An overview of financing options for early stage social enterprises.
An overview of financing options for early stage social enterprises.
Unconvention|L - JaipurDigbijoy Shukla – Director, Ennovent Impact Circle
Before Going for Financing…Are you really committed to your idea?Do you have the courage to quit your cushy salaried job? INIAAre you willing to put in whatever little capital you have, or can raise fromfriends and relatives, tighten your belt and somehow execute your idea? DO YOU HAVE SKIN IN THE GAME?????
Typical Enterprise Funding Landscape Idea/ INIA Prototype/Pilot Stage Market Entry/Revenue OpportunityCompetitions Grants, Govt. Schemes, Incubator, Angel Investors & Early Stage Impact Investors Scale Up Proof of Business Model Impact Funds, Mainstream Funds, Venture Debt, Debt
Sources of Capital – Early Stage Enterprises• Self• Family, Friends & Fools INIA• Competitions• Incubators• Grants/Govt. Schemes• Seed/Angel• Venture Capital• Debt – Bank Loan
Competitions (Examples) Stage 1 funding, generally expected to require an average of $50,000 (approx. Rs. 25,00,000), will not exceed $100,000 (approx. Rs.50,00,000). Stage 2 funding, generally expected to require an average of $500,000 (approx. Rs. INIA 2,50,00,000) will not exceed $750,000 (approx. Rs. 3,75,00,000). MA will make at least six awards per year, subject to the evaluation and recommendations of the Evaluation Committees. More Details - http://www.millenniumalliance.in The Global Social Venture Competition (GSVC) provides aspiring entrepreneurs with mentoring, exposure, and $50,000 in prizes to transform their ideas into businesses that will have positive real world impact. More Details - http://www.gsvc.org/ 5
Incubators/Accelerators (Examples) Villgro provides entrepreneurs with Seed Funding (Villgro offers up to USD 60,000 in seed funding to early stage social enterprises.), Fellowship, Mentoring, Training, Networks. More Details: http://www.villgro.org/ INIA Centre for Innovation Incubation and Entrepreneurship provides aspiring entrepreneurs with mentoring, exposure and seed funds. CIIE directly manages incubation funds in excess of Rs 10 crores investing in seed-stage start-ups across technology sectors. More Details - http://www.ciieindia.org/ 6
Snap Shot Govt. Scheme (Source - http://www.venturecenter.co.in/funding) Organization Scheme Funding Amount Target Purpose Dept. of TePP Project Fund INR 15 Lakh Individuals/Entrepreneur Grant to convert Scientific & s/Startups invention into a working Industrial prototype Research Department of Small Business Innovation Upto Rs 1 Crore, upto Rs Biotech Companies / Early Stage Funding for Bio Technology Business Research 50 Lakh as grant and rest Entrepreneurs INIA high risk, innovative Initiative (SBIRI) Phase 2 as soft loan ideas/products for commercialization Department of Water Technology Initiative Up to Rs 1 crore Scientists / Technologists To develop low cost Science and (WTI) Programme sanctioned in recent / R&D Labs domestic purification Technology (DST) projects, grant for technologies, otions for technologists in disposal of scientific academic institutions / waste, initiating grant to cover 50% cost application of nano- of consumables for technology Industry-Institution partnership Department of Depends on Project (in Entrepreneurs / Industry Loan @ 5-6% / Equity Science and Lakhs) / Institutions Partnership for working Technology (DST) in indigenous technologies National Rs 10 Lakh to Rs 30 Lakh Entrepreneurs / Angel Funding/take Research Incubatees at Business Equity in the company Development Incubators focus on rural and exit when a financial Corporation innovations investor is on board
GrantsWhat is it?In its simplest form a grant can be characterized as a “gift” provided for thepurpose of public benefit. It is not repayable to the donor nor does it give rise toany ongoing financial obligation of the grantee to the donor. INIASources of grant capital vary from:Government AgenciesCorporate FoundationsHigh net worth individualsNon profit organizationsPrivate foundations Source: www.socialedge.org/blogs 8
GrantsTechnicalities?A grant agreement – a legally binding contract between the donor and the granteewill detail such things as: INIA•Purpose for which the grantee is to use the grant monies;•How the grant monies will be disbursed;•Agreed milestones the grantee must meet to qualify if the grant is structured withprogressive disbursements over time; and•Reporting requirements (including social performance metrics) of the grantee tothe donor;Donors have become increasingly focused over the years in imposing increasedaccountability on grantees in achieving and measuring the social impact achievedwith grant money. Source: www.socialedge.org/blogs 9
GrantsQuestions You Should Ask!• Will the grant money allow pursuit of established strategy or does it cause divergence from strategy?• Is the grant for general operations or for a specific project? INIA• If for general operations, what period of time does the grant cover and what additional monies (if any) are needed to complement the grant?• If for a specific project, is the grant sufficient to cover the total cost of the project (capital cost, operating costs plus working capital)? If not, how will the balance of the project be funded?• How does the grant interact with existing or future funding sources?• Is the grant structured to maximize social impact?• Are the milestones the donor is requesting achievable?• Are the reporting requirements (including social performance metrics) manageable?• What resources are needed to meet the reporting requirements of the donor?• What is the cost of meeting such reporting requirements? Source: www.socialedge.org/blogs 10
