this stage depend on their personal savings to fund the operations and growth of their startup. Notably, there is no obligation for entrepreneurs to repay the funds or share equity with external parties.
• Friends and Family: Securing funding from friends and family members is a prevalent option for early-stage entrepreneurs. The advantage here lies in the existing trust between entrepreneurs and their close associates, making it a viable source of initial capital.
• Grants: Entrepreneurs can explore funding opportunities through grants or financial incentives offered by organizations or institutions hosting pitching events, business plan competitions, and challenges. While the funds obtained through grants may not be substantial, they often suffice to support entrepreneurs in the idea stage.

4.2 SEED STAGE:

Nurturing Growth and Proof of Concept Moving into the seed stage, startups have progressed to a point where they possess a prototype and seek to expand the potential demand for their product or service. This phase often involves the validation of the business idea, known as the Proof of Concept (POC), to assess its real-world feasibility. Subsequently, entrepreneurs introduce their product or service to the market. Funding sources at this stage include:

• Incubators: Incubators are specialized organizations dedicated to assisting entrepreneurs in launching and developing their startups. They provide a range of value-added services, including access to office space, legal support, administrative assistance, and more. In many cases, incubators may also offer equity investments or financial support in exchange for a stake in the startup.
• Government Loan Schemes: Various government-initiated loan schemes aim to provide aspiring entrepreneurs with collateral-free loans and access to low-cost capital. Examples include the SIDBI Fund of Funds, Startup India Seed Fund Scheme, Pradhan Mantri Mudra Yojana, Stand Up India, ASPIRE scheme, among others.
• Angel Investors: Angel investors are individuals who invest capital in promising startups in exchange for equity ownership. They assess the potential of a startup, invest in it, and anticipate returns when the startup becomes profitable, based on their equity stake. Platforms like Mumbai Angels, Angellist, and Lead Angels facilitate connections between startups and angel investors.
• Crowdfunding: Crowdfunding involves raising capital from a multitude of individuals, each contributing a relatively small amount. This funding approach is typically facilitated through online crowdfunding platforms, enabling startups to access a broader pool of potential investors.

4.3 SERIES A STAGE: SCALING UP POST-LAUNCH

As startups progress to the Series A funding stage, they have successfully introduced their products or services into the market and gained initial traction. Key performance indicators, including revenue, customer acquisition, app downloads, and more, take on heightened importance in securing additional funding. These funds are typically earmarked for amplifying product development, expanding the customer base, or establishing new branches. The types of funding sources sought at this stage encompass:

• Venture Capital Funds: Venture Capital (VC) funds, managed by seasoned professionals, specialize in investing in high-growth startups. Each VC fund has specific investment criteria, including the startup’s stage, preferred sectors, and funding amount, all of which should align with the startup’s trajectory. In exchange for their investments, VCs actively engage in mentoring startups and acquire equity stakes.
• Banks/Non-Banking Financial Companies (NBFCs): Startups that can demonstrate revenue and market traction for their products or services often secure formal debt financing, such as loans from banks and NBFCs. This funding avenue is primarily utilized to obtain working capital. Some entrepreneurs prefer debt financing over equity, as it doesn’t entail diluting or relinquishing their ownership stake.
• Venture Debt Funds: Venture debt funds infuse capital into startups in the form of debt, typically in conjunction with angel investors or VCs. Startups repay the debt according to their pre-agreed terms with the venture funds. Importantly, entrepreneurs retain full control of their equity stake in this funding scenario.

4.4 SERIES B, C, D, AND E: THE GROWTH AND EXPANSION PHASE

Following a successful Series A round, startups advance into Series B, C, D, and E funding rounds. During these stages, startups exhibit consistent revenue generation and operational stability. Entrepreneurs at this juncture aspire to further expand their business operations. Investors play a pivotal role in refining marketing strategies, assembling teams, devising market penetration tactics, and hiring new talent. Primary funding options in these stages include:

• Venture Capital Funds: Startups with a history of sustained growth can approach VC funds specializing in late-stage investments. However, these funds typically commit capital only after the startup has achieved significant market traction. In some cases, a consortium of VCs may collaborate to fund the startup.
• Private Equity/Investment Firms: While private equity and investment firms historically haven’t been known for funding startups, there is a growing trend of select firms providing funding to late-stage, rapidly-growing startups with a proven track record of consistent growth.

