How to get funds for Start-Up?
Start-Up capital, rather that which is commonly called ‘seed money’ refers to the general expenses that a new business requires at the start. It may be required to cover a variety of requirements, such as the new office space, talented employees, hardware or even new gadgets and equipment. There are a variety of things to be bought or settled before a new business can be comfortably set-up, especially in the top cities like Tokyo, St. Petersburg, Silicon Valley, Abu Dhabi, Delhi, Beijing or Neom.
No entrepreneur can start have his dream business take off
without the initial capital to invest in it. For most cases all the money
necessary can’t come out of a single wallet, hence, the need for funding.
Most
of the start-ups across the world seek funding to establish themselves. The
preliminary costs of building up a firm from scratch and then giving it a
unique identity in the market is a challenging one indeed and more so
economically, which is also good for job creation and employment.
With proper funding
to back them up, any business can have a good start and the mind to grow and
soar high. With so many budding entrepreneurs in the world, it is hard to get
the right people to invest in your dream out of all the rest of the
competitors.
The businesses have to first propose an impressive plan,
which will convince the investors of a bright and profitable future of the
firm. The investors are getting involved with the company with not just the
hope of getting the investments back, but also of future returns once the
company begins to earn well.
The start-up plans are often well-presented before
groups of prospective investors at Business Summits or conferences. The tools
used include PowerPoint presentations and detailed financial plans for the
start-ups. The whole process is called fundraising.
If you are an entrepreneur
looking for funds to help your start-up, it is important that you gain the
trust and faith of your investors. They are about to put their cash into the
business and they will not do it if they do not feel there is positivity and an
ambition to grow in you.
There is also an option as cryptocurrency loan but it is beneficial for online based startups, and is not always helpful as cryptocurrencies are not acceptable everywhere.
Often, start-ups get more than one investor to fund them as
they start off.
The investors or capital providers often become shareholders
in the firm and thus receive their shares of any future profit the business
will earn. This is in every way better than availing a loan because it does not
entail monthly payments or interest rates.
It is seen with start-ups that
findings are needed several times, at various stages of its growth. There is
usually an investor who leads the rest and who thus own the most shares.
As
time goes on, the number of investors may increase and the company will go more
public as it gets enlarged. This may lessen the control of the founders over
the firm but certainly increases its liquidity. These are the stages of a firm
when it gains a board of directors, each of whom will be a significant
shareholder in the company.
Those who are willing to
fund start-ups are usually looking for profitable investments that will fare
well. Even if they do not grow so well, if they have performed well, the larger
firms may buy them over. Thus, unless the business goes down altogether, the
investors will almost always gain from the start-ups. It is one of the reasons
why people are willing to take the risk of investments.
What is Start-up Incubation?
Startup incubators help startups. These are usually formed by government or by industries.
Who are Angels and VCs?
Venture Capitals are investments that start-ups receive from
bigger banks, well-to-do investors or similar parties towards its growth. These
are mostly awarded only to those start-ups that have proven themselves in the
markets and exhibit immense growth potential in terms of profits.
In Venture
Capitals, the company is divided into large chunks of shares and then sold to
investors as they show interest. But these investments may not always be
monetary.
There have been technical support or similar aides provided by larger
firms as investments. This has of late become a huge attraction to companies
that have only been a few years in the markets and are unable to avail
themselves bank loans. This however represents much risk to the investors.
The venture capitalists are attracted to the start-ups by
submitting a proper business plan before them. If interested, the investors
will then initiate the due diligence. It is a research conducted to analyze the
growth and condition of the firm so far.
It is important as the investors are
putting in large amounts at a small firm. The investments hence made will admit
them as shareholders in the business for a duration of five to six years. Then,
the investors often sell out through mergers or IPOs.
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| Sound Incubation enables VC stage |
Angle investments are another type of investment upon which
the start-ups depend on. It is a name by which the High-Net-Worth Individuals
are commonly addressed.
The term originated from the Broadway, funnily enough,
when the drama companies were kept up by wealthy individuals who gave money.
