Funding New Ventures

Foundations of
Entrepreneurship
Funding New Venture
Lecture Note # 17
25.10.2021

Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE

Funding New Ventures

Capital is the “lifeblood” of a new venture.

We have been building

a wonderful business Well! I am impressed
that will soon multiply and ready to fund.
investment many times

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Funding New Ventures

• Section – I: Introduction, funding requirement, possible sources
• Section – II: Bootstrapping, crowdsourcing, incubation, acceleration
• Section – III: BA | VC
• Section – IV: Debt funding
• Section – V: Government assistances

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

⮚ Introduction
⮚ Requirement of fund
⮚ Types of sources of fund
⮚ Pros and Cons of various funding

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Shares by number of Sales

deals Angel
Others 9%
20%

Incubators /
Accelerators VC
6% 31%
Private
equity
8%

Corporate
and CVC Asset/Invest
16% ment
management
10%

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
 Funding New Ventures

Angel/ VCs
High net worth Debt from
individuals/ banks/ Fintech
Incubators Early stage VCs
Accelerators
Crowd
Growth strategy
funding
Set up offices
Go-to-market Warehouses
strategies Recruit more
Infrastructure for people to handle
Equity Continuous
product or service growth
Family value addition,
Product creation Capture data,
Friends new product
development Set up Logistics for use analytics to
Decision to be development,
and validation both inputs and know customer-
entrepreneur – maintain
Define value sales satisfaction/
is primarily superior value
proposition/ Begin awareness repeat
driven by your proposition
product campaign customers
passion to Recruit
Idea, market differentiation Refine products
alleviate a pain manufacturing,
research, Price strategy
prototype marketing, and Business
service personnel process
Company Build shopping management
registration portal Recruit
Setup Payment professional
Gateway CEO and other
C-suits

Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE

Funding New Ventures

Movement of funds

Movement of goods
Banks
Current
account
Short-term
loan

Purchase of Shop floor

Finished goods Dealers/ Retailers/
inputs (raw- Goods under
inventory Distributors customers
materials) process

Accounting – Financial statements

Inventory management, manage cash flow, arrange fund in time
Bank
Human resource – recruitment, integration,
Long-term loan
reward/remuneration, career development, payroll.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Funding Decisions are Very Tricky

We hear stories of venture capitalists making nX returns from

funding startup that achieve remarkable success.
Peter Thiel invested $500,000 in Facebook in 2004. Eight years
later, he sold his stake for more than $1 billion.
But still many entrepreneurs face multiple rounds of rejection.
The success depends on attractiveness of the business model,
timing, traction, team, and prospect.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

For example, Joe Gebbia, Brian Chesky, and Nathan Blecharczyk sought funding
for their startup, Airbnb, in 2008.
They wanted to raise $150,000 in return for a 10 percent stake in their
company. None agreed to invest.
Nine years later, Airbnb, was valued $31 billion (presently valued >$100bn).
If one of these investors had invested, their $150,000 investment
would have been worth $3.1 billion in nine years.
Even the most accomplished venture capitalists invest in many
startups that do not succeed and pass on a number of deals that
could have been highly lucrative.
Every investor has at least one great regret.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Forms of Capital
• Forms of capital – equity, preference shares, debt, grant
• Equity investment gives ownership to investors
• Investment in preference shares may have equity or debt or both
flavours.
• Debt is loan taken on interest and has to be repaid – no matter
what.
• Grant has no covenant.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Startup Expenses ₹ '000

Early salary 100 Expenses before going to market:
Market research 40
Prototyping 500 Assets: Funding ₹'000
Design of logo, etc. 30 Current assets Liabilities
Traveling 25 Cash 50 Accounts payable 100
Legal expenses 60 Inventory 500 Other curr 50
Trial expenses 200 Other current assets 100 Friends & Relatives 500
Advert. & Promo 100 Long term assets Long-term liabilities 0
Rent 60 Machinery 200 Sub-total 650
Utilities 20 Computer 120 Equity
Website & hosting 20 Software 50 Owners 2000
Internet data plan 10 Interior decoration 10 Investors 0
Telephone bill 5 Furniture & Fixure 50 Crowdsourcing 830
Insurance 10 Preliminary & Preop. 1200 Sub-total 2830
Consumables 20 Sub total 1630 Loan fund 0
(Prel. & Preop.) 1200 Total expenses 3480 Total funding 3480

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

For what purposes a startup requires money?

Once you are ready with you product,  Employee benefits.
you need major amount of fund to
• Website/app development
 Create infrastructure.
• Team hiring
 Working capital.
• Legal and consulting services
 Sales promotion. for your startup
 Brand building. • Licenses and certifications
 Logistics. • Marketing and Sales
 Post sales service. • Office space and other
admin expenses

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Sources and Uses of Capital:

Balance Sheet
Assets Equity & Liabilities
Cash Owners’ equity
Trade receivables/ Debtors Equity capital
Inventory
Reserves & surplus
Land
Building Liabilities
Machinery Preference capital
Trade payable / Creditors
Short-term debt
Long-term debt

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Assets: Funding ₹'000

Current assets Liabilities
Cash 50 Accounts payable 100
Inventory 500 Other curr 50
Other current assets 100 Friends & Relatives 500
Long term assets Long-term liabilities 0
Machinery 200 Sub-total 650
Computer 120 Equity
Software 50 Owners 2000
Interior decoration 10 Investors 0
Furniture & Fixure 50 Crowdsourcing 830
Preliminary & Preop. 1200 Sub-total 2830
Sub total 1630 Loan fund 0
Total expenses 3480 Total funding 3480

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Assets: Funding ₹'000

Face value or
Current assets Liabilities per value: Say
Cash 50 Accounts payable 100 ₹10
Inventory 500 Other curr liabilities 50 2 lakh shares of
₹10 each
Other current assets 100 Friends & Relatives 500
Long term assets Long-term liabilities 0
Machinery 200 Sub-total 650
Computer 120 Equity
Software 50 Owners 2000
Interior decoration 10 Investors 0
Furniture & Fixure 50 Crowdsourcing 830
Preliminary & Preop. 1200 Sub-total 2830
Sub total 1630 Loan fund 0
Total expenses 3480 Total funding 3480

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Authorized, Fully and Partly Paid-up Capital

Post- and Pre-money value

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Equity Holding
Equity & Liability
Equity capital – Consisting of 2 lakh Total equity
fully paid-up equity shares of face capital: ₹ 20 Lakh
value ₹ 10 each.
equity capital i.e. 2 L shares
Co-founder A 50,000 shares 50,000/2,00,000 = 25%
holds holding
Co-founder B 80,000 shares 80,000/2,00,000 = 40%
holds
Co-founder C 70,000 shares 35%
holds
Total 100%

Shares provide you voting right

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Equity Holding
Equity & Liability
Equity capital – Consisting of 2 lakh Total equity
fully paid-up equity shares of face capital: ₹ 20 Lakh
value ₹ 10 each.
equity capital i.e. 2 L shares Number of shares held
by the co-founders will
Co-founder A 50,000 shares 50,000/2,50,000 = 20% not change. Therefore,
holds holding to offer 20% of equity
post-money, your
Co-founder B 80,000 shares 80,000/2,50,000 = 32% holding will go down to
holds 80%. So, post-money,
Co-founder C 70,000 shares 70,000/2,50,000 = 28% number of shares is
2,00,000/0.8 = 2,50,000
holds number of shares
Investor 50,000 shares 50,000/250,000 = 20%
Total : 100%

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Equity Holding

Founder A: 20% Founder B: 32%

50,000 shares out of
total of 2,50,000
shares issued.
A B 80,000 shares out of
total of 2,50,000
shares issued.

