Startup Finance

Startup Under the Startup India Scheme, Startup means an Entity –

Initiative in (a) Incorporated as either a Private Company / Registered Partnership Firm /
India LLP,
(b) Having Turnover for any Fiscal Year has not exceed ₹ 100 Crores
(c) Not having been formed by spitting up or reconstruction a business
already in existence
(d) Working towards Innovation, Development, Deployment or
Commercialisation of New Product, Processes or Services driven by
Technology or Intellectual Property, and
 (e) Up to 10 years from its date of Incorporation / Registration
Difference Startup Entrepreneurship
Scope Startup is a part of Broader concept and
entrepreneurship includes startups
Aim To build a concern, conceptualise To attain opportunities with
the idea which it has developed regard to the resources they
into a reality and build a product currently control
or service

Motive It generally does not have a major It mainly operates on

financial motive financial motive
Priorities The priority is on bringing more and more smaller firms into existence. So,
the focus is on need based, instead of opportunity based entrepreneurship.
Moreover, the trend is to encourage self-employment rather than large,
scalable concerns.

Challenge The main challenge with the startup firms is getting the right talent. And,
paucity of skilled workforce can hinder the chances of a startup
organisation’s growth and development. Further, startups had to comply with
numerous regulations which escalates its cost. It leads to further delaying the
chances of a break-even or even earning some amount of profit.

Pitch Deck 1. Pitch Deck Presentation is a short and brief presentation (not more than
Presentation 20 minutes) to Investors, explaining about the prospects of the company
and why they should invest into the startup.
2. It is a brief presentation, using Tools like Power Point, to provide a quick
overview of Business Plan, and to convince the Investors to put some
money into the business.
3. Pitch Presentation can be made either during face-to-face meetings or on-
line meetings with Potential Investors, Customers, Partners, and Co-
Founders.

Steps / 1. Introduction i.e. give a brief account of Entrepreneurs.

Approach 2. Working Team i.e. the people behind the scenes should be introduced.
The reason is that the Investors will want to know the people who are
going to make the Product or Service successful.
3. Problem i.e. explain the problem he is going to solve & solutions
emerging from it.
4. Solution i.e. describe as to how the company is planning to solve the
problem.
5. Marketing / Sales i.e. communicate Profiles of Target Customers, plan to
attract Customers, etc.
6. Projections / Milestones: i.e. give a brief idea about where is the
business heading, whether the business will be making profit of loss, etc.
7. Competition i.e. highlight as to how the Products / Services are different
from their Competitors.
8. Business Model i.e. way in which company generates Revenue & makes a
Profit from Operations.
9. Financing: Explain how much money has already been raised, how much
 he is looking to raise and how he intend to use the funds.
Business 1. The term Business Model is a wide term denoting core aspects of a
Model business including purpose, Business, Process, Target Customers,
Offerings, Strategies, Infrastructure, Organisational Structures, Sourcing,
Trading Practices, and Operational Processes and Policies including
Culture.
2. It is the way in which a company generates Revenue & makes a Profit
from Company Operations.
3. Analysts use the term Gross Profit as a way to compare the efficiency and
effectiveness of a Firm’s Business Model, Gross Profit = Revenues Less
Cost of Goods Sold.
4. It is better to show the Investors a list of the various Revenue Streams for
a Business Model and the timeline for each of them. Further, how to price
the Product and what does the Competitor charge for the same or similar
product shall also be highlighted.
5. It is also beneficial to discuss the lifetime value of the customer and what
should be the strategy to keep him glued to the Entity’s product.

Modes of 1. Modes of Financing: Bootstrapping, Angel Financing & Venture Capital

Financing Financing.
2. Innovative Methods: Personal Financing, Personal Credit Lines, Family
and Friends, Peer-to-Peer Lending, Crowd-Funding, Micro-Loans, Vendor
Financing, Purchase Order Financing, Factoring.
Boot- An individual is said to be boot –strapping when he or she attempts to found
Strapping and build a Company from Personal Finances or from the Operating Revenues
of the New Company. Some Methods by which a Startup Firm can bootstrap
include – (a) Trade Credit, (b) Factoring and (c) Leasing.