These are investors who are willing pit in their money for the growth of small
scale businesses.
The up-coming start-ups in their early phases often depend on
angle investors for their growth. Angle investors could be a single individual
or a group of individuals. They may even be friends or family. They differ from
venture capitalist is that the investments are made without aiming a greater
return. Rather, it is meant to take the firm through its initial struggles. But
to become an angle investor, one must meet the criteria set forth by the
Securities Exchange Commission or the SEC. It dictates that one should have a
net worth of at least $1 million and an annual income that amounts upto
$200,000 to be accepted as an angel investor. Mostly these type of investors
put in their own money into the funding or it may have its source in Limited
Liability Companies or LLPs.
There are four major points in which the venture capitalists
differ from angle investors.
1. The sum invested
While the venture capitalists often
invest large amounts that are more than $2 million in start-ups. They thus
focus on companies that have already earned a reputation for success and
profits. Angel investors, not being the large firms, tend to invest only a
maximum of $100,000 in any start-up.
2. Their professionalism
Venture capitalists can be compared to
the professional sportsmen who earn a living by it. Their main aim while
investing any start-up is to gain huge returns overtime. On the other hand, the
angle investors are true amateurs, are individuals who invest without solid
profit motives. They may even be helping out a friend in need.
3. Source of the investments made
In case of venture capitalist, the source of the investments
they make include pension funds, larger corporations and similar places. They
angle investors on the contrary invest their own money. That is why they are
called High-Net-Worth Individuals.
4. Buy Off
The
venture capitalists may buy off a share in the company and take a seat among
the board of directors for a few years. But the Angel investors do not make
sufficiently huge investments to get them a place among the board of directors.
Global scenario of start-ups will be covered on the regional
basis in posts in this site/blog. These days with massive global market the
start-up hub is India where Walmart recently entered a deal buying an
e-commerce company called Flipkart.
There are several such companies cropping
up for about a decade in this region. There is also tough competition in this
region with Chinese goods and services.
Where to get Funding for Startups?
Government Funding for Indian Start-Ups
Government of India has been promoting start-ups since the
introduction of the Start-Up India initiate in 2015. The campaign was launched
by the Prime Minister or India during the Independence ceremony at the Red
Fort.
As part of the initiative, the Ministry of Human Resources and the
Department of Science and Technology began the about 75 start up support hubs.
They are centered around the NITs, IITs, IISERs and NIPERs. It offers a total
of 10,000 crore startup funding pool for various start-ups in India.
There are
a large number of benefits that a start-up can benefit from if they could
avail themselves the support of the government of India. The steps to enrol are
simple and basic so everyone could do it without hassle. The initiative
provides the following benefits for start-ups:
- Lower patent registration fees.
- Zero surprise inspection for a period of three years from the beginning of the start-ups.
- Freedom from Capital Gain Tax for the first 3 years from the start.
- Freedom from taxes for the initial three years of operation.
5. Self-certification compliance
Individual states such as Kerala and Telangana also offers
support for start-ups in these states. Kerala had launched the Kerala IT Mission
which was intended to raise a total of $50 billion as investment towards
start-ups in the state.
Telangana introduced the T-Hub venture as part of
promoting start-ups in the state and also started the Technological Research
and Innovation Park that spreads over an expanse of 17,000 sq.ft. It was
built as a research and development laboratory for start-ups.
In 2018, India came in 100th in the world index of
ease of doing business in the country. It apparently took over 30 other world
nations to reach the position. It is said that the government funding allocated
to the start-ups made the nation more suitable for businesses and attracted
more investors.
MUDRA
MUDRA stands for the Pradhan Mantri (Prime Minister) Micro
Units Development and Refinance Agency LTD. It is an NBFC supporting the
development of micro enterprise sector all over India.