Founder C: 28% Investor: 20%

C I
70,000 shares out of 50,000 shares out of
total of 2,50,000 total of 2,50,000
nvestor
shares issued. shares issued.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

An Investor Can Invest in Equity, Preference Shares, Debt,

Grant.
Seniority of Creditors
• If a company goes into liquidation, the sales proceeds of all its
assets are distributed among all creditors and equity holders.
• Secured creditors are served first.
• Next are unsecured creditors and employees.
• Preference shareholders
• Stockholders are paid last.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Raising money is an essential part of early-stage

entrepreneurial ventures
• Most new entrepreneurs do not have enough money to fund
the exact need of the business.
• Unlimited risk.
• Capital investment.
• Cash flow challenges.
• Long duration of product development and creation of market
connectivity.
• Growth of business entails large amount of money.
• Money from external source somewhat reduces risk.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Startups Need Risk Capital at the Early Stage

Risk perception
Successful ideas
Number of ideas

• Only a few ideas are translated into commercially relevant

Risk perception

technologies and a very few of them reach the customers.

• Some sustain for a long time, some quickly extinct.

Product Dev. Life Cycle

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

How Much Money You Need? In billion dollar

Starting fund and eventual value

40 Started with Value

70000
36 60000
33 60000

Value in Billions of Dollar

30 50000
Starting fund in Dollar

45000
40000
20
30000
14
10 20000
10000 7
1000 1000
5000 10000
538
1 1 1
0 0
l l el s or
a rd
ess e n x r d
k l D
Sp
a pa oo rm
ac ead Ap
e
F r A
t P r n l e
l et Th ir c
a ho Un
d
ew e W
H Am

Company

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures Provide Exit to
Scale company +
Seek Profitability Investors - IPO
Set strategy for
All icons are from: repeatable model Series-A Public issue
https://www.flaticon.com Series-A Public issue
round
Get the product Angel round Value of
Customer Validated Angel
round
round the startup
Develop the Idea
Build the Friends &
& Business model
Product Friends &
Family
Family
Bootst Bootstrap
Bootst Bootstrap
rap
rap
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100 50 50 %
Fo er
1:
pool
23%
Founder 2:
Angels:
20%
und Found
er 40 Uncle er 2: 25 11%
% 13% Option Uncle: 9%
2: 25%
Equity Holding % 40
pool 18% Uncle:
10%
Option pool
16%
%
Progress & Valuation 25
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Progress & Valuation Series-A Public issue

Public issue
Series-A
round
All icons are from: Angel round Value of
Angel
round
https://www.flaticon.com round the startup
Friends &
Friends &
Family
Family
Cofounder
Idea Cofounder
stage
Idea
stage stage
stage
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100% 50 50 %
Fo er pool Founder 2:
Angels:
1: 23% Found 20%
und 11%
er 40 Uncle er 2:
% 13% Option Uncle: 9%
2: 25% Uncle: Option pool
pool 18%
40 10% 16%
%

26
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Progress & Valuation Series-A Public issue

Public issue
Series-A
round
All icons are from: Angel round Value of
Angel
round
https://www.flaticon.com round the startup
Friends &
Friends &
Family
Family
Cofounder
Idea Cofounder
stage
Idea
stage stage
stage
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100% 50 50 %
Fo er pool Founder 2:
Angels:
1: 23% Found 20%
und 11%
er 40 Uncle er 2:
% 13% Option Uncle: 9%
2: 25% Uncle: Option pool
pool 18%
40 10% 16%
%

27
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Progress & Valuation Series-A Public issue

Public issue
Series-A
round
All icons are from: Angel round Value of
Angel
round
https://www.flaticon.com round the startup
Friends &
Friends &
Family
Family
Cofounder
Idea Cofounder
stage
Idea
stage stage
stage
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100% 50 50 %
Fo er pool Founder 2:
Angels:
1: 23% Found 20%
und 11%
er 40 Uncle er 2:
% 13% Option Uncle: 9%
2: 25% Uncle: Option pool
pool 18%
40 10% 16%
%

28
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Progress & Valuation Series-A Public issue

Public issue
Series-A
round
All icons are from: Angel round Value of
Angel
round
https://www.flaticon.com round the startup
Friends &
Friends &
Family
Family
Cofounder
Idea Cofounder
stage
Idea
stage stage
stage
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100% 50 50 %
Fo er pool Founder 2:
Angels:
1: 23% Found 20%
und 11%
er 40 Uncle er 2:
% 13% Option Uncle: 9%
2: 25% Uncle: Option pool
pool 18%
40 10% 16%
%

29
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Progress & Valuation Series-A Public issue

Public issue
Series-A
round
All icons are from: Angel round Value of
Angel
round
https://www.flaticon.com round the startup
Friends &
Friends &
Family
Family
Cofounder
Idea Cofounder
stage
Idea
stage stage
stage
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100% 50 50 %
Fo er pool Founder 2:
Angels:
1: 23% Found 20%
und 11%
er 40 Uncle er 2:
% 13% Option Uncle: 9%
2: 25% Uncle: Option pool
pool 18%
40 10% 16%
%

30
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Progress & Valuation Series-A Public issue

Public issue
Series-A
round
All icons are from: Angel round Value of
Angel
round
https://www.flaticon.com round the startup
Friends &
Friends &
Family
Family
Cofounder
Idea Cofounder
stage
Idea
stage stage
stage
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100% 50 50 %
Fo er pool Founder 2:
Angels:
1: 23% Found 20%
und 11%
er 40 Uncle er 2:
% 13% Option Uncle: 9%
2: 25% Uncle: Option pool
pool 18%
40 10% 16%
%

31
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Progress & Valuation Series-A Public issue

Public issue
Series-A
round
All icons are from: Angel round Value of
Angel
round
https://www.flaticon.com round the startup
Friends &
Friends &
Family
Family
Cofounder
Idea Cofounder
stage
Idea
stage stage
stage
IPO
Public: 10%
Founder 1:
Founder 1: 18%
20%
Angel: VC: 20%
Found VC: 18%
Un 15%
er 1:
cle: Fo 25%Angel:12% Founder 2:
20 und Option 18%
100% 50 50 %
Fo er pool Founder 2:
Angels:
1: 23% Found 20%
und 11%
er 40 Uncle er 2:
% 13% Option Uncle: 9%
0.5 1 2:
40
25%
pool 18% Uncle:
10%
Option pool
16%
Value in %10 200
million 2500 75000
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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

• Your holding in the company gets diluted as you obtain investment in

the form of equity.
• Debt does not dilute equity but have to be repaid with interest.
• Grant is the most attractive form of capital.
• Some private organizations also provide grant.
• For example: Villgro: www.villgro.org
• Villgro is India's oldest and foremost social enterprise incubator,
that supports social startups in the sectors of Agribusiness,
Health, Education and Renewable energy.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Security: In Two Contexts

Securing a debt (loan) Securitization of assets
• Hypothecation • A document holding the right on a property.
• Mortgage • A fixed deposit certificate
• Lien
• A share certificate (equity & preference share)
• Pledge
• Guarantee • A bond certificate
You offer assets as security to secure a debt so that the lender
can liquidate the assets to recover the loan in the event you fail
to repay as promised.
Lenders’ motivation to extend the loan depends on the value
and liquidity of the assets that you pledge.
Assets other than what is financed by the loan and offered as
security is known as collaterals

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

• This knowledge is important because investors’ risk perception

depends on the type of security that they receive.
• Furthermore, it is important to know that in the event of liquidation,
the equity holders (the founders) may not receive anything if the
proceeds are inadequate to meet all other liabilities.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Seniority of Sources (Nature) of Funds/

Seniority of Liabilities
• Seniority in the context of various types of sources of fund refers to the priority or
order of payment (or repayment) in the event of liquidation of an enterprise.
• Seniority pertains to debt (loans, bonds, securities), preferred stock, various credits,
and equity. Every security has relative seniority. Some securities such as bonds may
be of same seniority, which is termed as pari passu.
• Say, based on court order, the assets of a company are being liquidated and the
proceeds are to be distributed among all the creditors (banks and others).
• The senior most debt must be repaid before subordinated (or junior) debt is repaid.
• Preferred stock (preference capital) is senior to common stock (equity capital), which
means that preference stock holders will be paid first. If anything is
left after paying to preference shareholders, only then equity
shareholders will be paid.

