How to Raise Funds for Startups in India
India is witnessing the emergence of start-ups in an unprecedented speed. The start-up culture is booming and so is the competition. The growing number of players, increased focus on the sector and the heavy funding have increased the challenges for the start-up’s even further. Therefore, it is pertinent for them to be focused and strategic in their approach and be equipped with a deeper understanding of market dynamics and economics of competition. With numerous start-ups fighting for funds, raising funds for your company can become a challenge.
Here are 10 tips on how to raise funds for start-ups in India.
Bootstrapping in business means starting a business without external help or capital. Such start-ups fund the development of their company through internal cash flow and are cautious with their expenses. Initially, it will be difficult to raise money for a startup, this can be the easy solution as there are no documentation or formalities required. This can to some extent be getting help from family and friends.
Angel investors are those who are interested in investing in startups with the exchange of equity ownership or so. These are basically successful entrepreneurs who have made their fortune in the business and are now looking to invest their money back into startup businesses. Whether it’s Facebook, Google or Twitter, all these world-famous businesses have had angel investors in the past. Angel investors come with a bank of connections and advice which can prove to be very beneficial to the startup. Angel investors can indeed prove to be the Angels for your startups.
Crowdfunding is a way to raise funding from a large number of people at the same time. This method is followed primarily online via social media and crowdfunding platforms. Some famous crowdfunding sites include Fundable, Indiegogo and Kicstarter. If you are looking to raise relatively small amounts, then crowd-funding is a suitable option. Just make sure you choose the right platform to start your crowd-funding campaign. More importantly, managing the campaign is vital to the success of fundraising exercise on any platform.
Startup accelerators, also known as seed accelerators, are fixed-term, cohort-based programs, that include mentorship and educational components and culminate in a public pitch event or demo day. An accelerator receives hundreds of applications each year for their programs which run for a few weeks to few months. Startups are given small seed investment and access to a large mentor network, in exchange for a small equity stake. There are specific types of startup accelerators which are often subsidiaries or programs of larger corporations that act like startup accelerators.
Such institutions usually provide space and other equipment to startup teams to set the project rolling along with funding and guidance. You can keep your startup housed at an incubators premises for a considerable amount of time till you start feeling the need for your own space. They take much higher stakes than the accelerators. Some of the famous incubators are Microsoft Ventures, Startup Village and IAN Incubator.
With the advent of startup culture, the number of events showcasing startups and startup ideas has multiplied manifold. There are various competitions that keep happening all across the year. The prize money is small in most of these events but winning at such contests can give you visibility in media and an opportunity to network with investors. Most of the competitions do not just offer prize money but also various other benefits.
A venture capitalist is professionals who invest in companies where there are growth and returns. They invest in early-stage businesses that have a high potential to grow in future. They traditionally receive equity in the startup business in return for funding it. However, nowadays the trend involves demanding a mixture of debt financing and equity.
Loan from NBFC’s
There are many nonbanking financial institutions who will sanction loan to business start-ups. Microfinance institutions will provide loans who cannot access banks or where the access is limited. There are alternative start-ups which are licensed as a non-banking financial company (NBFC), offers loans and also creates credit scores of its own by tracking a user’s online activities, such as payment of utility bills, e-commerce purchases, and even social-media behaviour. Most of the online alternative financing companies are either marketplaces for NBFCs or are NBFCs themselves. The list includes firms such as Lendingkart, NeoGrowth Credit Pvt. Ltd and Capital Float.
Government Start-up fund
Prime Minister Narendra Modi led government has come up with StartUp India campaign where they support budding entrepreneurs to carry out their projects. India Aspiration Fund (IAF) – Instead of directly investing in startups, under this program, the government would invest in various VC funds which in-turn would invest in MSMEs. SIDBI Make in India Loan for Small Enterprises (SMILE) focuses on 25 sectors under the Make in India program, SMILE will offer quasi-equity and short-term loans to startups. Micro Units Development and Refinance Agency (MUDRA Bank)- In the Union Budget 2015-16, a corpus of INR 20,000 Crore was earmarked for promoting startups.
Convertible debentures have become popular because of its phenomenal success with Y Combinator Startups. A convertible note by an investor converts the debt to equity in sometime in the future. This conversion is at a discount to the next funding round that the business raises and has a cap, which means if the business is successful in raising a huge round, the debt investors have protected themselves from getting diluted. In Convertible debt, you don’t have to set a valuation. This is taken care in the next round of financing. Plus, it helps to keep the costs lower as it requires less paperwork.
These are the primary sources from whom you can raise funds for your start-ups in India. In this current market scenario, you need to have a close watch on the various developments because every day something unique and new crops up.
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Reshma Ganeshbabu is an intern with SheThePeople.TV.