Advisory on how start-ups should raise capital

Startups are ventures initiated by visionary founders who believe their product or service is unique and capable of disrupting the market. They primarily function on high risk and high returns model. But the question which comes up is, do you only need a great vision and an idea to launch a successful business? To turn the idea into a successful reality you need adequate capital as well. The journey to secure this capital is long and tedious. Let’s discuss the process in detail.

Need

To proceed with the idea the founders require cash to purchase the necessary assets, equipment, build the team, develop prototypes and run trials. Initially, the founders rely on friends and family to raise funds or seek seed round from investors. For businesses, to enter the market and expand their reach in a competitive market, businesses need funds to burn and gain market share. This might not be for all the businesses, as there have been founders who have set examples by growing their business while keeping it bootstrapped but there are exceptions in every scenario. To keep the business sustainable and achieve long-term growth and profitability, businesses need to expand and have a significant market share.

Timing

A business goes through various stages in its life such as developing the offering, entering the market, expanding, achieving growth and sustainability. During these stages, businesses raise different rounds of funding. During the ideation and validation of the offering, startups raise pre seed and seed round. To enter the market and expand, businesses often raise a series of round such as Series A, B, C and D. Finally, to give an exit to the investors business go through activities, raising an IPO or merger and acquisition offer.

Achieving fundraising success at different stages is tough as it is a long and harsh process. An investor majorly looks for two key factors before investing, does the offering have a market fit and the potential of the founder. A founder with a successful track record of building ventures may find it easier to raise funds in the initial stages, while a new founder with a great idea will have to convince more to raise adequate funds. A founder should evaluate USP of their offering, market size, upcoming market trends, market fit of the product and its growth. With answers to these questions and an impressive founder, fundraising might not be as hard as it must be.

Amount to Raise

What can be seen nowadays is businesses tend to get struck in the trap to continuously raise money and keep jumping ships from one round to another to enhance their valuations. This has become one of the major reasons why startups fail. The business should aim at determining the amount of capital that is required to be raised to make the venture profitable. Once profitable, business can save their equity by being self-reliant and fundraising becomes easier as investors trust the profitable businesses.

To decide the amount to rise, the founder should have a clear vision and objectives. By assessing their past expenditures and plans set for the future, they should decide an amount which will help them achieve their goal in the span of the next 12 to 18 months. The amount to be raised comes at a cost, it is for the founder to decide the optimal amount to seek.

Sources of Funding

Different funding options are available at various stages of a business’s life. They are:

1. Initial Stages: Friends and family, crowdfunding, angel investors and incubators are the ones to reach out for funding.
2. Growth and Expansion Stages: Primary and most important sources are the venture capital, family houses and venture debt firms, there are other options such as bank loans and private equity also present in later stages of business life.
3. Final Stages: To offer an exit to the investors in the company, IPO and merger and acquisition offers from larger companies.

Venture Capital Funds

A large number of VC Funds are present, which have their own investment mandate. VC funds should be approached by constructing an appropriate strategy and recognizing the investment stage startup has reached. Here are some top VC funds categorized as per the investment stage.

1. Seed Stage: 3one4 Capital, India Quotient, Yournest Venture Capital, Beenext.
2. Early Stage: Accel India, Matrix Partners India, Kalaari Ventures, Blue Ventures.
3. Growth Stage: Sequoia Capital India, Bharat Innovation Fund, Prime Venture Partners, Inventus Capital Partners.

There are various initiatives taken by the government as well. Government has set up institutions like Small Industries Development Bank of India (SIDBI) and IFCI Venture Capital Funds ltd to boost the growth of startups and MSMEs by providing them access to quick funds. Various schemes have also been launched under these institutions like Venture Capital Fund for schedule castes, backward classes and for scheduled tribes to provide an opportunity to the minority classes and hence upliftment of them. Other schemes such as SIDBI fund of funds scheme, Startup India Seed Fund Scheme and Startup India Investor connect has also been established to promote the growth of startups in India. SIDBI fund of funds scheme doesn’t invest directly across the startups but invest via SEBI registered Alternative Investment Fund and till date successfully deployed over INR 17,452 crores across 939 startups.

To be a part of Start Up India Scheme, the companies need to have DPIIT recognition to avail benefits such as tax benefits, easier compliance, IPR fast-tracking & more. There are some basic eligibility criteria to be eligible for DPIIT Startup recognition:

1. Age: Company’s existence and operations should not be more than 10 years since its inception.
2. Type: Company should be registered as a Private Limited, registered Partnership Firm or a LLP.
3. Annual Turnover: The annual turnover of a company for any financial year should not exceed INR 100 crores since its inception.
4. Entity: Company should be an original entity and should not have been formed by splitting up or reconstructing an existing business.
5. Innovation & Scalability: The business should be scalable with high potential and should work on the development of their offering.

Steps of Fundraising

1. The first step is to decide is to decide why to raise, how much to raise and when to raise. The first step is vital and sets the tone for fundraising.
2. The second step is to be clear and sure if the business has reached the right stage where it should look to raise financing.
3. The next step is to prepare all the necessary information such as future financial projections, break-even analysis, long-term profitability, goal for the business and a pitch deck.
4. Moving ahead, it is important to reach out to the right investors, considering their different mandate based on location, field, stage of investment, size of investment and the sector. Targeting the right investors significantly increases chance of raising funds.
5. The final stage is where investors carry out their due diligence to check if all the information provided by the business is accurate and after a successful due diligence, a term sheet is signed.

Opportunities in India for Startups to Raise Funds

The year 2023 was challenging for startups seeking funding due to macroeconomic pressures. However, 2024 is believed to change this trend as Investors are looking for opportunities, with reports indicating they have more than $20 billion ready for investment. The year 2024 can also be called the “IPO” year for the startups, as many businesses have matured enough to get listed on the stock exchange. Already in the first half of 2024 more than $7 billion has been invested across various startups, with this upward trend, the future opportunities look great for Indian Startup Ecosystem.