36
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures
o
t
i
d
e
s
r
Seniority Ranking of Corporate Liabilities
ro • Claim by the government
Ct
• Credit secured by collaterals (Bank loans) In finance, seniority
i
refers to the order of
d • Subordinated (Subordinated bonds and loans)
e repayment out of
r salvaged value in the
uC
• Unsecured (Public deposits, corporate bonds, event of a sale or
bankruptcy of the
c
ee d corporate papers, trade creditors)
neS • Preference shares (Hybrid/quasi equity) issuer. Seniority can
ir refer to either debt or
nu preferred stock. Senior
ac • Preference shareholders debt must be repaid
ze
zs
• Seed capital before subordinated (or
eyn junior) debt.
MtU
i • Equity
• Subsidy, grant,
u
q
E

37
Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Types and Sources of Funds

• Grant, subsidy, donations (no cost and no obligation to return).
• Seed money (Zero to low cost, vary from grant to debt)
• Equity (cost obligation: dividend & capital appreciation, no repayment)
• Founders/promoters, accumulated surplus (profit)
• Investors
• Friends & relatives
Seniority

• Public
• Preference equity (Mostly hybrid in nature: mix of Debt and Equity)
• Unsecured loan (mezzanine senior to equity but subordinate to secured debt)
• Most costly
• Debt, Trade creditors
• Long-term debt
• Banks/financial institutions, private lenders, trade creditors, non-bank finance companies
• Short-term debt
• Mostly banks

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Example
A company defaults on payment to a creditor and the court orders liquidation.
How the payment will be made and will there be anything for the equity
holder? Suppose, the following is the list of creditors and their receivables.
Creditors Outstan Liquidation proceeds: 1500 1300 2500
ding
Bank loan 1000 1000 1000 1000
Trade creditors 200
Unsecured loans 300 Loan on second lien 200 200 200 200
(mortgage)
Bank loan 1000
Preference stocks 500 Trade creditors 200 200 100 200
Loan on second lien (mortgage) 200 Unsecured loans 300 100 0 300
Total 2200 Preference stocks 500 0 0 500
Equity holders 0 0 300

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

How to Fund Your Startup?

• Bootstrapping (own sources including • Bank Loans
credit cards) • Advance/ Pre-payment from future
• Friends & Family customers
• Crowd-Funding/sourcing • Startup-Specific Credit Card: Example:
LaghuUdhyami Card from IDBI
• Startup competitions
• Government Institutions – Example:
• Impact Investors – Example: VillGro DSIR, SIDBI, NABARD and MSME
• Incubators (mostly university based) (NSIC)
• Startup Accelerators (Surge by • Indian government Startup Funds:
Sequoia Capital) India Aspiration Fund (IAF),
SIDBI SMILE, Mudra Fund
• Angel Investors
• Government grants: visit
• Venture Capitalists
startupindia.gov.in
• Private Equity
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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Loan or Debt
• Loans are primarily of two types
• Long-term – for capital assets (useful life longer than a year)
• Short-term – for working capital
• Securities are of two types
• Primary (charge on the assets funded by the loan)
• Collateral (charge on assets other than those acquired with the loan)
• Seniority of a loan or type of fund primarily depends on: whether it is
secured or unsecured and is it primary or subordinated debt.

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Funding Requirement and Structure Change with Stages of Life-Cycle of

the Enterprise Set strategy Scale company
Provide Exit to
for repeatable + Investors - IPO
Get the product model Seek Profitability Debt
Build the Customer Growth Phase
Product Validated
Develop Strategic
the Idea investors
Organizational Growth/

& Bisiness
model Mid & Late
Stage VC
Cash flow

Early
Angels & Stage VC
Angel Groups
Seed Stage
& Incubators
Friends &
Family
Bootstrap

Period of operation

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

What Is Dilution
• Extent of dilution in a round of funding depends on valuation of your
startup.
Value of your startup goes up:
as you move forward with development of your product,
and as the risk perception on the success of your venture reduces.
• At idea stage, success appears uncertain. Value is very low.
• As you get your product customer validated, risk of success appears to
reduce and valuation becomes higher.
• Early investment leads to higher dilution of equity because of lower
valuation (though it may help in accelerating development), whereas,
delay in raising money may lead to loss of opportunity (though it may
help restrict dilution).

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

As you gain traction, risk reduces and valuation goes up

Risk perception on the Valuation of the startup
startup

Proof of Seed
Idea Prototype Basic infra Go-to-market
concept marketing

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Foundations of Entrepreneurship © Manoj K Mondal, RMSoEE
Funding New Ventures

Understand Dilution
Suppose you raise ₹ 1 million from angel investor in exchange for equity.
Likely dilution of equity for raising this sum at different stages of your start up?

1 million 1 million 1 million 1 million 1 million 1 million

for 25% for 20% for 10% for 1% for 0. 1% for 0.01%
Value: 3 mn Value: 4 mn Value: 9 mn Value: 99 mn Value: 999 mn Value: 9999 mn

Place
Initial Seed
Proof of basic Go-to-
Idea Prototyp marketin
concept infrastru market
e g
cture

At idea stage, the value of As a prototype is built, the value With the proof of concept,
the company is low, say ₹3 of the company grows to, say the value is much greater,
million. The angel would ₹4 million. The angel would say ₹9 million. The angel
invest ₹ 1 million for 25% invest ₹ 1 million for 20% would invest ₹ 1 million for
10%
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Dilution and Speed of Development

To obtain investment or not to obtain investment

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• Consider two scenarios: A. Say you plan to delay the fund raising till
the point B hoping that the cash flow will follow the brown dotted line.
• But if your burn rate is more than you expect, your cash flow may
actually follow the red dotted line.
• B. Suppose you raise fund at point A. With more fund at your disposal,
you move in an accelerated pace and things may take a positive turn.
B
A

Two points of Dilution:

entry of
investor
Say 20%
Early phases of a start-up

Loss of opportunity
Dilution:
Say 40%

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When you can say you are ready to raise fund?

• Promising concept
• Validated by early customers
• You are sure that additional fund can take you to the next phase.
• Typically, angels or seed stage VCs provide this kind of capital.
• But they prefer to invest in ventures located within particular area.
• They usually take an active role in the ventures they fund.

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The Making Of BYJU'S: The World’s Most Valuable Edtech

Company

• “There were no investors in the beginning,” Byju says candidly.

“And, that was very useful. This helped us patiently create enough,
in-depth and comprehensive content. We initially prepared
content for 8th to 12th-grade students. We kept on creating
content yet we didn’t launch them before 2015.”

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Understand Debt, Equity, & Preference Shares

Equity & Liabilities
Equity
Equity share capital Voting rights, % control of the venture, dividends
Reserves & Surplus Belongs to the owners but no other rights
Preference share Quasi equity, have features of both debt & equity
capital Compulsory dividend provided there is surplus
Liabilities
Long-Term Loan Debt. Have to pay interest. Repayment by installments.
Interest is to be paid on monthly basis on outstanding.

Short-Term Loan Debt. Have to pay interest. Repayment on demand not

by installments. Interest is to be paid monthly on
weighted outstanding balance.
Accounts Payable
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Investors Prefer to Invest in Preference Shares or Convertible

Debt

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Salient Distinctions between Preference Shares and Common Equity

Shares
Preference Shares (PS) Common Equity Shares (CES)
• Dividends are paid before paying to common • Dividends are paid out of surplus/net profit
equity holders. after paying to preference share holders.
• Dividends are accrued and paid when surplus • Varies with surplus and declaring such dividend
is generated. is prerogative to BoD.
• Rate of dividend is fixed. • Dividends are paid out of surplus and is never
• Convertible preference shares may be accrued for paying in future.
converted to equity shares. • A company may buy-back CES.
• PS holders do not have voting rights in • CES holders participate in management
management decisions. through their right to vote on resolutions.
• PS may be redeemed. • The entire surplus after meeting other
• In case of liquidation or bankruptcy, PS holders liabilities is distributed among CES
are paid before CES. Limited upside. holders. Unlimited upside.