4.5 EXIT STAGE: TRANSITIONING TO A ESTABLISHED ENTITY

The exit stage marks a startup’s transition from being a fledgling venture to a fully-established company with a strong foundation. At this juncture, startups may choose to pursue the following paths:

• Mergers and Acquisitions: Founders may opt to sell or merge their startup with another market player. When a startup is acquired by another company, it’s termed an acquisition, whereas a merger involves a consolidation with another company.
• Initial Public Offering (IPO): Going public via an IPO entails the startup listing itself on the stock market for the first time, enabling the public to purchase its shares. This capital-raising approach is typically undertaken by startups with a consistent track record of profitability and sustained growth due to its complex nature.
• Selling Shares: Early-stage investors in the startup may choose to sell their shares or equity to other VCs or private equity firms.
• Buybacks: In some cases, startup founders may repurchase their shares or equity from initial investors or VCs once they have the necessary liquid assets. This strategy allows founders to regain control of their startup and chart its future course.

5. TYPES OF FUNDING FOR STARTUPS

Startups can raise funds in various ways at different stages. Following are the different types of funding raised by startups at different stages:

5.1 Equity Funding for Startups: Attracting Investment Partners

Equity funding signifies the process of trading a portion of a startup’s ownership stake to investors in exchange for capital infusion. This capital injection is instrumental in fueling a startup’s growth and expansion efforts. Importantly, equity investors often become actively involved in the decision-making processes of the startup, leveraging their expertise and insights. The avenues for equity financing include:

• Angel Investors: These are individual investors who provide capital in exchange for equity stakes in startups. Angel investors often bring valuable industry knowledge and mentorship to the table.
• Self-financing or Bootstrapping: Startups may rely on their own resources and capital to fund their operations, thereby retaining full ownership control. This approach is known as bootstrapping.
• Family and Friends: Early-stage funding can also come from close associates, offering a sense of trust and camaraderie between the startup founders and investors.
• Venture Capitalists: Venture capitalists are professional investment firms that specialize in funding high-growth startups. They actively participate in the startup’s development and growth in exchange for equity.
• Crowdfunding: Crowdfunding platforms allow startups to secure funds from a diverse group of individuals, each contributing a relatively small amount.
• Incubators: Startup incubators provide resources, mentorship, and sometimes financial backing in exchange for equity. They are instrumental in nurturing early-stage startups.

5.2 DEBT FUNDING FOR STARTUPS: BORROWING WITH REPAYMENT OBLIGATIONS

Debt funding involves borrowing money from external sources, with an obligation to repay the principal amount along with interest within a predetermined timeframe. This form of financing is characterized by less direct involvement in the startup’s operations and decisions. Debt financing options include:

• Banks: Traditional banks extend loans to startups, which must be repaid in instalments over a specified period. Startups may need to provide collateral, such as business assets, to secure these loans.
• Non-Banking Financial Institutions (NBFCs): NBFCs offer alternative lending options and loans to startups, often with varying terms and conditions compared to traditional banks.
• Government Loan Schemes: Various government-initiated loan schemes aim to provide collateral-free loans to aspiring entrepreneurs, offering low-cost capital to support startup growth.

5.3 Grants for Startups: Financial Incentives for Achievement

Grants represent financial awards bestowed upon startups by various entities to support their objectives or incentivize exceptional performance. These grants are typically distributed in installments, contingent upon the startup achieving specific milestones. Startups are thus incentivized to continuously work toward these milestones to access the full grant amount. Grant sources encompass:

• Central Government Grants: Grants provided by the central government to support startups in achieving their objectives and fostering economic growth.
• State Government Grants: State-level governments may also offer grants to encourage local startup development and innovation.
• Corporate Challenges Grants: Corporations may organize challenges or competitions where startups can secure grants by showcasing their innovative solutions.
• Programs of Private Entities: Private organizations and entities may run grant programs to support startups that align with their missions or goals.

Understanding the diverse funding options available to startups is essential for founders to make informed decisions that align with their business objectives and growth strategies.

