CA FINAL – ADVANCED FINANCIAL MANAGEMENT STARTUP FINANCE

STARTUP FINANCE

Innovative Ways to Finance a Startup

1. Personal Financing:
• Most budding entrepreneurs never thought of saving any money to start a business
• Investors will not be attracted if you have not contributed your own money(Personal Savings)
2. Personal Credit Lines
• Personal credit efforts, example – Credit cards
• Banks are very cautious while granting personal credit lines.
3. Peer to Peer Lending
• Group of people come together to lend money to each other.
4. PO Financing
• Purchase order financing companies often advance required funds directly to Supplier. This
allows the completion of transaction and profit flows up to the new business.
5. Family & Friends
• These people invest without even thinking that your idea works or not (promissory note)
6. Factoring Accounts Receivables
• Facility given to seller who has sold the goods on credit to fund his receivables till the amount
is fully received.
7. Micro (Small) Loans
• Small loans that are given by individuals at lower interest rates to new business ventures
• Issued by a single individual or aggregated across a number of individuals.
8. Crowd Funding
• Use of small amount of capital from a large number of individuals to finance a new business
initiative. Makes use of easy accessibility to vast networks of people through social media &
crowdfunding websites to bring investors and entrepreneurs together.
9. Vendor Financing
• Company lends money to customers so that he can buy products from the company itself.
• Extending Payment terms to a longer period (30 days payment period can be extended to 45)

Concept of Unicorn
Meaning:
• A Unicorn is a privately held start-up company which has achieved a valuation US$ 1 billion.
• Unicorn is a mythical animal represents the statistical rarity of successful ventures.
Features:
A start-up is referred as a Unicorn if it has following features:

Other features are new

Emphasis is on the ideas, innovation,
A privately held Valuation of start-up
rarity of success of
start-up reaches US$ 1 Billion consumer focus, high on
such start-up. technology.
Unicorn Status:
• It is important to note that in case the valuation of any start-up slips below US$ 1 billion it can
lose its status of ‘Unicorn’. Hence a start-up may be Unicorn at one point of time and may not
be at another point of time.
• The next milestone for a Unicorn to achieve is to become a Decacorn, i.e., a company which
has attained a valuation of more than US$ 10 billion.

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PITCH PRESENTATION
Meaning:
• Short and brief presentation (not more than 20 minutes) to investors explaining about the
prospects of the company and why they should invest into the startup business.
• A brief presentation using PowerPoint to provide a quick overview of business plan &
convincing the investors to put some money into the business.
• It can be made either during face-to-face meetings or online meetings with potential investors

Points to be kept in mind while preparing a pitch presentation:

Introduction Projections / Milestones

Competition:
Who are you? Projected FS can be
How the products or
prepared - gives investors
What are you doing? services are different
an idea about where is the
Facts about business. from their competitors.
business heading.

Team
Marketing / Sales: Business Model:
Introduce audience to the
Market size of product Purpose, Process, target
people behind the scenes
must be communicated to customer, policy, strategy,
(investors are investing in
investors. infrastructure, structure.
the team also)

Financing:
Problem: Solution: How much money has
Explain problem that start How the company is already been raised, who
up is going to solve & planning to solve the invested money and how
solution emerging from it. problem. that money has been
used.

Financial projections include three basic documents that make up a business’s financial
statements:
• How much revenue did the business generate?
• How much did it cost to generate & support that
Income statement revenue?
• How much did the business pay its employees?
• How much did it pay towards rent?

• Projected CFS will depict how much cash will be

Cash Flow Statement coming into the business & how much cash will be
utilized.

• How much cash is in the bank?

Balance Sheet • How much money does company owe to suppliers?
• How much money has been invested in company?

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Startup India Initiative

An entity shall be considered as a Startup only if:

Up to a period of 10 years Turnover of entity

Entity should not
from the date of for any of the Entity is working
have been formed by
incorporation/ financial years since towards innovation,
splitting up or
registration, incorporated incorporation/ development, new
reconstructing a
as a Private Ltd Co. or registration has not product, processes
business already in
registered as Partnership exceeded 100 crore or services
existence.
Firm or a LLP in India rupees.

Reasons why India became a sustainable environment for start-ups to thrive in:
Pool of Cost Effective Increasing use Variety of Funding
Technology
Talent Workforce of the Internet Options Available

MODES of Financing

Modes

Bootstrapping Angel Investors Venture Capital Fund

Trade Credit Factoring Leasing

BOOTSTRAPPING
Meaning:
1. Individual attempts to start & build a company from personal finances / operating revenue of
new co. More money at the inception of business leads to complacency & wasteful expenditure.
2. Investments by startups from their own savings leads to a cautious approach.

Methods in which a startup firm can bootstrap:

• Prepare a well-crafted financial plan, visit supplier's office.
• Business organization is small, owner can be directly contacted.
Trade Credit In case of big firm, CFO can be contacted & convinced about
financial plan. Reference of someone known to the supplier.

• Accounts receivable of a business organization is sold to a

Factoring commercial finance company to raise capital.

• Take equipment on lease rather than purchasing it.

Leasing • It will reduce the capital cost and help lessee to claim tax
exemption.

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ANGEL INVESTORS

Also known as informal Focused on helping startups

Invest in small startups /
investors, private investor, take their first steps,
entrepreneurs. Often they are
seed investor, business (Different from venture
among the family & friends.
angels, angel funders. capitalists)

Provide more favourable

Provide one-time investment Angel investors use their own
terms compared to other
to help business propel or money unlike venture
lenders, since they invest in
ongoing injection of money capitalists who take care of
the entrepreneur starting
to support co. through its pooled money from many
business rather than viability
difficult early stage. other investors
of the business.