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Equity Funds
money is invested in the business in Debt Funds
exchange for part ownership borrowed money, which is paid back over time with interest

• Exit through IPO or • Repayment

acquisition • Cost: Interest and charges
• No ownership
• Cost: No interest, dilution
• Covenants
• Part ownership • Security: Charge on assets plus
collaterals
• Mentoring and supervision
• Claim on assets senior to the common
• Security: No security share holders
Government grant – No cost, in some cases no dilution, non-returnable
Hybrid securities (preference share/stock/capital) – Features of both equity and debt
Convertible bond/stock/

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⮚ Bootstrapping
⮚ Crowdfunding

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Bootstrapping

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Bootstrapping
• The dictionary meaning: “get (oneself or something) into or out of a
situation using existing resources.”
• Some say that bootstrapping is to pulling oneself up by own bootstraps.
• Arrange money from any source other than formal investors and lenders.
• It starts with personal savings, cutting costs to minimum, sharing office
space, traveling by the cheapest option, hiring intern instead of regular
employees, getting work done by freelancers, using used instead of new
machines, minimize personal expenses avoiding unnecessary expenses,
trying to obtain payment in advance or as early as
possible, applying for grant wherever possible, etc.

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Funding by Bootstrapping
personal savings
#
# sharing office space

# traveling by the cheapest option

# hiring intern instead of regular employees

# getting work done by freelancers

# using used instead of new machines

applying for grant wherever possible
#
trying to obtain payment in advance or as early
# as possible

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Crowdfunding

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Crowdfunding

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Crowdfunding
• The global crowdfunding industry generated about $34.4 billion in
capital last year.
• The biggest player in the Indian market is ‘Milaap’, which has
raised the equivalent of over US$12.7m through donations and
microloans. Spread across close to 50,000 projects, it has averaged
around just $260 per project.
• Ketto charges 5 to 8% of the amount raised.

• https://crowdsourcingweek.com/blog/indias-top-ten-
crowdfunding-platforms/

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Crowdfunding – Fund Raising Through an Online Platform

• Refers to raising money from scores of individuals or donors to

fund the development of a product or service and take it to
market through setting up a startup.
• Some details about the product or service, progress made, and
the planned roadmap are shared with people for them to make
an informed decision to give the money.

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Reward-Based Crowdfunding

• Entrepreneur propose to reward potential investors / donors with

their upcoming product or services or certain benefits
• If the founders are in businesses such as apparel, bags, jewelry,
beauty products, lifestyle products and personalized stationery,
they get valuable feedback in the process of response.

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Other Types of Crowdfunding

• Equity-based Crowdfunding – not legal in India

• Lending-based Crowdfunding
• Pre-order Crowdfunding
• Donations Or Social Crowdfunding
• Peer to peer lending platform

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• India has seen a rapid growth of crowdfunding platforms.

• The quantum of money raised through these growing number of
platforms has also grown substantially.
• Besides the much-needed capital, a startup may receive vital
feedback about the acceptability or attractiveness of their product
from a large audience with limited efforts early on.

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Total Supporters Platform Payment Important

Raised Fee Fee features
GoFundMe $5B 50M 0% 2.9%+ Protects
$0.30 against fraud
INDIEGOGO $1.5B 10M 5% 3.0%+ Do
$0.30
KICKSTARTER $3B 15m 5% 3.0%+ No
$0.20
WISHBERRY
FUELaDREAM
FUNDABLE Some Crowdsourcing
CATAPOOOLT Platforms

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Crowdfunding/ Crowdsourcing of Capital

Type of crowdfunding
model
1. Personal fund raising
2. Business or project fundraising
Features and performance 3. Charity/non-profit crowd funding
1. How fast you can access
Trust and fraud protection
1. All crowdfunding websites are required to use
encrypted Secure Socket Layer (SSL)
technology to process payments
Customer support 2. Reporting fraud should be easy.
1. 24/7 email support.
Fees
1. Mostly between 3 to 5%. But some
platform charge up to 30%.

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Advantages & Disadvantages of crowdfunding

Advantages Disadvantages
• Usually easy to raise fund • Usually requires a social
• The crowd does not interfere dimension.
• Usually not associated with • Have to build the story to
dilution resonate with investors
• Validation of product or • Risk of sharing the product
service idea to public too early and
run the risk of me-too copy-
cat competition
• Not suitable for B2B

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Crowdfunding in India
• Any kind of fund raising from the public is to be authorized by SEBI
(Securities & Exchange Board of India).
• SEBI is yet to put in place formal regulatory framework for
crowdfunding.

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Microfinance
• ‘Rang De’ has been providing microloans online. ‘Rang De’ has
been funded by the World Bank through ‘Development
Marketplace’ (DM). ‘Rang De’ takes 2% of the money lent.
• ‘Milaap’ – online microlending portal.
• ‘Fuel A Dream’ charges about 10.3% as platform fees.
• ‘Wishberry’ charges a one-time non-refundable fee of USD 52.37
plus 10% commission of the funds raised.
• ‘Catapoolt’ charges around USD 23 as a project submission fee
along with 10-15% of the total funding raised.

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Legality of Crowdfunding in India

• According to SEBI, Electronic platforms facilitating fundraising on digital platforms

are neither authorized nor recognized under any law governing the securities
market. Such platforms, which are open to all investors registered with the
platform, amount to a contravention Securities Contract Act and the Companies
Act.
• Pure Donation-Based Crowdfunding (where issuers directly seek a donation from
the grantors), Reward-Based Crowdfunding (where issuers directly offer rewards
like movie tickets, new computer game, download of a book, etc.) and Peer-to-
Peer lending do not fall within the regulatory purview of SEBI, as they do not
generally involve issuances of securities for financial return, and may require
authorization from other regulators. For example, Peer-to-Peer lending may fall
under the purview of RBI.

Source: https://taxguru.in/sebi/crowdfunding-india.html
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Incubation

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Incubation
• The dictionary definition of incubation is the process of keeping
something at the right conditions for it to desirably mature.
• A mother bird sits on her eggs to provide the warmth for the eggs to
mature and hatch.
• In case of diseases, it is the time from the moment of exposure to
an infectious agent and manifestation of the symptom. Incubation
period of chickenpox is 14-16 days, just as the coronavirus.

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Incubation and Incubators

• The word in startup context is a take-off from the meaning in biology.
• Incubators are an ecosystem of startups where the basic infrastructures
necessary for healthy unhindered progression of startup ideas into
commercial ventures are provided at subsidized rates.
• Incubators provide space, utilities, connectivity, mentors, and
considerable amount of seed money.
• Incubation centers are mostly created by academic institutions such as
IITs, IIMs, universities, and engineering colleges and by some corporate
entities.

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Incubators
• Incubation centers house several startups at one place where they
can share infrastructures, tools, expertise, and co-develop product
in a synergistic process for faster progress at the early stage.
• Once any startup is ready to go-to-market, it is expected to move
out to formal office of their own.
• Seed money provided by incubators are either grant or soft loan
repayable in easy terms.

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Accelerator
• A startup accelerator, also referred to as seed accelerator, is an
organization who runs programs to support, in an accelerated pace,
early-stage, growth-driven startups through
• mentorship,
• guidance,
• networking, and
• with small fund.
• It runs the program at its own space.
• Demo day

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Accelerator

• The acceleration programs run for a fixed and short durations ranging
from 3 to 6 months.
• Most of the acceleration programs run as part of the cohort of
companies who can learn from each other and collaborate for
synergies.

