Startup Funding in India
The Article “Startup Funding in India” by Naveen Talawar & Varun J Jangli is a comprehensive analysis of the innovative ideas which act as the main reason for the establishment of start-ups, along with the history of startups in India and the various challenges which are faced by a startup. The article describes in detail the startup funds and their various types. The authors suggest various ways to fund a business, such as self-funding, friends and family, crowdfunding, etc.
The article entails the NASSCOM India Startup report, which proves the increase over the previous years. It contains the significance of Startup India, the initiative of the Government, and the motive behind it. The authors in the last concluding paragraph recommend establishing a business in all areas of our country as it is clear that most developments in this sector have occurred only in metropolitan areas.
India is a South Asian country that is still developing. It is the world’s most populous country and the seventh-largest in terms of land area. A high population in India equals a vast potential market, which increases the demand for jobs. The promotion of entrepreneurship is becoming increasingly important worldwide, which is also true in India. In addition to helping the country’s economy, entrepreneurship also helps to solve significant societal problems and create jobs. Every organisation’s success, whether a start-up or an established one, depends on its capacity to generate innovative ideas.
Innovation is one of the main forces behind entrepreneurship. Therefore, entrepreneurs continuously develop innovative ideas for the same problem. The Indian startup ecosystem has expanded quickly as a result of private investments, including seed, angel, venture, and private equity funds, as well as technical support from incubators, accelerators, and the government. For its part, the government is striving to foster a hospitable environment through its flagship Startup India project, which began in 2016.
Startup India is an innovative programme that strives to help anyone who wants to launch a business. The government will assist these people in realizing their ideas and thriving because they possess both the capacity and the ability to do so. This initiative’s success would eventually lead to India being a stronger economy and nation.
Startup India, the flagship programme of the Indian government, strives to build a thriving ecosystem that supports the establishment of new enterprises, promotes long-term economic growth, and offers large-scale job opportunities. The government seeks to encourage enterprises to develop through innovation and design through this programme. Since the Hon’ble Prime Minister unveiled the plan on January 16, 2016, several initiatives have been launched to support his vision of India becoming a country where people generate jobs rather than looking for them. These initiatives have encouraged the startup culture, with the Startup India initiative recognizing enterprises and many entrepreneurs taking advantage of the benefits of establishing a business in India.
According to the NASSCOM India Startup Report 2015, with 4200 startups and counting, a 40% increase over the previous year, over $5 billion in investment, and three to four new enterprises beginning each day, India has moved up to the third position in the world in terms of startup numbers. In order to accomplish the objectives of the proposal, the Indian government published an Action Plan that covers every component of the startup system. The Government expects that this Action Plan will hasten the expansion of the Startup movement beyond the digital/technology sector to a variety of industries and sectors, including agriculture, business, the social sector, healthcare, education, and so on.
The Action Plan is based on the following three pillars:
- Simplifying and Assisting
- Funding Assistance and Incentives
- Industry-Academia Collaboration and Incubation
Definition of a startup
Startups are new business entities or organizations that create new utility in products and services to meet market demands and entrepreneurial endeavours in the early phases of development. They are new firms with a unique business model that is disrupting the market. There is currently no specific definition of a startup in the Indian context because of the subjectivity and complexity involved. There are certain conceptual definitions available in the public domain that take into account a variety of parameters relevant to every organization, such as the stage of their lifecycle, the amount and degree of finance achieved, the amount of money generated, and the area of operations, and so on. Some of the definitions are as follows;
On April 1, 2015, the Ministry of Commerce and Industry issued a notification defining a startup, and accordingly, a company will be classified as a startup if and only if the following conditions are met:
- If it has been completed five years after the date of incorporation.
- If it has not had a turnover of more than 25 crores in the previous five financial years.
- If it deals with the creation, deployment, and commercialization of innovative goods, processes, or services that are driven by technology or intellectual property.
On the official Startup website (startupindia.gov.in), the Department of Industrial Policy & Promotion (DIPP) provides a definition. A startup, according to that definition, is “an entity incorporated or registered in India not more than seven years ago, but not more than ten years ago for Biotechnology Startups, with annual turnover not exceeding INR 25 crore in any previous financial year, and working toward innovation, development, or improvement of products, processes, or services, or if the business strategy is scalable and has a great potential for creating jobs or wealth.”
History of a startup in India
Before the recent Startup boom, India was best known as an IT outsourcing destination, offering low-cost, basic labour to multinational firms for various back-end tasks. Over three decades have passed since India first had IT enterprises. The four crucial stages of development and maturity highlighted by the Microsoft Accelerator in India are the dot-com era, the growth of product startups, the expansion of the startup ecosystem, software services, and global delivery models. One of the turning points was Texas Instruments’ decision to establish an R&D facility in Bengaluru in 1985, which eventually served as an incubator for many of today’s entrepreneurs, is one of the milestones, as is the introduction of the popular accounting software Tally in 1986.
In addition to its recent strong economic growth, it has grown into one of the world’s largest startup ecosystems. Due to a rising number of angel investors, venture capital funds, incubators, accelerators, and government initiatives such as Digital India, Startup India, and Smart Cities, the Indian startup ecosystem has significantly evolved in recent years.
In 2004, Silicon Valley Bank opened its first branch in Bengaluru, ushering in the next wave of entrepreneurs. Since then, the pace of startup fundraising has accelerated. By 2015, India had over 10,000 startups, fairly similar to the People’s Republic of China (PRC). Eight unicorn startups were valued at $1 billion or more in e-commerce marketplaces, transportation and mobility, logistics and hyper delivery, ad: tech, digital banking and finance, online aggregators, and analytics.