As per the MUDRA policy,
it offers refinance support for banks and MFIs to lend money for micro units
that will need loans upto 10 Lakh rupees. The refinance is provided under the
title Pradhan Mantri MUDRA Yojana. There are three different funding
schemes available for start-ups under the MUDRA. They are:
·
Shishu, which covers loans upto 50,000/-
·
Kishor, that facilitates loans above 50,000 and upto a maximum of
5,00,00/-
·
Tarun, which covers loans above 5 Lakh and upto 10 Lakh.
The Shishu category is the major target of the MUDRA scheme
and its primary focus is to find the micro units under the Shishu scheme.
The funding support from MUDRA are of 4 types:
Micro Credit schemes or MCS for loans that amount upto 100
thousand rupees through the MFIs. These are facilitated through the various
Micro Finance Institutions in India.
The delivery of these funding may be
carried out through Self- help groups or the JLGs. But the loans are intended
specifically for individuals for particular micro enterprise developments. The
MFIs need to register themselves with MUDRA in order to avail the benefits for
its members.
Scheme for Commercial Banks or Rural Banks or Scheduled
Co-operative Banks is the second category of funds available with MUDRA. MUDRA
helps these banks to finance micro enterprises.
The refinance is available for
term loans and working capital loans, to a maximum of 10 Lakh per unit.
Registered banks can easily avail the refinance if they have lender loans under
either of the Shishu, Kishore or Tarun categories.
These are mostly for the Regional or Rural Banks It also has
funding schemes for women under the Women Enterprise program. It is aimed
exclusively for enterprises that are run by women. It is a scheme that the
government has put forth to empower women and bring more women into business.
The banks who offer loans under this scheme can get a reduction of upto 25 bps in
its interest rates. This is also applicable to the MFIs or NBFCs providing
loans.
The final funding scheme of MUDRA is the Securitisation of
Loan Portfolio. This is explained under the MUDRA scheme as, “raising funds for
financing micro enterprises by participating in securitisation of their loan
assets against micro enterprise portfolio, by providing second loss default
guarantee, for credit enhancement and also participating in investment of Pass
Through Certificate (PTCs) either as Senior or Junior investor.”
MUDRA was launched with the intent of providing support to
all the cottage industries in India. It was to give business loans for vendors,
shopkeepers and others engaged in similar sectors.
It involves transport
vehicle loans to buy two wheelers, three wheelers, e-rickshaws, passenger cars
and taxis etc. as part of MUDRA loans.
It is also for the food products sector,
textiles industry and agricultural activities. They are mainly for developing
the villages in India by providing funding for enterprises therein.
The MUDRA card is an innovative product which is similar to
debit cards. It provides capital to the lenders through the card. The card
issued against the MUDRA loan account to the borrowers.
It is also meant to
further the digitalisation process on-going all around India. The card will
allow the borrower to withdraw the amount in multiple steps. It can be used for
cash withdrawals from ATMs all over India.
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| Idea to Business- Its All about funding |
CGTMSE
The Credit Guarantee Fund Trust for Micro and Small
Enterprises is one of the government-funded schemes for the promotion of MSMEs
or Micro, Small and Medium enterprises.
It singly aims the backing of the small
industries and enterprises all around the nation which will not flourish
without proper financial back up and care. The government believed these
industries form the backbone of Indian economy.
The assistance the CGTMSE
provides requires no third party guarantee or collateral. It also assures the
lenders so they can give the money to those who require it without worry.
It
provides a guarantee cover so even if there is a default, it gets resolved. A
loan of upto 200 lakhs can be provided to various MSMEs according to this
scheme. It covers even the states of Sikkim and Jammu and Kashmir which is
otherwise exempted from schemes such as this.
CGTMSE charges a fee of 1% p.a. of the amount any company
gets sanctioned through the scheme. The guarantee of getting the loan
sanctioned varies for amounts you may require.
For loan upto 5 Lakh rupees
towards micro enterprises, the percentage of availing loan for sure is about
85%. For enterprises owned and operated by women entrepreneurs, the cover for
any default may amount upto 80% of the amount loaned. This is also applicable
for any loans given within the state of Sikkim.