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Accelerator
• The accelerator select the companies for the program based on
potentials, provides resources, invites experts for delivering
lectures & mentoring, invites investors for both advising and
funding the supported companies.
• The accelerators usually charge the accelerated companies some
equity that may range between 3 to 8%.
• Each program ends with an event referred to as “graduation” or
“demo day” when startups pitch before a group of inventors and
experts.

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Accelerator
Accelerators focus on one technology domain at a time for synergy.
Some of the preferred areas are tech hardware, AI and biotech, though
all emerging technology domains are of interest.
Famous accelerator such as Plug and Play Tech Center in Silicon Valley
helped Google, PayPal and Zoosk transform their ideas into businesses.
Y Combinator mentored Airbnb, Dropbox and Reddit and almost a
thousand others.

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Established Accelerators are Highly Demanded:

Y Combinator and TechStars have application acceptance rates

between 1% and 3%.
The focus is on teams, not on individual founders.
Accelerators tend to think that it is too difficult for one person to
handle all the work associated with a startup.

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Accelerator
• Venture capital firm Sequoia Capital India has set up its startup
accelerator programme called Surge in February 2019.
• The Surge picks up 10–20 early stage startups twice every year for
mentoring.
• Surge invests $1 to $2 Mn in each startup.
• Byju Raveendran and Ritesh Agarwal are some of the mentors in
Surge.

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https://www.surgeahead.com/ landing page

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https://www.surgeahead.com/ landing page

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Estimating Requirement of Fund

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Project Cost
Year 1 2 3 4
Investment in land and building 10
Investment in machinery 100
Other expenses such as electrical connection 20
(transformer), licenses, approach road,
disposal arrangement
Investment in trial production 5 Fixed
Contingency 10
Capital
Total investment in fixed assets 145
Turnover 200 250 300 400
25% of turnover 50 62.5 75 100
Working capital requirement (Turnover method) 50 62.5 75 100
Project cost
190

Working
Capital
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Working Capital (WC): Holding Period Method

Annual Holding Value
Cost Period thereof

Raw- Purchase cost plus 600 1 month 50

Materials transportation.
Goods-in- Cost of production: Raw 720 0.5 m 30
Process materials, labor, interest
Finished Cost of production: Raw 840 1.5 m 105
Goods materials, labor, interest,
Receivables Cost of sales: Raw materials, 1200 2.5 m 250
labor, interest, selling and
administrative expenses.
Creditors Total requirement of WC 540 1m (–) 45
Total 370

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• Requirement of Fixed Capital Investment:

• Requirement of Working Capital Investment:
• Margin Money to be brought in by founders:

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Funding Through Equity

Issues
• Pros
• No interest payment obligation. [If you raise ₹100 of debt (loan from
bank) you have to pay ₹15 of interest in a year: assuming rate of interest is @ 15%.
Raise the same money through equity, you don’t have to pay any interest].
• Comes with mentoring by the angels.
• No repayment of the money received.
• Cons
• Dilution of holding by founders
• Payment of dividend
• There may be undesirable interference by investors.

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Sources of Equity

• Founders’ contributions to business are mostly in the form of equity., though at times,
founders can lend money to the company as unsecured loan or preference capital.
• Incubator
• Accelerator
• High Net-Worth Individual
• Impact investors
• Business Angels
• Venture Capital Funds
• Private Equity Fund

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Project Report

• Need for fund (create long term and short term assets to maintain
business operation)
• Sources of financing (equity, debt, and grants)

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⮚ Business Angel – Angel Investor

⮚ Venture Capital fund – VC
⮚ Structuring a deal

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Business Angels or Angel Investors: Who Are Angel Investors?

• An angel investor is an individual who has surplus fund and
provides capital to an early stage startup in exchange for part
ownership. Invests personal capital in start‐ups
• Angels usually support at the early stage when the risk of failure is
higher compared to more matured stage.
• Usually they are experienced in particular domain or new venture
creation in general and have a good perspective of the likely
success of a venture.
• They take calculated risks, mentor the ventures closely, take all
necessary actions for it to succeed.

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Who Are Angel Investors?

• Business Angels are individuals, invest personal capital in start‐
ups
• The prototypical business angel …
is in the middle age; has high income and wealth; is well‐educated;
has succeeded as an entrepreneur;
is interested in the start‐up process.
• Business angels are valuable because of their willingness to make
relatively small investments, giving equity funding to a start‐up
needing about ₹ 2.00 million to ₹ 10.00 million.
• Venture capitalists usually fund above ₹ 50.00 million per unit.

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• In recent time, angels also work in group or in network /

consortium to neutralize risks.
• Individual members may bring in key skills and connections.
• In the last 50 years the number of angel investors has greatly
increased.
• There is no set upper limit that an angel would like commit per
venture.

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Angel Investors
Usually successful Identify potentially
entrepreneurs winning startup
Closely mentor

Have surplus fund Supplement required

key skilla

Experts in
some field Connect with market

Want to enjoy the

Connect with other
excitement of
investors
venture creation
Ready to absorb
high calculated risk

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Factors to consider while raising money: When and How Much to Raise?
• Conventional wisdom has it that entrepreneur should bootstrap and
leverage every strand of non-diluting funding source to increase
value in the business before raising fund from angels.
• But understand the values that BA can bring. The knowledge,
experience, and connection with market & other investors.
• Look for seed fund (seed round) to cover beta testing of prototype
(public test) and generate the first MVP.
• Amount in one round should be enough to take the venture to the
next milestone. High-growth venture may raise more money to
avoid delay in processing next round of funding.

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Investment Negotiation Stages: Business Angel (BA) and

Deal Venture Capitalist (VC) share
Negotiation similar stages to close an
Deal &
Structuring investment round
Deal Agreement
Deal Evaluation
Deal Screening
Origination

01 02 03 04 05

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Common Reasons for Rejection of Investment Proposal by Angel

• Business located outside the geographical reach of BA investors.
• Stage and type of venture: for example, long pre-revenue and
product development phase.
• Unattractive sector or market: for example, low margins and high
volatility (retail, hotels, restaurants, property); highly competitive or
high technical risks or both (e.g. consumer goods, telecom, clean
tech, drug development, computer hardware).

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Other Common Reasons for Rejection

• Limited scalability or growth potential: for example, traditional service
business.
• Weak business model: unclear value proposition; no clear customers;
weak customer channels; no “go-to-market” strategy; insufficient
profit margins; lack of exit potential.
• Size of initial investment and estimated total funding requirements
exceeds capabilities of investor.
• Management team is weak, unconvincing, or has poor reputation.
• Investment is not eligible for tax relief (for example: the new Start-up
India incentive scheme).

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De-Risking The Deal!

Preserve equity by de-risking the deal
• You only raise enough money to
get to the next proof point.

Valuation
• At early stage: technology & team

RISK
risk.
• As you go-to-market: execution
risk, market acceptance risk, team
• Growth phase: risk associated with
cost of manufacturing, marketing
channel, skilled manpower, adequate Time
finance, competition.

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Deal Structuring

Term Sheet
If investors are happy at the end of the presentation they make
formal offer in the form of “Term Sheet”.
The conditions in the term sheet are non-binding on investors.

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Term Sheet
• Basic terms/conditions of an investment at the
minimum:
– Pre-money valuation
– Amount of investment
– Form of investment
– Use of proceeds
– Term and mode of exit
• Non-binding on investor
• Exclusivity or no-shop clause

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Term Sheet
• Terms in the term sheet are negotiable but with fairly significant
limitations.
• Make deals based on future market and not based on past deal.
• They are hard bargainers and may be posturing.
• Be consistent and don’t bluff; you may meet again; leave ego out of
the deal.
• Try to have a short time horizon before it gets stale.

