7 Different Funding Options for Startups in India

7 Different Funding Options for Startups in India

by Sanjeev Archak

For an entrepreneur to pivot their business models and explore untapped opportunities, funding becomes the inevitable step. Apart from choosing the right entity for registering your startup business and going through the cumbersome process of following the various regulatory compliance’s, getting your startup funded is an important aspect that needs significant time and effort.

Before you start the process of looking for funds for your business, one needs to take care of two things. Firstly, ensure that you have a sound financial plan for your business. This comes in handy when seeking investment from from angel investors, venture capitalists, financial banks, ledgers etc. Secondly, startup funding depends largely on the nature and the type of business you’re in. So ensure that raising funds is in line with the short term and long term goals of your company.

“When looking for funding , don’t just look for cash. Look for the right people.”

There is more to startup funding than just looking for cash. As choosing the right option among the various funding options for startups would provide access to talent, investors, mentors, access to more money, and PR.

Having said that, let’s have a look at the different funding options for startups in India.

7 Funding Options for Startups in India

Option 1 – Bootstrapping Your Startup

Bootstrapping means self-funding your startup. This option is ideal for those entrepreneurs that have just started their business. Getting funding can be a difficult task for first-time founders unless they show some traction and a business plan that has the potential of making money in the long run.

If the initial funding requirement for your business is small, then bootstrapping is the right choice to begin with. This will help you to gain some traction and build the required confidence before you raise funding through investors.

Option 2 – Crowdfunding Your Startup

Of the many funding options for startups, this one is getting a lot of attention lately. Crowdfunding your startup means to raise funds from more than one person at the same time. The concept is similar to that of mutual funds on a basic level. In this funding option, more than one investor is involved. These investors offer a fixed amount of funding depending on several parameters such as your business idea, goal, financial plan of action, and plans of making money i.e being profitable.

Crowdfunding can help you in more ways than one. Firstly, it ascertains that your startup idea is believed by other experienced players in the ecosystem. Secondly, it can help you raise funding right from the first stage itself i.e turning your idea into a full-fledged business. And last but the least, getting your startup crowdfunded can get you right feedback at the initial stage. Whether your product is solving a problem, will it have a demand in the market, is it generating enough interest? All these can be answered during the crowdfunding process.

And the best part is that you can involve common people and get your startup funded. You can gather funds from family, friends and buddying entrepreneurs that believe in your vision and are ready to support you in your startup journey.

Option 3 – Through Angel Investment

Angel investors are those individuals that are always on the lookout for promising startups and offer funding in exchange of convertible debt or ownership equity in the startup. These individuals can work alone or in groups of networks to screen startups, share research, pool their investment capital, as well as to provide advice to their portfolio companies. Apart from offering money, angel investors can also offer mentoring and advice for your startup.

Many prominent companies such as Google, Yahoo & Uber are well known examples of angel-funded firms. The advantages of raising funds through angel investors is that these investors are experienced entrepreneurs who have gone through the same phase themselves and are the ones that understand what it takes to create a billion dollar startup right out of an idea.

With handsome amounts of money in their pockets and a will to trust others with their finances, these ‘Angels’ step in and provide the initial support and sometimes mentorship that helps startups successfully take over these crucial and challenging times. (Source)

Funding your startup through angel investment has it’s shortcomings too. These investors invest less amounts of money as compared to Venture Capitalists (covered in next point) and might have higher interest expectations. So plan and research well before choosing this option. Here’s a list of the most prominent and active angel investors in India.

Option 4 – Through Venture Capitalists

Venture Capital (VC) is a type of startup funding provided to small, early-stage startups that are emerging businesses and are deemed to have high growth potential, or the ones that demonstrate high growth value (be it in terms of number of employees, annual revenue, or both).

The firms or funds invest in early-stage startups for exchange of equity, or an ownership stake, in the companies they invest in. These venture capitalists take on the risk of financing startups that are risky in nature in the hopes that some of the companies they support will become successful. The startups that attract VC funding are usually based on an innovative business model or technology and they are usually from the high technology industries, such as information technology (IT), biotechnology or clean technology.

Typically a venture capital investment occurs after an initial “seed funding” round in Startups. The first round of institutional venture capital to fund growth is known as the Series A round. VCs provide this financing in the hopes and interest of generating a return through an eventual “exit” event. This exit can be in the form of the company selling shares to the public for the first time in an initial public offering (IPO) or undergoing a merger and acquisition (also known as a “trade sale”) of the company.