The groups that can avail the
CGTMSE include existing or budding Micro, Small and Medium enterprises such as
Manufacturing units and service providers. It excludes retail traders,
educational institutions, self-help groups and training institutions from its
scope.
The reach of the scheme is wide spread with a large number of
banks working with it. It has under the scheme 26 public sector banks, 21
private sector banks, 73 regional rural banks and 4 foreign banks among a vast
number of others all over India.
One can avail the CGTMSE loan by preparing a detailed
business plan initially. It is then submitted to the intended bank. The bank
will then research upon the plan and the proposal.
It verifies the facts
provided and then send it over to the CGTMSE fund.
The final decision to
sanction the loan or not will be made by the CGTMSE fund who scrutinises the
plan for a last time.
Fund of Funds
According to Investopedia, Fund of Funds, otherwise called
multi-manager investment, is an investment strategy in which a fund invests in
other kinds of funds.
This strategy invests in a portfolio that contains
different underlying assets instead of investing directly in bonds, stocks and
other types of securities.
This is a plan that most suits the small investors
who do not want to take up big risks investing in start-ups.
Here the
investments get diversified and thus the variety of fund categories are all
brought together as a single fund.
Fund of Fund has several advantage compared other funding. It
helps the investors by providing access to professional finance management
services.
As part of the Government of India plan to support start-ups,
they launched the Fund of Funds for start-ups.
On June 22nd 2016,
the press release given out by the Government of India read that the.
Fund of Funds for Start-UPS will be launched along with the Small Industries
Development Bank of India or the SIDBI. It will be used for making
contributions towards the Alternative Investment Funds or AIF registered with
Securities and Exchange Board of India.
As of now , a sum of around 1100 crore
rupees has been provided to the FFS in a move to support the start-ups in
India. It is expected to improve entrepreneurship in India by proving aides to
all those who come up with good business plans and strategies but are not able
to realise dreams due to lack of funds.
Reports say that around $ 92 million of the total amount of
the FFS has been used to fund 75 start-ups from 17 AIFS in India. One good
factor is that there is no minimum investment limit prescribed. This is a move
to support a maximum number of smaller industries in India so they can grow and
help the economy grow in turn. Among the 75 start-ups that received the FFS
funding, 62 are still active.
Sadly 5 of these have actually been closed down
and another 5 have no information available on their progress. E commerce
sector was the biggest benefactor of the FFS so far and is closely followed by
Real Estate industry, Healthtech, Logistics and Consumer Services. Some of
these include companies likes:
- Atomberg, which developed smart appliances
- Azuro, a real state enterprise
- Bizongo, the B2B and packaging material marketplace
- Blowhirn, the logistics enterprise and Boxx.ai, an Artifucail Intelligence and Analytics developer
These above were to name a few of the more successful
ventures.
Following the example set by the Government of India, the
Government of Kerala launched a $ 78 million scheme in Fund of Funds to support
young budding business men in the state. It is still in the developmental
stages with a span of three more years to be fully ready to be availed.
KSUM
acts as the manager of the programs on behalf of the Kerala government and is
undertaken following the success of the likes of Technopark and Infopark
technology hubs.
Private Funding
Being
a newcomer into the world of business, you might not always be able to secure
funding initially. There is no doubt that gaining the trust and funds from
investors is a tough and challenging task. Still there are ways to get your
business on its feet without having to find investors.
The one way is boot
strapping. It is another name for funding the company on your own, that is,
form your own pockets. Although it might not be the possible in the long run,
bootstrapping, as it is called, is a good means to get your business started
and working.
Then
there is the option of getting funding from family and friends. This is one of
the easiest ways if you cannot secure funds from investors as such. Being
family, they will definitely know you well to give you Funds for the business.
This is actually what supports most entrepreneurs in the early stages. They
support, both mental and economical, is absolutely necessary for a budding
businessman or business woman.
Another
way of raising funds is crowd funding. You bring together a number of
individual, each of whom will invest various amounts in the business you will
undertake.