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Due Diligence
• You, your team and your company are under a microscope.
• Legal, financial and strategic review of organizational structure,
history, contractual relationships and documents.
• Will be tedious, frustrating, time consuming and costly.
• Key to success: preparation and cooperation.

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Due Diligence – Art and Science

The “Art”
– What to ask, how to ask, when to ask.
– DD team is on a “search and destroy” mission.
Search for problems.
Destroy (eliminate) concerns or fairly allocate.

The “Science”
– Comprehensive list of questions to ask.
– System to organize and analyze data provided.
– Quantitative analysis of risks uncovered.

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What are They Looking for?

• Overdue tax liabilities.
• Inadequate systems.
• Related-party transactions.
• Unhealthy reliance on customers/suppliers.
• Overdue accounts or unrecorded liabilities.
• Immediate need for major expenditures.

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Define Venture Capitalist and Venture Capital

•  A venture capitalist (VC) is a private equity investor who pool
funds from various investors and provides capital to companies
exhibiting high growth potential in exchange for an equity stake.
• Venture capital is a form of risk capital that
fund startup companies and small businesses that are believed
to have long-term growth potential or companies that have
grown quickly and appear poised to continue to expand.
• Venture capital generally comes from well-off investors,
investment banks and any other financial institutions.

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Angels and VCs

• An angel investor works alone or in group, while venture
capitalists are part of a company.
• Angels invest smaller sums and investment decisions are quick.
• They have different responsibilities and motivations; Angel do get
personally involved, but VCs usually get inextricably associated.
• Angel investors only invest in early-stage companies. VCs look for
proven track record.
• They differ in due diligence. VCs are more formal &
meticulous.

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Preference Shares

Preference shares represents quasi equity capital.

It has features of both equity and debt.

It does not give voting right to the holders.

Fixed rate of dividend, but are performance-driven.

It carries preferential rights over ordinary equity shares in sharing of

profits and also claims over assets of the firm.
Thus, it is ranked between equity and debt as far as priority of
repayment of capital is concerned.

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Pre-money And Post-Money Valuation

Pre-Money Anel-1 brings in Post-Money value
₹5,00,000 ₹10,00,000 ₹15,00,000

Founders’ holding: 5,00,000/15,00,000 = 33.33%

Investor’s holding: 10,00,000/15,00,000 = 66.67%
Pre-Money Angel-2 brings in Post-Money value
₹100,00,000 ₹500,00,000 ₹1500,00,000

Percentage holding is based on negotiation. It is not

calculated based on investment committed
Founder & Angel-1= 70%
Investor’s holding: 30%

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Two Features of Preference Shares

• Liquidation preference (how they decide to get their principal money back)
• Options
• no liquidation preference – Get nothing
• 1X liquidation preference: get exactly what they invested.
• nX liquidation preference: getting ‘n’ times the money they invested.
• Participating & Non-Participating (receiving money proportional to %
holding in the venture)
• Both options are available concurrently.
• Say 2X liquidation preference and participating preference share holder:
Investor receives 2 times the money they invested and receives part of the
remaining money proportionate to their holding in the venture.

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Liquidation Preference
• It states how the proceeds from liquidation event such as trade sale,
initial public offering, or dissolution of company will be distributed.
• All VCs and some BAs provide this clause.
• In liquidation events, investors will be entitled to their investment and
a minimum return ahead of founders.
• VCs will often set a liquidation preference such 1X, 2X, or 3X.
• Only after distribution of proceeds of liquidation to preferred
shareholders—in accordance with respective liquidity preferences—
the remaining proceed (if any) is distributed
among common shareholders.

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Participating Preference Shares

• Preferred share (non-participating) – Investors get their money back.
• Preferred share with liquidity (1X, 2X or 3X) preference – Investor
receives 1X (2X or 3X) times their money.
• Participating preferred equity with or without liquidity preference.
Participating means if they hold 25% equivalent of equity in preferred
stock they receive back their investment plus pro rata (25%) of the
remaining money.

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Participating Preference Shares with assumed 1x liquidation preference

• Participating preferred shareholders not only receive back the amount

originally invested along with unpaid dividends upon liquidation, but
also part of the remaining assets as if they held common shares.
• A new venture raises ₹ 50 million at a pre-money valuation of ₹ 50
million with equity percentage split 50%—50%.
• The venture realizes a liquidity event and is acquired for ₹ 250 million.

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Example cont’d.
• The BA/VC holding participating preferred stock will receive their original
investment of ₹ 50 million (1xliquidation preference) plus 50% of the
remaining amount as they hold 50% ownership in the company.
• The entrepreneur would receive ₹ 100 million.
• 250M – [50M + 0.5X9250-50)] = 250M – 150M = ₹ 100M
• [If BA/VC held “convertible preference shares”, post conversion, the BA/VC
and the entrepreneur would receive 50% of the exit proceeds or ₹ 125.5
million each.]
• However, with lower exit value, the share of the entrepreneur
will go down faster.

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Anti-dilution Clause
• Usually, the valuation of the company is expected to go up moving
forward and thus, the per-share value. But, there may be situation when
the valuation goes down.
• Anti-dilution is used in case of preferred stock and not common stock.
• If the investee company issues stock at a price lower than what the
existing shareholders paid, the former has to compensate the later by
issuing new shares at a price such that the average price of their holding
is not more than that of the subsequent round
of funding.

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Anti-dilution Provision
• A company avails investment from an angel ABC by issuing preference
shares. Subsequently, the company issues preference shares to another
investor XYZ at a lower valuation, the existing shareholders i.e. ABC has
the right to be compensated by granting additional shares at a price
such that the average price of acquisition is not more than the new
issue price.
• The existing investors may also insist on maintaining percentage holding
in the company through fresh investment along with the new investors.
• Antidilution may be so structured that it would be automatically
triggered in case of failure to meet milestones.
• If the investors do not subscribe to new equity, the antidilution
protection may not be available.

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Other Preference
Drag-along provisions – it grants investors the right to compel the
founders and other shareholders to vote in favor of the sale, merger, or
other “deemed liquidation”.

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An Example of Preferred Shares

• A BA group invests ₹ 50 million for 25% of a venture. The venture is sold
for ₹ 100 million.
• Case I: no liquidity preference
• The BA group would receive ₹ 25 million and lose 50% of their original investment.
The entrepreneur or common shareholders would receive ₹ 75 million.
• Case II: BA group has a 1X liquidity (non-participating) preference
• The BA group would receive ₹ 50 million. The entrepreneur or common shareholders
would receive the remaining ₹ 50 million.
• Case III: BA group negotiates a 1X liquidation & ‘participating preference’
• The BA group receives their ₹ 50 million plus another ₹ 12.5 million (25% of the
remaining ₹ 50 million). The entrepreneur or common shareholders would receive
only ₹ 37.5 million.

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Another Example of Preferred Shares:

Further clarified.
• A BA group invests ₹ 50 million for 25% of a venture. The venture is sold
for ₹ 100 million.
• Post money valuation: 50M/0.25 = 200M
• Premoney valuation = 200M – 50M = 150M
• Case I: no liquidity preference
• The BA group holds 25% of equity in the company. With no liquidation clause,
they would receive only 25% of the proceeds: i.e. 25% of 100 M = ₹ 25 million.
• Their original investment is ₹ 50 million. So, they lose 50% of their original
investment.
• The entrepreneur or common shareholders would receive ₹ 75 million.

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An Example of Preferred Shares

Further clarification
• A BA group invests ₹ 50 million for 25% of a venture. The venture is sold for ₹ 100 million.
• Post money valuation: 50/0.25 = 200
• Premoney valuation = 200 – 50 = 150

• Case II: BA group has a 1X liquidity preference (but not participating)

• The 1X liquidation preference means that the BA group would receive one times
the investment, which is equal to 1X50 = ₹ 50 million.
• Since it is not participating preference shares, the BA does not get a share of the
remaining money.
• The entrepreneur or common shareholders would receive the remaining
₹ 50 million.