6. STRATEGIES FOR RAISING CAPITAL FOR STARTUP VENTURES IN INDIA

Securing funding for a startup in India is a crucial undertaking for entrepreneurs. A multitude of factors influence the success of fundraising endeavors. Here are key steps and considerations to enhance the prospects of attracting investors and obtaining the necessary capital:

• Determine Funding Requirements: Entrepreneurs should meticulously assess the financial needs of their startup before approaching investors or considering loan applications. The nature and scale of the business, whether small or large, should dictate the choice between business loans, grants, angel investors, or venture capitalists. Understanding these requirements ensures a well-informed approach to potential investors.
• Craft a Comprehensive Business Plan: A well-structured business plan or startup pitch serves as a foundational document. It not only instills confidence in potential investors but also serves as a guiding blueprint for the business. The business plan should articulate the startup’s vision, target market, industry analysis, timelines, marketing strategies, and competitive analysis, presenting a compelling case for investment.
• Assess Financial Standing: Understanding the current financial status of the startup is pivotal in determining the type and amount of funding required. Entrepreneurs should compile essential financial documents, including business and personal tax returns, cash flow statements, bank statements, and projected expenses. Additionally, preparing a profit and loss statement and revenue projections aids investors in assessing the startup’s financial health.
• Explore Funding Options: India offers a diverse array of funding options tailored to various stages of startup development. Before selecting an investment avenue, thorough research is essential. Entrepreneurs should meticulously evaluate each option to ascertain its suitability and alignment with their startup’s unique needs and goals.
• Create a Repayment Strategy: For borrowed funds, entrepreneurs must devise a repayment plan. This plan should encompass estimations of payment schedules and budgetary considerations. It not only guides entrepreneurs in managing their financial obligations but also provides investors with clarity regarding the startup’s capacity to repay borrowed capital.

7. UNDERSTANDING INVESTOR MOTIVATIONS

Investors commit their capital to startups with the expectation of reaping returns on their investment. Their involvement typically translates into acquiring equity or ownership stakes in the startup, entitling them to a share of future profits. The partnership between investors and startups hinges on the potential for financial gain, but it’s not without its risks. If the startup thrives, investors stand to profit commensurate with their equity share. However, in the event of failure, investors face the prospect of losing their invested capital.

The realization of returns on investment from startups often materializes through various exit strategies. Ideally, discussions regarding exit options should occur at the outset of investment negotiations. High-growth startups with strong management and operational processes are more likely to be exit-ready sooner than others. Venture Capital and Private Equity funds, in particular, are typically bound by fund timelines, necessitating exit from investments before the fund’s termination.

In summary, raising funds for a startup involves a well-thought-out approach, diligent financial planning, and a clear understanding of investor expectations. Success in securing capital not only depends on a compelling business case but also on the startup’s ability to deliver on its promises and generate returns for its investors.

8. STARTUP INDIA FUNDING SUPPORT

8.1 ASPIRE SCHEME: NURTURING INNOVATION, RURAL INDUSTRIES, AND ENTREPRENEURSHIP IN INDIA

The ASPIRE Scheme, an initiative championed by the Government of India and administered by the Ministry of Micro, Small and Medium Enterprises (MSME), serves as a beacon of empowerment for Indian entrepreneurship. Launched with a vision of establishing incubation centers and a network of technology hubs, the scheme has been designed to foster entrepreneurship and innovation across India, with a particular focus on the agro-industry sector.

In a nation where a substantial proportion of the population remains reliant on agriculture, persistent challenges of poverty and unemployment persist. In response, the government introduced ASPIRE in 2015 to stimulate job creation, nurture entrepreneurial endeavors, and cultivate enterprises within the agriculture sector.

Key Objectives of ASPIRE Scheme:

• Job Creation and Unemployment Reduction: ASPIRE aims to create new employment opportunities and drive economic development at the grassroots level, primarily within district areas.
• Cultivating an Entrepreneurial Culture: The scheme seeks to promote and instill a culture of entrepreneurship across India, encouraging individuals to embark on innovative business journeys.
• Addressing Social Needs through Innovation: ASPIRE envisions fostering innovative solutions to address societal needs, with a particular emphasis on rural areas and traditional agro-industries.
• Strengthening Competitiveness in the MSME Sector: By promoting innovation, ASPIRE aims to enhance the competitive edge of the Micro, Small, and Medium Enterprises (MSME) sector.

Scope of ASPIRE Scheme:

The support provided under ASPIRE is channeled into several critical areas:

• Automation of Agricultural Practices: This encompasses the application of automation technologies to agricultural and related activities.
• Value Addition to Agricultural and Forest Produce: ASPIRE encourages the addition of value to agricultural and forest-based products, enhancing their market appeal.
• Recycling of Pre/Post-harvest Agricultural Wastages: Efforts to reduce wastage and optimize resource utilization in agriculture are actively promoted.
• Business Models for Value Addition in Rural Areas: ASPIRE backs business models that focus on value addition and aggregation relevant to rural settings, delivering both social impact and local employment generation.

