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How an evolving funding environment is giving emerging startups in India a big boost

Jatin Goel
3rd Nov 2016
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With young and ingenious minds completely revolutionising the rules of the game, the Indian economy has seen exciting disruption of all possible status quo in the last few years. The country’s startup ecosystem has grown from strength to strength, leveraging the latest developments in technology, the growing adoption of e-commerce, and the burgeoning domestic market to fuel its unprecedented growth. The progress of entrepreneurship in India has also been supported to a great extent by the availability of funding. The investment ecosystem has been anything but stagnant and has evolved with the developments in entrepreneurial behaviour.

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As a result, emerging startups now have a variety of funding options to benefit from in their quest to acquire the necessary capital to grow. This has resulted in more and more startups venturing into the market; industry estimates predict more than 11,500 startups will be active in India by 2020. With the process of investment and exit becoming smoother, here are some of the options available for Indian startups looking to secure funds and drive greater growth and scale:

 

  1. Equity funding

Acquiring ‘equity’ gets one a stake or claim in a startup venture, and startup businesses can issue equity in exchange for funding to a corporation, individuals or other entities. Equity rounds include seed funding (raised in the very initial stages) and Series funding rounds. Some of the most popular equity-based funding options available to startups are:

  • Funding from business incubators and accelerators: Found in many major cities, incubators and accelerator programmes are a useful funding option for early-stage businesses. These programmes assist hundreds of startups every year, running for four to eight months and requiring time commitment from business owners. The platforms also provide opportunities to make good connections with investors, mentors, and other startups.
  • Angel investor funding: Angel investors differ from venture capitalists in terms of the former having much smaller operations, sometimes featuring only one individual. Such investors can often secure a large portion of an emerging venture, because of which they are invested in the growth of the model. This is a particularly popular form of investment — the amount invested by angel investors in 2014, at $32.2 million, was eight times greater than the angel investments done in 2010.
  • Venture capitalist (VC) funding: A VC investor is basically a professional group that offers capital specifically to startups. This option makes available an enormous amount of money, along with plenty of other assistance such as business advice and mentorship. However, this form of funding may require an entrepreneur to be flexible with his or her business, and give up varying amounts of control over the business model.

 

  1. Debt-based funding

One funding option is the issuance of debt, which, like equity, involves the exchange of a claim for an obligation, i.e., a loan. This format is quite simple, as it involves a transfer of funds in exchange for the obligation to repay those funds in certain amounts over time according to a fixed schedule. Businesses choosing this form of financing must offer some assurance in the form of collateral upon which the lender will have claims in the absence of repayment.

Depending on the duration within which the loan is paid back, debt funding can either be short-term (6 to 18 months), intermediate (up to three years), or long-term (within five years). Banks and NBFCs are a common source of securing debt financing for upcoming startups. However, these institutions often shy away from smaller companies which are either witnessing temporary decline in business or a rapid sales growth. Approaching them during a stable phase is therefore more preferable for ventures.

 

  1. Crowdfunding

Crowdfunding is the one of the newest funding options to have taken the startup world by storm. The beauty of this funding method is that any common person can contribute money towards a business idea they see potential in. A crowdfunding platform enables an entrepreneur to put out a detailed description of his or her business model, including details such as amount of funding needed, future financial strategies for getting profits, goals of the business, target audience, etc. Subsequently, consumers and investors can choose to contribute depending on their perception of the idea. Several crowdfunding platforms such as Kickstarter, Indiegogo, and GoFundMe have received impressive traction in developed markets such as USA and the UK.

There are many advantages of crowdfunding, beginning with its ability to generate interest due to its public nature. Thus, it also acts as a marketing tool; an active crowdfunding campaign can successfully introduce a venture’s overall mission and vision to the market. The format allows entrepreneurs to cost-effectively and swiftly reach multiple channels and create momentum that is significantly different from that created through traditional channels. Successful crowdfunding stories are also regularly given attention by media outlets. In addition, the entrepreneurial endeavour in question may be able to attract VC investment in future based on the response to its crowdfunding plea.

Another advantage of this funding method is that it gives proof of concept. Testing the product or service out determines its market validation at an early stage. It also leads to collective brainstorming, as business founders are able to engage with potential customers and receive comments, feedback, and ideas. Lastly, the format provides the opportunity of pre-selling, which is a great way to gauge user reaction and decide whether to pursue or pivot on a given concept.

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