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An Example of Preferred Shares

Further clarification
• A BA group invests ₹ 50 million for 25% of a venture. The venture is sold for ₹ 100 million.
• Post money valuation: 50/0.25 = 200
• Pre-money valuation = 200 – 50 = 150
• Case III: BA group negotiates a 1X liquidation ‘participating
preference’
• The 1X liquidation clause gives the BA: 1X50 = ₹ 50 million.
• The Participating clause gives the BA group 25% of the remaining money
of (100 – 50 = 50) = 50 X 0.25 = 12.5 M.
• The founders receive the remaining 37.5 M.

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Case IV: Suppose the VC has a 2X ‘participatory liquidity preference’

in the above case:
• On liquidity event, the VC will get 2 times its investment plus their percentage
equivalent of the rest of the money.
• In this case, VC gets 2 times 50 M, i.e., 100M plus 25% of the rest, which is
zero.
• The founders and employees holding equity get nothing (the valuation 100M,
whereas their holding is 75%).
• Therefore, it is not percentage holding that matters. One has to read between
lines.

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In the above example, let us change only the value at which

the company is sold and see how the money is distributed:
• Suppose, the venture is sold for ₹400M, 2X participatory liquidity
preference would give the BA:
• 2X liquidation gives 2 times the investment = 2 X 50 = ₹100M
• Participatory clause gives the BA 25% of the remaining amount of
300M = ₹75 M
• Thus, total receipt by BA = 100 + 75 = ₹175M.
• The founders would receive the remaining sum of ₹225M
(400 – 175)

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Increase the value further and see the shares of proceeds

• Suppose, the venture is sold for ₹1000M, 2X participatory liquidity

preference would give the BA:
• 2X liquidation gives 2 times the investment = 2 X 50 = ₹100M
• Participatory clause gives the BA 25% of the remaining amount of
900M = ₹225 M
• Thus, total receipt by BA = 100 + 225 = ₹325M.
• The founders would receive the remaining sum of ₹675M
(1000 – 325)M

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• Moving forward, all convertibles get converted.

• Preference shares and convertible debts get converted into equity
shares.
• All that the investors have is the percentage holding in the company
and they received proportional amount in liquidation event.

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Syllabus is up to the
previous slide

Supports from the Government through Various Schemes

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⮚ Debt fund
⮚ Funding for innovation
⮚ Government schemes

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Convertibles
• Convertible debt – investment made as debt is subsequently
converted into equity, usually preferred equity, when the
investee company raises the next round of funding.
• The valuation is determined by the next round of investors.
• Depending on the risk perception, discount is allowed on
valuation during conversion to shares - roughly in the range of
10% to 30%

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Example
• An angel (Angel 1) agrees to invest ₹ 6 million in a startup (say ABC) as
convertible debt and negotiates a 20% discount.
• The meaning of the above is that the debt will be converted into equity at
some future date at a price that is less than 20% of the price at which the
company will issue shares to another investor(s).
• Suppose, during the next round of financing a VC (say VC 1) values ABC at ₹
100 per share (par value or face value of Rs. 10).
• A discount of 20% is allowed to ‘Angel 1’ on the price of ₹ 100 per share.
i.e. the ‘Angel 1’ will be able to covert ₹ 6 million into equity shares at a
valuation of ₹ 80 per share.
• So ‘Angel 1’ will receive ₹6M/₹80 = 75,000 shares of the
company.

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Convertible Debt
Advantages and Disadvantages of Investee Company
Advantages Disadvantages
• Funding does not dilute equity. • May have to pay interest on debt
• Can avoid estimating pre-money and stress cash flow.
valuation. • May lead to higher dilution for the
• Chances of lower dilution after value same amount of fund if it fails to
accretion. meet performance milestones.
• • Higher discount rate may lead to
Can avoid bias of earlier valuation
higher dilution.
when approaching to subsequent
investors. Avoid down round. • If there is ‘cap’ on premoney
valuation, the investee company
• Less processing and quick disbursal.
may not avoid dilution.
• Investor may opt not to convert • No voting right

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Convertible Debt with Cap

In case of very high valuation by a subsequent investor, the conversion of debt
into equity may be at a high price (even after discount), leading to smaller holding
by the original investors than anticipated, who actually contributed to the growth
of the business.
Therefore, a maximum value may be fixed at which the debt will be converted.
• In the example  above, suppose the ‘Angel 1’ originally puts a cap of ₹50 per
share for conversion of debt to equity. This means, the company has to convert
debt of ‘Angel 1’ into equity at price
below or equal to ₹50 though shares are being offered to the ‘VC 1’ at ₹100 a
piece.
• Suppose, ‘VC 1’ is being offered equity shares at ₹40, ‘Angel 1’ will receive
the same share at 20% discount, i.e. @₹32.

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How to Approach Angels or VC’s

o Don’t bother with “cold calls”
 Won’t work
o NETWORK; NETWORK; NETWORK
o You need a personal introduction
 F&F
 Champion
 Another Angel
 Physician (previously funded)
 Entrepreneur/manager (previously founded)

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Things VCs Are Interested In

• Your market. Are the market going to buy your products? How are
you pitted against the competition?
• Your team
• The technology
• Why now, why you, why this technology?
• The pay-out

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Startup in India
An entity is defined as a startup if its headquarter is in India, less
than 10 years old, and an annual turnover of less than ₹100 crore
(US$14 million.
The government has launched the I-MADE program under this
initiative to help Indian entrepreneurs build 10 lakh (1 million)
mobile app start-ups, and
The MUDRA Bank's scheme (Pradhan Mantri Mudra Yojana aiming to
provide micro-finance, low-interest rate loans to entrepreneurs.
Initial capital of ₹20,000 crore has been allocated for this scheme.
Startups and Entrepreneurs @ 1 MILLION STARTUPS
www.1millionstartups.com

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Definition of Startup for Availing Government Schemes

An entity shall be considered as a Startup:
• Up to a period of ten years from the date of incorporation/ registration.
Splitting up or reconstructed entities from existing ones are not eligible.
• Recognition is done by the Department for Promotion of Industry and
Internal Trade.
• Turnover of the entity for any of the financial years since incorporation/
registration should not exceed Rs. 100 crore.
• Entity is working towards innovation, development or improvement of
products or processes or services, or if it is a scalable business model
with a high potential of employment generation or wealth creation.

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Government Supports for Prototyping

1. Department of Scientific & Industrial Research www.dsir.gov.in
• Promoting Innovations in Individuals, Start-ups and MSMEs (PRISM):
₹ 2 lakh, ₹ 20 lakh and ₹ 50 lakh of grants in phases.
• Patent Acquisition and Collaborative Research and Technology
Development (PACE)
2. TIFAC and SIDBI - https://tifac.org.in/
SRIJAN scheme: Low-cost fund up to Rs. 10 million (1.00 crore) is
provided by TIFAC through SIDBI. A rolling fund of Rs. 30 crore has been
created by TIFAC that is dispensed and monitored by SIDBI.
3. Ministry of Small & Medium Enterprises (MSME)
https://msme.gov.in/

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PRISM
Phase - I
• Category-I: Proof of Concept/ Prototypes/ Models
• For prototyping ideas and testing hypothesis
• Any Indian national including students can apply.
• Maximum support ₹2.00 lakh (subject to 90% of the total requirement)
• Form: Grant (no repayment obligation)

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PRISM
Phase - I
• Category-II: Fabrication of working model/process know-how/
testing and trial/patenting/technology transfer etc. (Innovation
Incubation)
• For fabrication, refinement and validation of prototypes.
• Any Indian national can apply.
• Maximum support ₹20.00 lakh (subject to 90% of the total requirement).
• Form: Grant (no repayment obligation).

