[UNIT] FINANCING AND PROTECTION OF IDEAS 5) MEANING OF FUNDING Fundingrefers to the money required to start and runa business. tis financial investment inacompany for product development, manufacturing, expansion, sales and marketing, office ces, and inventory. Many start-ups choose to not raise funding from third Parties and are funded by their founders only (to prevent debts and equity dilution). However, most start-ups doraise funding, especially as they grow larger and scale their operations, 5.2 NEEDS OF FUNDING {@ To Make the Process of Ideation to Development Simple The process of evolving an idea into a product or a service requires an immense amount of time, money, effort and skills. As an entrepreneur, you would require a solid base of resources and expertise during the development phase. If you get funding for your start- up; you will have the ability to hire specialists, invest in production costs and keep the operations running. Gi) To Make as Much Noise as Possible | Ifyour target audience likes your product or service, you would want to capture as much market as possible. Once you get funds for start-up, you will be able to invest money and ‘ime in marketing and sales. This will also help you compete with other players in the market and you can let the audience know what makes you different and better. ‘i To Grow Your Network One of the f major reasons why entrepreneurs contact investors is to get business funding for Start-ups, But is that it? Of course not. Investors can help you in building a wee" You can get in touch with other companies as well. Since both your goals wil “Fen, they will want you to succeed and push you in the right direction. > Scanned with CamScannerpo i, | ENTREPRENEURSHIP AND START-UPS (iv) Build Your Future by Attracting Future Investors for Start-Up Business If you get funds for start-up business, it increases your visibil attention of the market. This way it is easier for you to achieve prospective investors and customers. lity and capti your goals ty ines te riguing (v) For Expansion and Development There is no denying the fact that if you are looking to scale your busines to the level, you need to get funding for your start-up. Whether you want to expand tes of products or services, move to new premises, increase your hires, or expand on) the borders of your country, finding investors for a start-up is a must. Whatever your goal is, growth finance will help you take advantage of new opportunites and tun-wc ambitions into reality. 5.3 METHODS OF START-UP FUNDING IN INDIA The start-up funding ecosystem has evolved beyond angel investors and venture capitalists. Start-ups can raise funds from different kind of investors and platforms based on their needs and stage. (i) Angel Investors Angel investors are individual investors or a network of individuals with family connections or rich experience. Most of them are experienced entrepreneurs who have been through the process of starting a business. They understand the pain points and opportunities. These investors have surplus cash that they are willing to risk in your venture at the seed stage. Before investing, they screen the start-up, research, and see how much the fom has invested. Once they are convinced, they give you funding in exchange for convertible debt or equity ownership in your start-up. Angel investors act as mentors to young entrepreneurs. But they invest a lesser Lae than venture capitalists and expect higher returns. Some popular individual inves Kunal Shah, Rajan Anandan, Ritesh Malik. \ Gi) Angel Networks & Platforms Angel networks & platforms is where angel investors pool their funds to investing | ups. As they operate as a group, these investors can provide larger funds ‘hestartup | 1 risks. The platform gets equity ownership of the start-up, and they benefit ifthe prospers. Some popular platforms are AngelList, Venture Catalysts, LetsVenture. , (iii) Venture Capital Funds . sng Venture Capital Funds are an institution whose business is to provide capital! toprerntue start-ups. This point is where the start-up funding goes to the next level. ‘company capital funds are an institution, they provide large amounts of capital to ae aelves for growth and expansion and monitor its progress to ensure their investme sustainable development Scanned with CamScannerFINANCING AND PROTECTION OF IDEAS | 123 yr ' [imeem al funds get equity or equity-linked start-ups in return for | vente ing, They leave the company when it releases an IPO or is acquired. | ing: the fun’ “go Venti Capitals cr Tf venture capital is micro Venture Capitals, with a lesser fund size of around 0470 Million. Micro VCs invest in idea-stage start-ups and get an equity ay) Mi ae ili orate Venture Capital a com pranch of Venture Capital is Corporate Venture Capital (CVC). Corporate another ‘ital (CVCs) are large multinationals that invest corporate funds into small, haan 1 Seartupe either for technology, talent pool, or to acquire a target market. inn grate Venture Capital (CVCs) provide startups with resources like marketing Corporate categic direction, or a line of credit. Being associated with big names gives ertise, Sertups a boost. Corporate ‘Venture Capital (CVC) provides funding in exchange for an equity stake in the start-up. Among Indian Corporate Venture Capital (CVCs) are Mahindra Partners, Reliance Ventures, and Times Group's Brand Capital. (vi) Venture Debt Funds Equity is an expensive source of funding for start-ups. Hence, non-banking financial corporations (NBFCs) offer a hybrid scheme called venture debt funds that provide debt financing to VC-backed start-ups. Bank loans or equity are not a viable funding option when a start-up is expanding and needs working capital. Venture debt funds lend you money in return for non convertible debentures (NCDs) and equity warrants. Alteria Capital and Trifecta Capital are some players that provide venture debt financing to Indian start-ups. (vi) Government Grants & Funds Funding for Indian start-ups went beyond angel investors and VCs in 2016 when the government of India launched the ‘Start-up India’ program. The program offers grants, {ke an 80% rebate on patent costs and income tax exemption for the first three years, to start-ups