Trade Credit It represents credit granted by suppliers of goods, in the normal course of
business. It is common to almost all business operations. There is no explicit
cost associated with Credit Period availed. It is available and keeps on
rotating as long as the business is a going concern. It enhances automatically
with the increase in the volume of business.

Factoring The Borrower sells his Accounts Receivables (i.e. Book Debts) to the Factor.
The Factor purchases the Receivables and provides advances against them,
after deducting and retaining – (i) A suitable Margin / Reserve, (ii) Factor’s
Commission / Fees, and (iii) Interest on Advance. The Borrower forwards
collections from his Customers / Buyers to the Factor, and thus settles the
advances received by him.

Leasing Leasing is a contract where one party (Owner / Lessor / Leasing Company)
purchases the Assets and permits its use by another party (Lessee) over a
specified period of time. Thus, Leasing is an alternative to the purchase of an
Asset out of own or borrowed funds.

Venture 1. Venture Capital Financing refers to financing of high risk ventures

Capital promoted by new, qualified entrepreneurs who require funds to give
Financing shape to their ideas.
2. Here, a Financier (called Venture Capital Fund) invests in the Equity or
 Debt of an Enterprenuer (Promoter / Venture Capital Undertaking) who
has a potentially successful business idea, but does not have the desired
track record or financial backing.
3. VC Fund may be formed as a Trust Company or LLP. Investors in VC Fund
may be – (a) Banks and Financial Institutions, (b) Pension Funds, (c)
Corporate Entities (d) High Net-worth Individuals etc.
Advantages 1. Venture Capitalist (VC) is a Business Partner, sharing both the risks and
rewards. Venture Capitalists are rewarded with Business Success and
Capital Gain.
2. VC injects Long-term Equity Finance which provides a solid Capital Base
for future growth.
3. VC is able to provide practical advice and assistance to the Startup based
on past experience with other Companies which were in similar
situations.
4. Venture Capitalist also has a network of contacts in many areas that can
add value to the Startup.
5. VC may be capable of providing additional rounds of funding, if required
to finance growth.
6. Venture Capitalists may be experienced in the process of preparing a
company for an Initial Public Offering (IPO) of its Shares onto the National
Stock Exchange or Overseas Stock Exchanges.
7. Venture Capitalists can also facilitate a trade sale.

Stages of VC Stage Activity to be Financed

Seed Money For supporting a Concept or Idea or R & D for Product
Development
Start Up Initializing, Prototypes, Operations, etc.
First Stage Product Development, Start Commercials, Marketing,
Production, etc.
Second Stage Market expansion and growing Working Capital needs.
Third Stage Market Expansion, Acquisition & Product Development for
profit-making Company (This is also called Mezzanine
Financing].
Fourth Stage Facilitating Public Issue [This is also called Bridge Financing
in VCs].
Angel 1. Angel investors invest in small startups or entrepreneurs. They are among
Investors Vs. an entrepreneur’s family and friends. It may be a onetime investment to
Venture help the business propel or an ongoing injection of money to support and
capitalists carry the company through its difficult early stages.
2. The provide more favourable terms compared to other lenders, since they
usually invest in the entrepreneur starting the business rather than the
viability of the business. They are focused on helping startups take their
first steps, rather than the possible profit they may get from the business.
3. Essentially, angel investors are the opposite of venture capitalists. Angel
investors are also called informal investors, angel funders, private
investors, seed investors or business angles.
 4. These are affluent individuals who inject capital for startups in Exchange
for ownership equity or convertible debt. Some angel investors invest
through crowdfunding platforms online or build angel investor networks
to pool in capital.
5. Angel investors typically use their own money, unlike Venture Capitalists
who take care f pooled money from many other investors and place them
in a strategically managed fund.
6. Though angel investors usually represent individuals, the entity that
actually provides the fund may be a Limited Liability Company / Business
/ Trust / Investment Fund, among many other kinds of vehicles.
7. Angel investors who seed startups that fail during their early stages lose
their investments completely. This is why professional angel investors
look for opportunities for a defined exit strategy, acquisitions or initial
public offerings.

Cyber Risk Risk of damages due to lawsuits / compensation on account of being a victim
of cyberattack, due to which data of customers, vendors or any other counter-
party can be leaked to an unauthorized, malevolent entity.