Managing finance in a startup
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This document discusses various sources of funding for startups at different stages, including equity, debt, grants, and bootstrapping. It outlines common sources of funding such as friends and family, angel investors, venture capital, and government grants. It also discusses factors that influence fundraising decisions like valuation, risk perception, and proof points. Methods for conserving cash like bootstrapping, leasing equipment, and obtaining advances from customers are also covered.
Managing finance in a startup
- 1. MANAGING FINANCE IN A STARTUP
- 2. FUNDING NEEDS CHANGE WITH EACH STAGE Bootstrap OrganizationalGrowth Years of operation Develop The Idea & Biz Model Build the Product Launch Product + Customer Validation Build Team Out + Repeatable Model Scale company + Seek Profitability Friends & Family Seed Stage & Incubators Early Stage Mid & Late Stage Mezzanine & Debt Strategic Angels & Angel Groups Riskperception
- 3. HOW FUNDING IS DECIDED ▪ Valuation and fundability is related to perception on future commercial success, competitive advantages, scalability, pricing power of the business and potential market size. 1 million for 20% 1 million for 10% 1 million for 5% 1 million for 1% 1 million for 0. 1% 1 million for 0.01%
- 4. RAISE MONEY IN CHUNKS TO PRESERVE EQUITY YOU ONLY RAISE ENOUGH MONEY TO GET TO THE NEXT PROOF POINT time Valuation Risk: tech, team, market Risk: team, market Risk: team, execution Risk: mkt size seed Series A Series B Series C A B C Risk time D
- 5. SOURCES OF FUND ▪ Government grant ▪ Equity ▪ Hybrid of equity and grant ▪ Soft loan ▪ Loan from friends and relatives ▪ Loan from banks ▪ Leasing and hire purchase
- 6. SOURCES OF FUND: EQUITY 1. Bootstrapping : Equity capital 2. Friends and relatives : Unsecured loan (quasi equity) 3. Seed fund under incubation : Mostly equity (or mix of debt & equity) 4. Seed fund from Accelerator : Equity (or mix of debt and equity) – example: VillGrow 5. National Equity Fund : Equity 6. Crowdfunding : Equity 7. Angel investors : Equity 8. Venture capital : Equity 9. Private Equity fund : Equity 10. Public Issue of Shares 11. Startup fund from Ministry of Small and Medium Industries
- 7. CATEGORIES OF CAPITAL ▪Debt: borrow money, which is paid back over time with interest. ▪Equity: money is invested in your business (or idea) in exchange for part ownership. ▪Grants: Some of them are non-dilutive sources. ▪Hybrid securities (preference share/stock/capital) – Features of both equity and debt ▪Convertible bond/stock/
- 8. EQUITY DEBT GRANT money is invested in the business in exchange of part ownership borrow money, which is paid back overtime with interest Money which is given as party of social initiative by govt or any org Exit through IPO or acquisition Repayment non-returnable Cost: No interest Cost: Interest and charges No cost, Dilution Part ownership No ownership in some cases no dilution, Mentoring and supervision Covenants Security: No security Security: Charge on assets plus collaterals Claim on assets senior to the common share holders
- 9. WHAT TO DO IF YOU ARE BOOTSTRAPPING ▪ Buying used instead of new equipment ▪ Leasing equipment instead of buying ▪ Minimizing personal expenses ▪ Sharing office space with other businesses ▪ Coordinating purchases with other businesses ▪ Obtaining payments in advance from customers ▪ Bootstrapping ▪ Avoiding unnecessary expenses ▪ Applying for and obtaining grants
- 10. DEBT Lenders of Debt Fund have Low Risk Appetite. Early-stage companies rarely raise money via debt (exception, convertible notes which are a ‘hybrid’ with features of both debt and equity).
- 11. PREFERENCE SHARES/STOCKS Have features of both Equity and Debt Known as company stock - dividends are paid to shareholders before paying dividends to common stock holders. Claim on assets senior to the common share holders in case of bankruptcy or liquidation. Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders, preference share shareholders usually do not have voting rights.
- 12. GRANTS - VARIOUS GOVT. GRANTS Funds for Prototyping 1. Nonrefundable grant from DSIR (Department of Scientific & Industrial Research) www.dsir.gov.in Patent Acquisition and Collaborative Research and Technology Development (PACE) Under this scheme Indian industries are supported to acquire patented technology at an early stage from within the country or overseas on an exclusive as well as non-exclusive basis, add value to the acquired technology, (either independently or in collaboration with public funded research institutions in India or abroad) for exploitation in India or abroad and make socially relevant products for public consumption in India and abroad. Up to 50% of cost of acquisition is provided under the scheme. 2. Equity Grant for prototyping from DSIR Promoting Innovations in Individuals, Start-ups and MSMEs (PRISM)
- 13. PRISM Phase-I ▪ Category-I: Proof of Concept/ Prototypes/ Models Maximum support up to 2.00 lakh or 90% of the total project cost whichever is lower. ▪ Any Indian citizen including student innovator can avail support to develop their novel idea into demonstrable models/prototypes. ▪ Category-II: Fabrication of working model/process know-how/ testing and trial/patenting/technology transfer etc. Maximum support up to 20.00 lakh or 90% of the total project cost whichever is lower. ▪ Any Indian citizen having innovative ideas can receive the grant. PRISM- Phase-II (Enterprise Incubation) ▪ Maximum support up to 50.00 lakh limited to 50% of the total project cost. The support may be provided for scaling up technology based innovations, including patenting/design technology transfer to develop a marketable product/process towards enterprise creation. ▪ Successful PRISM innovators or innovators who have successfully demonstrated proof of concept with the support of other government institutions/agency are eligible.