High valued startups such as Uber, Airbnb, Flipkart, Xiaomi & Didi Chuxing have raised funding through Venture Capitalists. Apart from contributing to the financial requirement, VCs also offer strategic advice on the business model and marketing strategies of their portfolio companies.

Here’s a list of the top most active VC funds in India.

Indian startup ecosystem continues to remain attractive for investors with almost US$ 6.4 Bn of funding in first half of 2017 demonstrating 167% growth over H1 2016. The start-up ecosystem also witnessed mushrooming of a significant base of companies building solutions for India centric grass root level problems across Healthcare, Education Inclusion, Financial Inclusion, Clean Energy and Agriculture.

Option 5 – Raise Funds Through Business Incubators & Accelerators

Early stage Startup founders that are looking to start off on the right foot can raise funds through a startup accelerator or startup incubator by joining their startupprograms. Often assumed to represent the same concept, startup incubators and accelerators have a few key distinctions between them.

Accelerators “accelerate” growth of an existing company, while incubators “incubate” disruptive ideas with the hope of building out a business model and company. So, accelerators focus on scaling a business while incubators are often more focused on innovation. (Source)

If an accelerator is a greenhouse for young plants to get the optimal conditions to grow, an incubator matches quality seeds with the best soil for sprouting and growth.

Raising funds through incubators and accelerators is useful for early-stage startups as these options are readily available in almost every major city. The programs of Incubators and Accelerators typically run for 4-8 months of duration during which a startup founder is introduced to various mentors, investors and other buddying entrepreneurs that have enrolled for the same program.

Entrepreneurs should look for the right fit while choosing the right program for their startup. Some startups may benefit from being in an incubator, while others could be fit for an accelerator. So do your research and choose wisely.

Here is a list of the top startup incubators and startup accelerators in India.

Option 6 – Raise Funds Through Bank Loans

The conventional means of taking a bank loan can also be one of the viable funding options for startups. However there are certain factors that the bank considers before offering you a loan. These are related to your startup business model, expected returns, your ability to pay back the loan, management experience and expertise and last but not the least – the collateral security that will be provided by you.

Under this option, entrepreneurs can raise funds through the following types of bank loans:

  1. Term Loans – These are lent out for the purpose of buying and constructing capital assets for your business such as machinery, plant, equipment, etc. for the use of business.
  2. Working Capital Loans – These can be obtained for the purpose of stocking inventory or even providing credit to customers. However, banks adopt a conservative outlook while lending out money for this, and try to evaluate the working capital requirement for the startup business based on the model and details provided.
  3. Asset Backed Loans – Asset backed loans solve the purpose of Research &Development or marketing or expanding the startup business. However, these are usually lent out depending upon the market value of the residential or commercial or industrial property that is to be pledged as collateral security. Usually for a period of 7-15 years banks lend approximately 70% of the assessed market value of the pledged property. In addition to this, the startup founder will also be required to provide the bank the details of the business model as specified earlier i.e. expected returns, your ability to pay back the loan, and management experience and expertise. (Source)

Option 7 – Through the ‘Startup India’ initiative

The Startup India project by the Narendra Modi led government can be another option to raise funds for your business. As part of this initiative, the government of India has set up a Fund of Funds with a total corpus of Rs 10,000 crore ($1.6 billion) to empower startups and build a robust ecosystem by nurturing them to grow through innovation and design. This money is disbursed via the Small Industries Development Bank of India (SIDBI).

According to October 2017 status report by DIPP on the Startup India website, about $92 Mn (INR 605.7 Cr) from the fund has already been released to SIDBI, and 75 startups have received funding from 17 AIFs so far. The entire Fund of Funds corpus has been earmarked to get allocated across two finance commission cycles (2015-2020 & 2021-2025).

The Startup India Action plan might be too complex to understand. In case you have questions or need help to get onboard the Startup India plan, talk to our specialists at IntegraBooks.

Final Thoughts

With a plethora of funding options for startups available at your disposal, we hope this helps you to make the right judgement call to raise funding for your business. Before raising funds ask yourself this fundamental question – How much money do I actually need? Talk to your co-founders and mentors to discuss the right financial plan and possibilities. Validate your business idea twice before approaching investors and bankers. Lastly, chase the vision, not the money, the money will end up following you. Good luck!

 

 

 

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