6111: ENTREPRENEURSHIP AND START-UPS
UNIT 5
Financing methods available for startups in India
The various financing methods available in India are:
1. Bootstrapping: Bootstrapping is when an entrepreneur starts a company with personal
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savings, including borrowed or invested funds from FFF and income from initial sales.
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Self-funded businesses do not rely on the support of investors, public funds,
crowdfunding or bank loans.
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Rather, entrepreneurs must “pull themselves up by their bootstraps” using their capital to
launch.
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For example, a bootstrapped company can take preorders for its product and use that
generated amount to build and deliver it.
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2. FFF: Every year, 35-40% of startups receive capital from friends and family.
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The well-known “Friends, Family and Fools” is, normally, the first source of financing that
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every company turns to in its beginnings.
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This form of financing uses the savings of the entrepreneur and the help of family and
friends who trust the business project they are working on.
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3. Seed Funding: Also known as seed financing, company shares are offered to investors
so that they acquire a part of the business in exchange for capital.
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Apart from the FFF, seed capital comes from Angel investors and crowdfunding.
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Seed capital is one of the sources of financing for a company that provides initial support
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so that a business can start its operation and consolidate. It is usually oriented towards
new companies, offering innovative products or services, incorporating new technology
or addressing new market niches.
4. Public Funds: Public funds are government expenditures focused on public goods and
services programs. It refers to any money a public entity receives from appropriations,
taxes, fees, interest, or other ROI.
The Public Account of India tracks the transaction flows, where the government only
serves as a banker.
Some examples of public funds in India are –
● Pradhan Mantri Mudra Yojana (PMMY)
● Startup India Initiative
● Startup India Seed Fund Scheme
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● Qualcomm Semiconductor Mentorship Program (QSMP)
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● ATAL Innovation Mission.
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● Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
● Single Point Registration Scheme.
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● Modified Special Incentive Package Scheme (M-SIPS)
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5. Crowdfunding: Crowdfunding is one of the most popular forms of financing companies,
startups and projects contributing to the common good.
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The term can be broken down into two terms, crowd + funding. In such type of funding,
you reach out to a crowd who can collectively provide the necessary amount to fund your
venture.
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Crowdfunding is about raising small amounts of money from many different sponsors to
get the overall sum you need.
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6. Angel Investors: An “angel” investor offers capital and knowledge to a company or
startup through financing.
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In exchange, you will receive a profit in the future, which usually translates into a
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shareholding in the company. Angel investments are normally the second financing
round for startups with high growth potential.
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7. Bank Financing: There are different bank financing instruments that a company can
resort to have the necessary capital flow in its daily operations. However, to receive this
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type of loan, a company must meet many requirements and conditions before becoming
a financing creditor and offer guarantees that guarantee the amount.
Finally, the interest rate on this type of loan is high, so it is advisable to think carefully if a
company wants to assume this type of financing.
8. Venture Capital: Venture capital financing is provided by private funds to companies or
ventures with high growth potential. These funds manage and contribute capital from
individuals, companies or institutions, investing in innovative companies or startups with
great possibilities to be successful.
In exchange for this financing, venture capital funds receive a direct shareholding in the
company, usually 20-30%. They also usually acquire voting rights in relevant company
decisions and a position on the board of directors.
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Once the success of the projects has been achieved, the venture capital companies
withdraw their investment by selling their shares to other interested members or on the
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stock market if the case arises, obtaining the high returns sought from the beginning.
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9. Private Equity: Another financing possibility for companies with a certain size, traction
and growth potential is through private capital sources, also known as private equity.
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Unlike venture capital, private equity funds tend to invest in all types of companies, with
larger amounts and acquiring a greater percentage of the companies where they invest.
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In addition, these funds tend to invest in a smaller number of companies since they take
more into account the risk they assume with each of them while investing large amounts
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of capital; therefore, they also expect a higher return on investment than in VCs.
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10. Leasing: A lease is a contract summarising the terms according to which one party
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agrees to rent an asset another party owns.
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Instead of opening a loan and putting down a downpayment, startups often lease their
initial business equipment. They may even continue to lease after revenue makes buying
possible. Equipment leasing has numerous benefits for a startup, from flexibility to liquid
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cash flow.
This rental contract incorporates a purchase option for the lessee to be exercised at the end of
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the contract.
There are four types of leases –
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● Gross lease
● Modified gross lease
● Triple net lease
● Bond lease
11. Factoring or Invoice Discount: For those companies that sell on credit, there are much
more convenient financing options for their needs.
The problem is that companies that sell for 30, 60, 90 or more days require capital to
continue operating or growing. However, they need the necessary liquidity due to their
accounts receivable.