- 14. GOVERNMENT SUPPORTS FOR PROTOTYPING 3. Not refundable Capital subsidy from TIFAC and SIDBI Launched on Aug 12, 2011 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 monitored by SIDBI. 4. Ministry of Small & Medium Enterprises (MSME) Provides small grant of Rs. 5.00 lakh to each technology-driven start up. Startup fund 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/mob/home.aspx ).
- 16. MAIN CONSIDERATIONS FOR FUNDING PRISM AND SRIJAN ▪ Originality of the idea. ▪ Proof of concept. ▪ Patented or not. ▪ Patentability (inventiveness and novelty). ▪ Commercial value. ▪ Social value and relevance. ▪ Quantum of fund is decided based on complexity of the development process and realistic estimate of cost. Where to approach: There are outreach centers across the nation.
- 17. LOANS ▪TECHNOLOGY DEVELOPMENT BOARD DEPARTMENT OF SCIENCE AND TECHNOLOGY, GOVT. OF INDIA ▪http://www.tdb.gov.in/?q=about-tdb ▪ Provides equity capital or loans to industrial concerns and financial grants to research and development institutions. ▪ The loan carries a simple interest rate of 5% per annum.
- 18. BUSINESS INCUBATORS AND ACCELERATORS Seed accelerators also known as startup accelerators are fixed-term, cohort-based programs, that include mentorship and educational components and culminate in a public pitch event or demo day. While traditional business incubators are often government-funded, generally take no equity, and have specific business segment focus . Accelerators can be either privately or publicly funded and focus on a wide range of industries. Highly competitive: Y Combinator and TechStars have application acceptance rates between 1% and 3%. A seed investment in the startups is usually made, in exchange for small equity. Typically, the investment is between Rs. 5.0 lakh to Rs. 10 lakh. The focus is on teams, not on individual founders. Accelerators consider that one person is insufficient to handle all the work associated with a startup.
- 19. BUSINESS INCUBATORS AND ACCELERATORS ▪ The startups must "graduate" by a given deadline, typically after 3 months. During this time, they receive intensive mentoring and training, and they are expected to iterate rapidly. Virtually all accelerators end their programs with a "Demo Day", where the startups present to investors. ▪ Startups are accepted and supported in cohort batches or classes. The peer support and feedback that the classes provide is an important advantage. If the accelerator doesn't offer a common workspace, the teams will meet periodically. ▪ The primary value to the entrepreneur is derived from the mentoring, connections, and the recognition of being chosen to be a part of the accelerator. The business model is based on generating venture style returns, not rent, or fees for services.
- 20. CROWD FUNDING Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, today often performed via internet-mediated registries, but the concept can also be executed through mail-order subscriptions, benefit events, and other methods. Crowdfunding is a form of alternative finance, which has emerged outside of the traditional financial system.
- 21. ANGEL INVESTORS Business Angels are individuals who invest their personal capital directly 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. This gives access to equity funding to a start-up that needs about $100K to 5 10.00 million. Venture capitalists usually fund above $10.00 million per unit.
- 22. LEASING A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. A leasing company purchase the assets based on requirement of the users. The users pay rentals on regular intervals and do not hold title on the assets. Most significantly, the depreciation benefit accrue to the title-holder of the assets.
- 23. DEBT - LOAN FUND ▪ Long term loan – creation of long-term (fixed) assets – land, building, machinery, vehicle. Known as TERM LOAN. ▪ Short term loan – working capital loan – to fund inventory of raw-materials, good-in-process, finished goods, receivables. ▪ This loan is provided in the form of either in Cash Credit (CC) or in Overdraft (OD) accounts. ▪ The loan amount is registered as a debit limit up to which the borrower can draw money. ▪ It allows any number of daily transactions and interest is charged only on the debit balance as at the end of the day. ▪ The borrower can manage interest by routing all sales proceeds through the account. ▪ Non-fund based credit facility – Bank guarantee (covering performance or financial obligation), letter of credit [document on acceptance (DA) or document on payment(DP).
- 25. THANK YOU For more details contact at shubham@startuptalky.com Join our largest community of entrepreneurs here https://www.facebook.com/groups/startuptalkygroup/