Eligibility for ASPIRE Scheme:

Various entities are eligible to access the benefits offered by ASPIRE, including:

• Entrepreneurs initiating startups.
• Technical, university, and research institutes, particularly those engaged in rural and agro-based industries.
• All MSMEs with Entrepreneurs Memorandum Registration.
• Government and state-owned institutions, as well as Public-Private Partnership (PPP) entities, engaged in technology, business management, rural development, and entrepreneurship development.
• Private institutions, including industry associations, academic institutions, universities, government entities, research and development laboratories, and technology parks, looking to establish new incubation centers.

The application process for the scheme involves submission to the ASPIRE Scheme Steering Committee of the Ministry of MSME, responsible for coordination, policy formulation, and overall management support.

Components of ASPIRE Scheme:

ASPIRE comprises three vital components:

1. Livelihood Business Incubation (LBI): LBI focuses on the establishment of business incubators designed to nurture youth, provide skill development training, promote entrepreneurship, and facilitate funding for startup ventures. These incubators are pivotal in generating local employment opportunities and reducing unemployment.

2. Technology Business Incubation (TBI): TBIs serve as drivers of economic development by fostering enterprise growth through technology application, innovation, and support for small businesses. They play a crucial role in local economic growth and technology transfer.

3. Start-up Promotion through Small Industries Development Bank of India (SIDBI): SIDBI plays a pivotal role in encouraging creative and scalable ideas to transform into commercially viable enterprises. This component offers innovative financing means, including equity, venture capital, and impact funds, to support idea-to-enterprise transformation.

The ASPIRE Scheme, with its multifaceted approach, acts as a catalyst for innovation, rural empowerment, and entrepreneurial growth in India. Promoting entrepreneurship, it aligns with the ‘Make in India’ initiative, driving manufacturing growth and sustained employment opportunities in the country.

8.2 MUDRA LOAN: FUELING MICRO AND SMALL BUSINESSES

Launched on April 8, 2015, by the Prime Minister of India, the **Pradhan Mantri MUDRA Yojana (PMMY)** serves as a transformative initiative aimed at bolstering micro and small businesses that operate outside the realms of farming and corporate sectors. At its core, the program is a lending initiative that extends financial support to such enterprises, offering loans that can reach up to Rs. 10 lakh. A key objective of PMMY is to foster the spirit of entrepreneurship, particularly among the youth.

The PMMY scheme encompasses three distinctive offerings:

• Shishu: Under this category, loans of up to Rs. 50,000 are extended, catering to businesses in their nascent stages.
• Kisho: The Kishor scheme provides loans ranging from Rs. 50,000 to Rs. 5 lakh, addressing the financing needs of businesses as they progress and expand.
• Tarun: Designed for businesses that have reached a more advanced stage, the Tarun scheme offers loans spanning from Rs. 5 lakh to Rs. 10 lakh.

These schemes delineate the growth stages and funding requirements of enterprises, serving as a compass for identifying the appropriate phase of support. The government places particular emphasis on the Shishu scheme, followed by the Kishor and Tarun schemes. The allocation of resources also takes into account the sector in which the enterprise operates and the nature of its business activities.

Prospective borrowers can access MUDRA loans through nearby bank branches, Non-Banking Financial Companies (NBFCs), or Microfinance Institutions (MFIs). An additional avenue for loan application is the Udyamimitra portal (www.udyamimitra.in), which allows online applications. It’s imperative to remain vigilant and avoid falling prey to fraudulent agents or intermediaries, as the facility does not involve any such third parties.

8.3 SIDBI FUND OF FUNDS SCHEME: ENERGIZING THE INDIAN STARTUP LANDSCAPE

The Government of India has introduced the **SIDBI Fund of Funds Scheme** with the aim of augmenting capital availability, stimulating private investments, and propelling the growth of the Indian startup ecosystem. Established as a Fund of Funds for Startups (FFS), this initiative was approved by the Cabinet and implemented by the Department for Promotion of Industry and Internal Trade (DPIIT) in June 2016. Notably, FFS does not make direct investments in startups but channelizes capital to SEBI-registered Alternate Investment Funds (AIFs), known as daughter funds, which, in turn, invest in promising Indian startups.

Managing the FFS and overseeing the disbursement of committed capital has been entrusted to SIDBI. The Fund of Funds operates in a manner that fosters catalytic impact, with funding provided to startups across different stages of their lifecycle.