tegistered under the scheme. prepoverment disburses the funds as loans through the Small Industries Development anf India (SIDBI) Fund of Funds Scheme. The scheme invests in venture capital and “native investment funds (AIF) that invest in start-ups. Last year, the government a launched the Start-up India Seed Fund scheme which provides funding support to stage start-ups. For th for Saree year, the government has allocated INR 1,000 Cr for the Fund of Funds ‘ups and INR 283.5 Cr for the Start-up India Seed Fund Scheme (SISFS). a Scanned with CamScanner124 | _ ENTREPRENEURSHIP AND START-UPS (viii) Accelerators & Incubators nding options are for start-ups already doing business prep schools for start-ups. These programs run feet ers with funding and a platform to cone et While all the above fu and accelerators are like months, where they provide business own with investors, mentors, and other start-ups. Accelerators and incubators are generally found in major cities and take an equity ss, jn return for the program, These programmes are either run by individual entities or . part of large corporations or big tech companies. aa ar accelerator programmes for Indian start-ups include ¥ Combi: Google Launchpad Accelerator, JioGen! Some of the popul GSF Accelerator, Microsoft Accelerator, amongst others. (ix) Family Offices ‘Another emerging funding for Indi ‘an start-ups is family offices. India has a his! family businesses that pass on their wealth to the next generation. Examples inc Azim Premji of Wipro, ‘Anirudh Damani of K. Damani Group, and Gaurav Burman of Burman Family Office (investor in Dabur India). This next-generation seeks to break the stereotype and invest in different avenues. w Family offices are more patient than angel investors and give start-ups more ime, ac sto approach the right family ofSce and resources to grow their businesses. But the trick i India has over 140+ family offices that have heavily invested in the Indian start They have been pro-actively involved in 50+ such deals every year since 2015, a repo Prats Global Alliance and 256 Network. The report further predicts that Indian F Offices are expected to contribute 30% of the estimated $100 Billion tobe raised by start-ups by 2025. @) Banks ‘Amid all the new funding options for Indian start-ups, of bank loans still exists. Banks offer different types of I like equipment loans, start-up business loans, and working capit different terms. There is a loan for all stages of business. " oo rgouresct For an idea-stage start-up, banks require higher collateral, typically with others, income, Fullerton India and Omozing.com are popular banks and NBFCs that of! to Indian start-ups. the conventional fun: i loans for different business al Joans, each a ca] ro Crowd Funding ‘Another less popular funding option for start-ups is crowd funding. eo investors looking for alternative investment options assemble on @ platform through the business model, and invest in the start-up of their choice. Every ts invests a fixed amount (peer-to-peer lending) in a business idea with hopes &f 8° higher interest. Scanned with Camm@eannerFINANCIN IG AND PROTECTION OF IDEAS | SONOFIDEAS | _125 ity crowd funding, but i . ay co fin its legality in In : ies and scams. SEBI warns again: i annie a WS against unregistered pistered digital jatforms. je crowd funding platforms for f i for start-ups inch se, StartEngine, Gol include Indiego artEngine, GoFundMe, Patreon, Gripes ce est, ImpactGuru. is als0 ere ig prone “a i in ene Based Financing ‘ a rin allowsa start-up to get its future revenue si i ing eee advertising, and marketing Seine tise it i ie Te pre-decided percentageof therevenuea ing, The payment 2 gona’ jean the recent tes, nia has seen thee eee ee } on companies Wich a= addressing the revenue needs of the i revenue-based panies. based financin; . 7 cg companies for Indian startups i cataiage amend artups include Velocity, third-largest star-up ecosystem globally, thanks to the various rage business owners. These fundingand fundraising options pdinhas emerged 0 the funding options that encou} sm to fuel business growth. 5A TYPES of START-UP FUNDING ‘There are three types of start-up funding: equity funding, debt funding, and government pants. Each funding option has its pros and cons. Grants Working Capital | Equity Financing | Debt Financing Debt financing [A srantis an award, the [usually financial, joney back Equity financing involves _selling | involves a portion of borrowing of m Brief fompany’s equity in} and paying it return for capital. | with interest. he é Thaw is mo Invested Funds © | component el be repaid within 2 repayment of the stipulated time frame in with interest e 7 Ni a invested funds. Ci anned Wi amscanner126 | _ENTREPRENEURSHIP AND START-UPS Financer: There is no guarantee against his investment. Start-up: Start- ups need to give] risk of eee up a portion of not meetin, up their ownershi wen the nership to| or objective ar’ 2 shareholders, the grant hat Financer: The lender | provided.“ has no control |< ‘ over the business’s| Sup: There is. operations, risk ofthestartupre receiving a potion Start-up: You may/of the grant due 4 need to provide al several reasons, business asset as collateral. While startups | Startups need _ to | Grantsaredistribus are under _ lesser | constantly adhere to| in different tranches pressure to adhere} repayment timeline] wart the fulflmes to a repayment | which results in more | of the correspon Threshold timeline, investors] efforts to generate | milestone. Thu are constantly trying | cash flows to meet] status is cons: to achieve growth | interest repayments working to adi ve targets the milestones down. of Commitment Capital growth for Taree payment i Retum Return to Investor | investors direct Equity Investors] Debt Fund has very|No usually prefer to| less involvement in involveme! aking . . involve themselves in | decision-making decision m: in Decisions the decision-making process Involvement i 5 Govern ‘Angel Investors Banks Non-Banking Cat rae Self-financing Family | Financial Institutions cali and Friends Venture | Government Loan | Como Capitalists Crowd | Schemes Grant Entities Funding. Incubators/ Prival Accelerators po Scanned with CamScanner Sources