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PRISM
Phase - II
• Enterprise Incubation
• The support is for scaling up technology based innovations,
patenting/design registration/trademark registry/ technology transfer to
develop a marketable product/process towards enterprise creation.
• Successful PRISM innovators or those who have received assistance from
any other government scheme and demonstrated success.
• Maximum support ₹50.00 lakh (subject to 50% of the total project cost).
• Form: Grant (no repayment obligation).

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PACE - Patent Acquisition and Collaborative Research and

Technology Development - DSIR
• The scheme supports development and /or adoption of new
technologies or creative/innovative application to solve unmet
needs of industry.
• For projects in collaboration with R&D organization/ academic
institution/ university, support is up to 100% of the project cost.
• For projects of industry alone, support is up to 50% of the project
cost in the form of secured loan.

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SRIJAN by
TIFAC & SIDBI

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SRIJAN
• Loan assistance is not more than Rs. 10 million for each project.
• This is development loan on soft terms & conditions.
• The interest rate is not more than 5% per annum (simple).
• The repayment shall commence within one year after the project
completion and shall be fully repaid in five years.
• The duration of the project should not normally exceed 18 months.
• The soft loan is limited to maximum 80% of the estimated
project cost and the promoter has to contribute minimum 20%.

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Funds for Prototyping

Besides the schemes of DSIR and TIFAC, several startup funds launched
by the Government of India and is administered through the Ministry
of Small & Medium Enterprises (MSME).
MSME has many funding schemes to support startups (
http://msme.gov.in/ ).

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• Atal Incubation Centers (AIC)

• Atal Innovation Mission (AIM)
• AIM will provide a grant-in-aid of INR 10 Cr to each AIC for a
maximum of five years to cover the capital and operational
expenditures to establish the AIC.
• The applicant would have to provide at least 10,000 sq.m.
space
• https://aim.gov.in/atal-incubation-centres.php

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SBIRI of Biotechnology Industry Research Assistance

Council (BIRAC) under DBT
• SBIRI :  The following structure of funding will be available to industry
depending on the project cost and own resources brought in by the promoter
to the project.
• If the actual project cost is up to Rs. 25 lakhs, 80% of the project cost will be
available as a government grant.
• If the actual project cost is between Rs. 25 lakhs and Rs. 100 lakhs, 50% of the
project cost will be available as government grant subject to a minimum of Rs.
20 lakhs and maximum of ₹50 lakhs.
• Higher grant is available for collaborative research project.

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Biotechnology Industry Research Assistance Council (BIRAC)

• SEED - Sustainable Entrepreneurship and Enterprise Development

Fund to incubators
• ACE – Accelerating Entrepreneurs’ Fund [Fund of Funds]
• NABARD – fund for incubation agro-based startups.

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Government Funding Schemes for MSME

1. Business Loan or Working Capital Loan: Loan up to ₹ 1.00 crore @

concessional interest rate of 8%.
2. Mudra Business Loan: three sub-categories: Shishu: up to
₹50,000; Kishore: up to ₹5,00,000; and Tarun: up to ₹15,00,000
3. Credit Guarantee Fund Scheme:
4. Udyogini: to empower women: up to ₹ 15,00,000
5. National Small Industries Corporation Subsidies: i. marketing
support and ii. Credit support

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More Government Schemes

• Hardly 5% of MSMEs have access to formal credit. There is almost no
possibility of getting credit at idea or early stage of startup.
• Indian government has recently rolled out initiatives to offer business
loans for startups and MSMEs through authorized channels.
• One of the important ones was the recently-launched 59-minute loan
platform enabling online easy access to credit for MSMEs.
• Furthermore, the Small Industries Development Bank of India (SIDBI)
has started lending to companies directly bypassing banks.
• The interest rate on these loans is at least 300 basis
points lower than the usual rates.

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• The initiative aims to automate various processes to loan appraisal

in such a way that one gets an eligibility letter, in-principle approval
in less than 60 minutes and chooses the bank that one may prefer to
ease access to credit to smaller and micro enterprises.
• You update your credential online, choose the bank you prefer, and
receive an in principle approval in 59 minutes.
• Actual sanction is expected within 7 to 8 days. Interest rate starts at
8%.
• Credit Guarantee Fund Trust for Micro and Small Enterprises
(CGTMSE): Loans up to ₹ 1 crore is covered.

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A number of other government startup loans and schemes for entrepreneurs in India have
been introduced in the past few years. Here is a list of some of the most popular and
notable government schemes that offer business loans for startups And MSMEs in India.

• New Gen IEDC (Innovation and • MSME Business Loans For

Entrepreneurship Development Centre) Startups In 59 Minutes
scheme. • Pradhan Mantri Mudra Yojana
• Bank Credit Facilitation Scheme (PMMY)
• Credit Guarantee Scheme (CGS) • SIDBI Make in India Soft Loan
• Credit Linked Capital Subsidy Fund for MSMEs (SMILE)
for Technology Upgrades • Standup India
• Coir Udyami Yojana • Sustainable Finance Scheme

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SIDBI Make in India Soft Loan Fund for MSMEs (SMILE)

Small Industries Development Bank of India (SIDBI)

• New enterprises in manufacturing as well as the services sector can
apply.
• Support 20 lakh or 10% of the project cost.

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• Comprehensive List Of Venture Capital Funds Managed By SIDBI

That Have Catalysed More Than 500 MSMEs And Startups.
• SIDBI funds many venture capital funds.
• Maharashtra State Social Venture Fund (MS Fund)
• Investment Size: Not more than $3.9 Mn (INR 25 Cr) per investee company.
• West Bengal MSME VC Fund (WB Fund)
• Investment Size: Not more than $1.4 Mn (INR 9 Cr)
• India Opportunities Fund
• SME Growth Fund
See here for details
• Samridhi Fund
https://www.sidbiventure.co.in/

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• Fund of Funds for Startups

• In April 2017, the Union Cabinet, chaired by PM Narendra Modi,
approved the establishment $1.4 Bn (INR 10, 000 Cr) corpus for a
‘Fund of Funds for Startups (FFS) proposed by the government in
June 2016.
• ASPIRE Fund
• India Aspiration Fund
• SIDBI Make in India Loan For Enterprises (SMILE) Fund
• SAARC Development Fund
See here for details
https://www.sidbiventure.co.in/

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Tax exemption under section 80 IAC

• The recognized startups are eligible to receive Income Tax
exemption.
• They enjoy tax holiday for 3 consecutive financial years out of its
first ten years of operation since incorporation.
• Eligibility Criteria (80IAC)
• The entity should be a recognized Startup.
• Only Private limited companies and Limited Liability Partnerships are
eligible for Tax exemption under Section 80IAC
• The Startup should have been incorporated after
1st April, 2016

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Some Does and Donts

• Do not keep information from investors – both positive and
negative.
• “I like to send out a monthly update to our entire investor base with most of our metrics, regardless of
whether they’re good or bad, to further nurture this trust with our partners.” – Giuseppe Stuto

• It Maximizes the Probability of Getting the Right Help at the Right Time
• It prepares you to accept failure and move on.
• It helps the investors to come to your rescue at times of distress.

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⮚ Financing New Ventures: An Entrepreneur's Guide to Business Angel Investment by Andrew Zacharakis, 2013
⮚ Harvard Business Review Entrepreneur's Handbook (HBR Handbooks) Paperback – 23 Mar 2018
⮚ https://encycolorpedia.com/
⮚ https://unsplash.com/s/photos/background for images
⮚ https://www.youtube.com/watch?time_continue=231&v=SB16xgtFmco&feature=emb_logo
⮚ https://slidebean.com/templates/investor-deck-template
⮚ https://guykawasaki.com/the-only-10-slides-you-need-in-your-pitch/
⮚ https://slidebean.com/templates/investor-deck-template
⮚ Various Wikipedia pages

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• Create empathy with the investors, understand

their risks and aspirations.
• Try eliminating questionable statements.

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