With the discount or advance of invoices or factoring, for example, a company can have
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credit immediately in addition to reducing the risk of non-payment of its customers.
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Some online lenders and fintech companies provide factoring services, like IFCI Factors
Ltd., SBI Global Factors Ltd., Siemens Factoring Private Limited, Bibby Financial
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Services (India) Pvt. Ltd., etc. The Reserve Bank of India (RBI) is the regulatory body
supervising the factoring business.
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The processes have been streamlined with the advent of online financial services
platforms. The costs of this type of operation are reduced, making it a highly
recommended option for small and medium-sized companies.
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Investor Pitch
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A pitch is a presentation of a business idea to potential investors.
The Investment Pitch.
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An investment pitch presentation is a concise summary of our business plan that increase the
interest of potential investors. It should NOT be just a product pitch – Product is only one
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element of the business plan.
It illustrates the business and its potential success in an easy manner through the slides so that
the investor can understand the business potential.
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An Investor Pitch deck presentation consists of various slides that help the entrepreneur to tell
more about its business.
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Investor pitch-steps
1. Develop your elevator pitch.
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2. Know your Customers.
3. Tailor your pitch.
4. Make Pitch deck.
5. Tell the story.
6. Demostrate your solution.
7. Know your target market.
8. Give the description of Business model.
9. Represent your strong points compare to competitors.
10. Represent your success and traction.
11. Represent financial goals
12. Introduce your team
13. Public your fund requirements
14. Follow up
15. Take feedback & Refine your pitch
16. Practice on your pitch Investor pitch Deck A pitch deck is a brief presentation that gives
potential investors or clients an overview of your business plan, products, services and
growth traction.
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Pitch presentation is a short and brief presentation (not more than 20 minutes) using Power
Point to the investors explaining about the prospects of the company and why they should
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invest into the startup
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It provides a quick overview of the business plan and convinces the investors to put some
money into the business
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Which presentation can be made either during face to face meetings or online meetings with
potential investors, customers, partners and co-founders.
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Some of the methods to approach a pitch presentation are as follows:
1. Introduction: this is a brief account about ourselves. It should be short and we should
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use opportunity to get our investors interested in the company.
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2. Team: this step is used to introduce the audience to the people behind the scene. The
reason is that investors will want to know the people who are going to make the product
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for the service successful. Investors not only put the money in the idea but also in the
team. The background of the promoter should also be included in this.
3. Problem: the promoter should be able to explain the problem he is going to solve and
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the solutions emerging from it. The investor should also be convinced that the newly
introduced product or service will solve the problem convincingly.
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4. Solution: In this step the company should describe how it plans to solve the problem.
For example, when Flipkart first started the business in 2007 it brought the concept of
e-commerce in India but when they started payment through credit card was not
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common so they introduced the system of payment on the basis of cash on delivery
which was later followed by other eCommerce companies in India.
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5. Marketing/Sales: the market size of the product must be communicated to the investors.
This can include the profiles of target customers but the promoter should be able to
answer how he is willing to attract the customers.
6. Projections/Milestones: this step will give us the answer weather the business will meet
profit or loss. Also it includes 3 basic documents-
a. income statement: It gives estimate about the projected income and expenses.
For 1st year of business we create a monthly income statement, for 2nd year a
quarterly income statement and for the following years an annual statement is
sufficient.
b. cash flow statement: It gives information about how much cash is coming into the
business and how much cash is going out.
c. balance sheet: it gives the business’s overall finances including assets, liabilities
and equity.
Patent
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I. A patent is a legal right to an invention given to a person or entity without interference
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from others who wish to replicate, use, or sell it.
II. Patents are granted by governing authorities and have a time limit, usually 20 years.
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III. A patent is an exclusive right granted for an invention, which is a product or a process
that provides a new way of doing something, or offers a new technical solution to a
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problem.
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To get a patent, technical information about the invention must be disclosed to the public in a
patent application.
Example: Patents have been used in their modern definition since the 1500s to provide
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inventors the exclusive right to produce and sell their inventions.
Some famous examples of products that have been patented include:
The Telephone: Patented by Alexander Graham Bell in 1876.
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The Lightbulb: Patented in 1878 by Thomas Edison.
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Types of patents:
1. Utility patent. A utility patent, or patent for invention, is a common type of patent
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application received by the USPTO.
2. Design patent. A design patent covers ornamental designs applied to existing products
without altering the function of the original product.
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3. Plant patent. Reissue patent
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Advantages of owning a patent:
● We own the invention for a given time (20 years)
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● We can use it to build a business
● We can rent it (in this case license it) to existing businesses
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● We can exclude all others for using, selling, offering for sale, and importing your
invention in your country
● We can completely sell the patent to another company
