Want to raise money for your startup but not sure which way to go? Let HSBC help you pick the right option

25th Jun 2019
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  • In 2013, OYO Rooms began with one hotel in Gurugram. Today, the company has a presence across 500 cities across the world and is valued at $4 billion.
  • OLA started off in 2010 as a small online venture offering weekend trips. Today, valued at $6 billion, it is India’s No. 2 startup.
  • Ninjakart started off as a small B2C hyperlocal grocery platform in 2015. In April this year, the agri-tech startup raised $100 million in funding.


What’s common in all these examples is that before they became the global brands that they are today, all these companies had humble beginnings, just like any other startup. Their success can be attributed to a combination of factors, a crucial one being funding.


To scale up, startups need funding, with the amounts varying based on their size, the stage that they are at, as well as the industry they belong to. While early-stage startups need funds to bring more clarity to the direction they are headed in, get a better idea of the market and customer preferences, and try to find the right product-market fit, more mature startups will look at external funding for marketing, building the brand, growing the team, and expanding the portfolio and geographical footprint, among other growth-based metrics.


From short-term working capital loans to raising longer-term equity-based investments, today there are a number of options available to startups across stages to pick the type of funding most suited to their specific need.


Venture equity


One of the most popular methods of raising external funding involves investors getting a stake in the company based on its valuation, in exchange for funding the company.


Usually, startups opt for this type of funding when:

  • they need a long runway and need sizeable funds to sustain the business
  • they have no collateral to offer as security against loans
  • they are in an industry or sector certain to see tremendous growth.


Typically, investors are interested in specific industry sectors and geographies. Since VCs are besieged by a large number of “investment recommendations”, it is important to have a good elevator pitch and a strong investor deck to get their interest and sustain it.


As there is no obligation to pay back the amount in a pre-specified timely manner, this kind of investment allows startups to utilise their cash inflow to grow the businesses.


There are some things to keep in mind when choosing to raise funds via this route:

  • While the risks get divided between the founders and investors, it also means that equity investors expect a proportionate reward, such as a larger stake in the company.
  • Raising equity capital is a time-consuming process, and can take up to six months or even longer.
  • The demand for venture equity is disproportionately high compared to the funds being disbursed.


Venture debt


Typically structured like a loan or a series of loans, venture lending is a form of risk capital where the recipient has to pay interest on the amount “borrowed”, instead of parting with equity as is the case when raising funding through traditional equity-based venture capital.


Here are some interesting statistics on venture debt:

  • Between 2017 and 2019, the venture debt market saw significantly more action than in all the previous years.
  • By the end of 2019, the market is likely to see a growth of over 25 percent with startups expected to raise over Rs 1,500 crore in venture debt.
  • This growth will be both in the number of deals as well as larger amounts of funding.


Typically, venture debt is an option for more mature startups that have raised previous rounds of funding and need more short-term capital for scaling operations or a more specific purpose. These startups also use venture debts to extend their runway and enable them to meet more milestones. Mature startups that have raised funding previously are more likely to get venture debt since they have proven themselves.


For smaller startups that may need smaller amounts, venture debt loans can prove more useful, for purposes such as purchase of equipment or planning a product scale up.


Venture debt is a smart option for startups for the following reasons:

  • It’s comparatively cheaper since startups don’t need to dilute their equity to investors in exchange for being funded.
  • Since it also comes without any end-use restrictions it is more flexible. 
  • Entrepreneurs get to retain control over their business.
  • It takes less time to process venture debt loans than it does to process equity-based financing.


ECBs


External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognised foreign entities, such as commercial bank loans, buyers’ credit, suppliers’ credit and securities, among others.


The RBI allows startups to raise up to $3 million (approximately Rs 20 crore) or an equivalent amount in a financial year through ECBs to meet business expenses. Some of the qualifying criteria (as mentioned in Circular No. 17 dated January 16, 2019) include:


  • The borrower should be recognised as a startup by the Central Government as on the date of raising the ECB.
  • Startups can borrow the amount either in rupees, or in any convertible foreign currency or a combination of both — for a minimum average maturity period of three years.
  • The investor or lender in the ECB transaction should be resident of a country which is either a member of the Financial Action Task Force or a member of a regional body along the same lines, and shouldn’t belong to any country identified in the public statement of the FATF.
  • The borrowing can be in the form of loans, non-convertible, optionally convertible or partially convertible preference shares.
  • Conversion into equity is permitted, subject to regulations applicable for foreign investment in startups.


“For startups, ECBs are a good way to borrow large volumes of funds for a relatively long period to sustain growth. AD Category-I banks like HSBC may assist startups to raise ECBs in an advisory position,” says Prakash Jaiswal, Country Head of Business Banking, HSBC India.


Working capital is crucial at the beginning of any startup journey. When a startup is scaling up to the next stage, or funds are trapped in large inventories, and you need to pay suppliers or cater to a seasonal spurt in demand, every business needs a helping hand to manage their cash flows more efficiently.


Here, HSBC India helps provide financial support. They also play the role of an advisor to aspiring startups looking to do business overseas by providing them with supply chain financing and trade and receivables solutions.


The Payment environment is changing at an unprecedented pace, and is expected to grow in double digits. Growth in this space can be can be attributed to “political, economic and demographic factors”. It’s all about convenience and ease, and alternative payment methods like cards are topping the charts.


“We are seeing an increasing demand of procurement cards among startups. They are exploring cards as an early payment tool to negotiate early payment discounts with their suppliers and, at the same time, maintain or extend their DSOs by effectively using the interest-free credit period that comes with the procurement cards,” adds Prakash.


Ultimately, choosing the option that’s best suited to your requirements is a critical success factor and, while this can be confusing and overwhelming, having someone like HSBC as a trusted advisor can make a huge difference to startups in their journey.


To know more about HSBC’s dedicated solutions for startups, click here.



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