In August 2019, Indian enterprises invested $1.4 billion in 50 collaborations, up from $182 million in 32 alliances the previous year. According to IVCA-EY (2019), India has over 50,000 enterprises, with 3,500 of them growing at a 30% annual rate, making it the world’s third-largest ecosystem (after the United States and the People’s public of China).
Challenges faced by Startups
The following are some of the problems that startups face:
Many entrepreneurs struggle as they grow due to insufficient revenue creation. As operations expand, expenses rise in pace with reduced sales, forcing corporations to focus on fundraising and diminishing their focus on the main business. As a result, revenue generation is critical, needing effective burn rate management, or the rate at which companies spend money in their early stages. The issue is not just raising enough finances but also developing and maintaining growth.
Incubators, science and technology parks, business development centers, and other support mechanisms play an important part in the life cycle of startups. The lack of such support mechanisms raises the likelihood of failure.
Financing is important for companies, and getting enough money is always a challenge. Several financing possibilities are accessible, including family members, friends, loans, grants, angel funds, venture capitalists, crowdfunding, and so on. As the company grows, the necessity grows as well. A timely inflow of finance is required for business scaling. For a startup to succeed, proper financial management is essential.
Startups fail because they do not pay attention to market limits. Because of the uniqueness of the product, the environment for a startup is frequently tougher than for an established company. The situation is more complex for a new product because the company must create everything from the ground up.
Startup funds and their types
Startup funds are the sums of money required to start a new business, be it for office space, licences, permits, inventory, product development, marketing, or any other need. Financing options include banks, angel investors, and venture capitalists. Sometimes one of the first challenges a business faces is raising finance. Prospective or early-stage business owners must decide first whether to manage their company on their own or seek outside funding. Knowing what each source has to offer in terms of features, benefits/disadvantages, tax, and regulatory repercussions, etc., is crucial even though many factors play a role in the decision.
Entrepreneurs tend to be more committed at first, trying to manage funds from internal sources and personal debt rather than looking for outside funding. This gives entrepreneurs more freedom to develop their enterprises but also puts them in danger. It’s referred to as bootstrapping. Examples include controlling subsidized finance, limiting inventories and debtors, increasing creditors by delaying payments, increasing personal debt, owner financing, sweat equity, and other internal sources of funding.
Many new businesses demand more capital than the owner or entrepreneurs can give with their assets. A well-documented business plan comprising background information about the firm, promoters, organizational goals, and plans for achieving them is submitted to bankers and investors to receive external money. Investing in such projects follows a careful analysis of the company’s growth strategy and possibilities. External financiers and investors do more than just make money; they also offer advice and support by evaluating and monitoring corporate developments. There are choices for angel/seed financing, private equity funding, debt financing, crowdfunding, and other outside funding.
According to a recent report, more than 94% of businesses fail within their first year due to a lack of finance. Finance is the lifeblood of every business. India’s well-developed financial system includes financial institutions, banks, non-banking financial organizations, and venture capital firms. All of these organizations offer financial assistance to new and current businesses. The following are the most popular ways to fund a business:
Self-funding is the process through which an entrepreneur uses their own funds to launch a company. The investing process is the initial phase. Before moving on to the next round of financing, a founder makes an initial investment in the business using his own money or resources. The ideal course of action for an entrepreneur who wants complete control over the business is self-funding from personal funds. The main benefit of this kind of financing is that it avoids equity dilution.
Friends and Family
Taking the assistance of friends and family who are enthusiastic about the new business is the second-best choice for quick financing. This is a significant non-personal funding source for enterprises just starting out. With experienced investors who might be interested in additional investment down the road, this strategy not only raises money but also builds the entrepreneur’s credibility. To ensure that their expectations are clear from the start, entrepreneurs must be completely upfront with them about the possibility of losing all of their money if the new business stagnates or fails. These investors may have inflated expectations and demand a specific percentage of ownership since they are ignorant of the reality of operating a new company.
Projects using crowdfunding are becoming more and more common to raise small amounts of money. During a campaign, members of the public can pledge online to support startup companies by making donations or placing pre-orders for later delivery. Crowdfunding is the best approach to accelerate a startup company’s growth without taking on debt or giving up stock.
Wealthy individuals who are prepared to invest in start-up businesses in exchange for convertible debt or equity ownership are known as angel investors. Nowadays, there are high-net-worth locals interested in funding up to a million dollars in qualified entrepreneurs in almost every major city. Members of the network are business experts with extensive operational expertise who may offer guidance and financial support to emerging entrepreneurs.
Professional investors who invest institutional money in commercially attractive startup ideas are known as venture capitalists. They are frequently looking for large prospects, have an established business strategy, and are ready to expand and demand large capital. As their money is at stake, they have the ability to influence significant decisions made by the companies in which they invest.
The most popular means of raising money to launch a new firm more quickly is equity financing. In exchange for their funds, investors are given stock in the form of a stake in the company. Shareholders are only responsible for paying the face value of their freely transferable shares. This helps the business expand more quickly because it stops paying out money on a monthly basis.
Debt finance is a loan that must be repaid over a specified time period. The entrepreneur is accountable for repaying the interest on the debt by financing borrowed funds. This sort of investment is typically employed during Seed Investment Rounds to protect the company’s founders and existing investors from dilution. This also prevents the startup from losing a valuable business asset at an early stage.
India is steadily becoming a startup hub, creating fresh creative ideas, owing to its significant number of youthful, educated, and working individuals. New businesses in India are primarily concentrated in metropolitan areas but must expand to other parts of the country. Innovative concepts with economic feasibility and growth potential are increasingly being supported and promoted through seed and private equity investments. SEBI has recognized crowdfunding as an alternative source of investment for startups. However, if properly handled, rules and regulations should be updated to boost crowdfunding and debt financing in the country, as well as scale-up company entrepreneurial growth.
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