VENTURE CAPITALIST

Meaning: Money provided by professionals who invest in young, rapidly growing co. that have the
potential to develop into significant economic contribution (exceptional growth potential)
Venture Capitalists generally:
AAP Finance
Assist in the Add value to Purchase Finance new &
development of the company rapidly
equity
new products through active growing co.
securities
or services. participation.
Characteristics of Venture Capital Financing

High Risk Works on principle of high risk & high return

Participate in the mgnt & help co. grow.

Equity Participation Board decisions can be supervised by VC.
Characteristics
Lack of Liquidity Less liquidity on equity HELL

Long Time Horizon Minimum period of investment 3 to 10 years

Advantages of Venture Capitalist in the Company

Advantages of Venture Capitalist in the Company PAINTS

Practical Injects Initial Network

advice & Additional long- Public
of contact Sharing
assistance. rounds of term Offering
in many Trade both risks
based on past areas that sale &
funding equity (IPO) of
experience can add rewards
finance its shares
value.

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Stages of Funding for VC
Financial Period Risk Activity to be financed
Stage (Funds locked Perception
in years)
Seed Money 7-10 Extreme For supporting concept / idea / R&D for product
development & involves low level of financing.
Start Up 5-9 Very High Early-stage firm that need funding for expenses
associated with marketing & product development.
First Stage 3-7 High Early sales and manufacturing funds.
Second Stage 3-5 Sufficiently Growing working capital needs though not earning
high profit.
Third Stage 1-3 Medium Expansion money for a newly profitable co. (Mezzanine
Financing)
Fourth Stage 1-3 Low Public issue i.e. going public (Bridge Financing)

VC Investment Process
1. Deal Origination:
• VC operates directly or through intermediaries. (mainly practicing Chartered
Accountants)
• Before sourcing the deal, the VC would inform the intermediary about the sector focus,
stages of business focus, promoter focus & turnover focus so that the sourcing entity does
not waste time.
• Business model, fi nancial plan & exit plan are covered in document which is called as
Investment Memorandum (IM)
2. Screening:
• Carried out by a committee consisting of senior level people of the VC.
• Once the screening happens, it would select the company for further processing.
3. Due Diligence:
• Process by which the VC tries to verify the veracity of the documents taken, handled by
external bodies, mainly renowned consultants.
4. Deal Structuring:
• The deal is structured in such a way that both parties win.
• In many cases, the convertible structure is brought in to ensure that the promoter retains
the right to buy back the share.
• In many structures, to facilitate the exit, the VC may put a condition that promoter must
sell a part of his / her stake along with the VC. Such a clause is called tagalong clause.
5. Post Investment Activity:
• The VC nominates its nominee in the board of the company.
• If any milestone has not been met, the company has to give explanation to the VC.
• Besides, VC would also ensure that professional management is set up in the company.
6. Exit plan:
• At time of investing, VC would ask the promoter / company to spell out in detail the exit
plan:
(a) One way is ‘sell to third party(ies). This sale can be in the form of IPO or Private
Placement to other VCs.
(b) The second way to exit is that promoter would give a buy back commitment at a pre
agreed rate.

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Structure of Venture Capital Funds in India

➢ Structure of Venture Capital Fund in India
▪ Domestic Funds - One which raises funds domestically are usually structured as -
1. A domestic vehicle for the pooling of funds from the investor
2. A separate investment adviser that carries those duties of asset manager.
The choice of entity for the pooling vehicle falls between a trust and a company

▪ Offshore Funds
An investment vehicle makes investments directly into
Indian portfolio companies.
Offshore Funds

Offshore structure Assets are managed by an offshore manager, while the

investment advisor in India carries out the due diligence
and identifies deals.

When domestic investors are expected to participate in the

fund, a unified structure is used.
Unified Structure Overseas investors pool their assets in an offshore vehicle
that invests in a locally managed trust,whereas domestic
investors directly contribute to the trust.

Fund Overseas Fund

Overseas Manager
Manager

Trust
Indian Advisor
P1 P2 P3
Indian
Advisor
Unified
P1 P2 P3
Offshore Structure Structure

Succession Planning in Business

Meaning:
• Succession planning is the process of identifying the critical positions within an organization
and developing action plans for individuals to assume those positions.
• Succession plan identifies future need of people with skills & potential to perform leadership
roles.
• It ensures that the right people are available for the right jobs today and in the years to come
Challenges:

Founder mindset might be Premature for startups to

Founders are the face of
different than the corporate implement business
startups
mindset succession

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Why is there a need for succession planning? ARCTC

Risk Cause Talent Conflict

Aligning Resolution
Mitigation Removal Pipeline
Mechanism
If existing If the existing
leader quits, Keep employe
leader is Helpful in
Helps to motivated and
then searches culpable of promoting
align with determined as
can take 6-9 gross open &
the culture, negligence, it can help
months for them transparent
vision, suitable fraud, wilful
obtaining
misconduct, communicati
direction and candidate to more visibility
or material on &
values of the close. around career
breach while settlement of
business. paths
(uncertainty, discharging conflicts.
expected.
conflict) duties

Business Succession strategy:

Step 2: Step 3:
Step 1:
Map Identify Step 4:
Evaluate key
competencies competencies of
leadership Bridge Leader
required for current
positions
above positions workforce

Identifying what are

In family owned
These are such possible internal
One needs to identify business appointment
positions which options that can
qualifications, of an outsider as
would bring deliver results as
behavioral and ‘bridge leaders’ will
transformation to the expected in Step-2,
technical help to develop the
entire business or & also if there is
competencies business and prepare
create strategic need for training &
required to perform young family
direction for the development of
the role successfully. members for
organization. certain skills
leadership role.
required

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