As of February 28, 2023, SIDBI has committed a substantial sum of INR 8,294.95 crores to 103 AIFs, and a remarkable INR 3,654.89 crores has been disbursed to 74 AIFs. These investments have collectively injected a staggering INR 14,828 crores into the ecosystem, fueling the growth of 818 startups.

8.4 STARTUP INDIA SEED FUND SCHEME: NURTURING STARTUP ECOSYSTEM

The Startup India Seed Fund Scheme (SISFS), initiated by the Department for Promotion of Industry and Internal Trade (DPIIT), is an ambitious endeavor supported by a fund allocation of Rs. 945 crores. This scheme is strategically designed to provide financial support to startups at crucial junctures, including proof of concept, prototype development, product trials, market-entry, and commercialization stages.

The ultimate aim of SISFS is to enable startups to reach a level of maturity where they can attract investments from angel investors, venture capitalists, or secure loans from commercial banks and financial institutions. The scheme is poised to support approximately 3,600 entrepreneurs through 300 incubators over the next four years.

Seed funding will be disbursed to eligible startups through qualified incubators across India, fostering a nurturing environment for innovation and entrepreneurial growth.

8.5 STARTUP INDIA INVESTOR CONNECT: FOSTERING ENTREPRENEURSHIP AND INVESTMENT

In a significant move towards catalyzing entrepreneurship and stimulating investment, the Startup India Investor Connect was unveiled during the sixth meeting of the National Startup Advisory Council (NSAC) on March 11, 2023. This dedicated platform has been strategically crafted to bridge the gap between startups and investors, fostering engagements across diverse sectors, stages, geographies, and backgrounds – a much-needed synergy in the startup ecosystem.

Key Features of the Portal

1. Investment Opportunities: At the core of this platform lies the facilitation of investment opportunities. It serves as a dynamic meeting ground for startups and investors, providing startups with a coveted stage to showcase their innovations, present their ideas, and create alluring investment avenues.

2. AI-Based Matchmaking: A cornerstone of the platform’s functionality is AI-based matchmaking. This intelligent system judiciously connects startups and investors by aligning their respective requirements, ensuring that partnerships are built on compatibility and shared objectives

3. Enable Access in Emerging Cities: Recognizing the burgeoning potential of emerging cities in the startup landscape, the platform extends its reach to these regions. By enabling connections between investors and startups in these burgeoning hubs, it contributes to decentralizing the startup ecosystem.

4. Virtual Marketplace Creation: The platform is set to revolutionize the investor-startup interaction by creating a virtual marketplace. Within this marketplace, investors can explore a diverse array of innovative startups that align with their investment preferences and objectives, streamlining the investment process.

The Startup India Investor Connect holds the promise of not only promoting entrepreneurship but also fortifying the startup ecosystem by facilitating seamless interactions between startups and investors, fostering innovation, and ultimately driving economic growth.

9. CONCLUSION

The journey of raising funds for startups in India is a multifaceted endeavor, and it plays a pivotal role in the growth and success of these entrepreneurial ventures. The startup ecosystem in India is experiencing significant growth, thanks to various government initiatives and funding support schemes. As startups progress through different stages, from pre-seed to Series A, B, C, and beyond, they require different types of funding to fuel their growth, and India offers a diverse array of funding options to cater to these needs.

One key takeaway is the importance of understanding investor motivations. Investors commit their capital with the expectation of generating returns, and it’s crucial for startups to align their business plans and growth strategies with these expectations. Moreover, clear exit strategies should be discussed early in investment negotiations to ensure a smooth transition when the time comes.

Government schemes such as the ASPIRE Scheme, MUDRA Loan, SIDBI Fund of Funds Scheme, and Startup India Seed Fund Scheme are instrumental in nurturing entrepreneurship and innovation across India. They provide crucial financial support to startups at various stages of development, contributing to economic growth and job creation, particularly in rural areas. The recent introduction of the Startup India Investor Connect platform further strengthens the startup ecosystem by facilitating seamless interactions between startups and investors. This platform holds great promise for promoting entrepreneurship and fostering innovation in India.

As startups continue to thrive and evolve in India’s dynamic landscape, founders and entrepreneurs should meticulously assess their funding requirements, craft comprehensive business plans, and explore the diverse funding options available to make informed decisions that align with their business objectives and growth strategies. By doing so, they can enhance their prospects of attracting investors and obtaining the necessary capital to fuel their entrepreneurial dreams and contribute to India’s vibrant startup ecosystem.

Author	Organization/ Affiliation	Email
Main Author	myCACFO	[email protected]
Co-Author	Astik Dubey	[email protected]