These funds, which are small amounts when considered individually,
will be enough to support a business when pooled. However, it is more
challenging than any other form of fundraising because you will have to go
around meeting a large number of people and then convince them to find your
business. It requires a lot of time, confidence and patience from your side.
Micro
financing is also an option but only if you have run out of every other
options. Clearly, this is the last choice for many.
Micro financiers are
numerous in the country but the interest rate they charge and the limited
period of time given to pay back the amount makes it unattractive for the
borrowers. They will soon come under the pressure to start paying back the
amount, not to mention the never ending interests. They also normally ask for
assets and third party guarantees before they will give the loans.
This
type of funding is never secure and might be not enough to run any business. These
are certainly never an option when you want to take your company to the next
level. The kind of amount you need when you decide to expand can never be
raised through crowd funding or from family and friends.
Borrowing such large
sums from micro financiers is highly risky and pressurising. That is why most
start-ups prefer the government funding as opposed to the private ones. They
even opt the venture capitalists or angle investors rather than the private
funding options.
In case of government funding, the way you spend the allotted
amount will be highly monitored and regulated by those banks who lend the
amount. The same is more liberal when it comes to private funding. However, the
MUDRA scheme is a proof of the changing attitude of the government towards the
entrepreneurs.
Practicality of Government Funding and its Implementation
The
whole process of availing government funding is quite simple. These procedures
are set up to easily avail funds and other benefits to the entrepreneurs. These
policies promote business and start-ups in India. The benefits of government
funding are as follows:
1. Simple process
The start-ups can now easily register
for their funding with the government from home. The government has launched
special apps and sophisticated website pages for the very purpose, simplifying
the procedure to a bare minimum. They can fill up a simple form online and then
upload scanned copies of certain documents to complete the process of
registration.
2. Reduction in costs
As said earlier, the government will
allow zero tax benefits and lower interest rates under the MUDRA plans for upto
three years from the beginning. It eases the whole process of getting patents
and trademarks. This gives better Intellectual Property right services for the
budding entrepreneurs of India. As a result of these schemes, the government
will take care of all the facilitator fees and the beginners will only have to
pay the statutory fees.
3. Access to funds made easy
With facilities such as the MUDRA card
and a 100, 000 million rupees fund for the entrepreneurs as venture capital,
the government facilitates better access to funds for start-ups. The government
provides guarantees to the lenders so people can easily avail loans for their
businesses.
4. Tenders
The start-ups in India have the
opportunity to apply for tenders, unlike other fresh businesses. They do not
have to have so many years of prior experience or turnover or similar criteria
that are applicable for normal companies.
5. Research and Development
These Start-ups in India will have
access to the Research and Development facilities set up as part of the
start-up initiative. Thousands of acres of research facilities have been made
available for these start-ups by the government.
6. Compliance made easy
There are no time consuming compliance
for the start-ups in India. They are all simplified to save time and money for
the businessmen. They can certify themselves by going through a few steps in a
mobile app, with 9 labour laws and 3 environment laws. This applicable for
white industries.
7. Freedom to choose investors
These start-up, set up according to the
Indian Start-up initiatives will have the complete freedom to choose their own
investors. They have the options of various venture capitalists to choose the
best investor(s) for themselves.
8. Easy exit options
In case you ever want to quit, a start-up
can wrap it up and close down the whole business within a time period of 90
days from the date when you apply for closure or wind up.
9. Start-up feasts
To create opportunities for the
entrepreneurs to meet each other and learn through interactions, the government
organises start-up rests, business meet ups and summits on national and
international level. Select start-ups that have been performing well since
their beginnings and successful business men both attend these function so they
can mutually benefit from the summits. It is a very good opponent for the
start-ups to get further funding and know future
developmental options.
See also:
- Cryptocurrency Payment Gateway Services
- Cryptocurrency Escrow Services
- Online Mode of Payment
- Online and Offline Payment
- Legality of Cryptocurrency
- Crypto Wallet
- Smart Contract
- Payment in Cryptocurrencies
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