DebtWhat is it?Debt can be simply defined as money that you borrow to run your business. Generallyspeaking, debt can be divided into two categories: Debt financing requires theentrepreneur to repay the borrowed money to the lending institute. This may include INIAeverything from a loan to bond, credit. An important consideration with this kind offunding option is that, it requires the entrepreneur to have exceptional credit history.Long Term Debt Financing usually applies to assets you are purchasing for your socialenterprise, such as equipment, buildings, land, or machinery. With long term debtfinancing, the scheduled repayment of the loan and the estimated useful life of theassets extends over more than one year.Short Term Debt Financing usually applies to money needed for the day-to-dayoperations of the social enterprise, such as purchasing inventory, supplies, or payingthe wages of employees. Short term financing is often referred to as an operating loanor short term loan because scheduled repayment takes place in less than one year. Source: www.socialedge.org/blogs 11
DebtWhat to Watch out for?Debt entails the payment of interest. Debt financiers require a borrower to have aclearly defined and proven revenue model that can be relied on for servicing ofthe loan and in most cases backed by collateral security. INIAAside from loan repayment, what are some of typical terms and conditions thatone can expect to see in a loan agreement:• Amount• Purpose• Final date of maturity• Interest rate• Other fees• Principal and interest payment schedule ( ie. amounts and payment dates)• Financial, operating and reporting covenants• Events of default• Form of securityRemember that the cost of finance for any loan is not just the interest rate butalso must take account of any upfront or additional ongoing fees that may becharged as part of the loan. Source: www.socialedge.org/blogs 12
DebtPros:Good source of financing and cheap compared to equity mostly for companieswith steady growth, consistent sales & solid collateral.Debt financing can be obtained from commercial banks, NBFCs and other financialinstitutions like NSDC etc. INIAHere the entrepreneur gets to maintain his ownership & maximum control overbusiness.Cons:Debt financing requires monthly payments on a regular basis irrespective of howthe company is doing.This sort of financing is most often limited to businesses with a solid & successfultrack record. In addition to providing collateral in a lot of cases as security.Typically go to enterprises with at least three years of operations with provencredit history and profitability and growth. These are available at interest rates of16-20 %, while loans against property cost 12-18 %.This requires the filing of formal application either online or at the lendinginstitute and a lot of paper work at times. Source: www.socialedge.org/blogs 13
DebtUseful Tips in Managing DebtDefer the start date of repayment by adding a "grace period." Startup loans oftenhave a six- to 12-month grace period before repayment starts, providing entrepreneurswith some time to ramp up the business. INIAUse interest-only payments. If your lender wants to be repaid immediately, offer tomake interest-only payments for a period of time to keep your monthly budget incheck.Institute graduated payments. You can create a unique repayment schedule with lowpayments at the start of the loan and higher payments at the end when your businessis proven. Source: www.socialedge.org/blogs 14
Equity – Angels/FundsWhat is it?Equity financing seeks ownership in company in exchange for money invested. ImpactFunds and Impact Investors look at a balance of social/environmental impact and returnson their investments. INIAAn Impact Fund fund has limited partners (LPs), usually corporates, foundations,endowment funds or high net-worth individuals – who give their money to the fund toinvest on their behalf.The fund has team members (partners) who are responsible for investing from the fund.They usually pick sectors to invest in (energy, healthcare, microfinance etc) – dependingon the experience of the team members. The experience matters since the teammember helps guide the company they invest in with their experience and connections.Angel Investors are high net worth individuals, who invest in a start -up in return for aminority share in the business. They are usually serial entrepreneurs or heads of majormultinational firms . Source: www.socialedge.org/blogs 15
EquityWhat to watch out for?Before trying to raise venture capital, decide what your business will look like in 5 -7 years. Impact Funds invest in businesses that are likely to scale in operationsand impact, and they’d like to get their returns.Venture Money is RIGHT for your business if: • You are trying to build a large business over 5-7 years and INIA • Your business could go public or be acquired for a large amount • You are comfortable with involvement from partners of the VC fund – on strategic operations of your businessHaving a venture investment in your company means you are signing on to be ahigh growth company and will do the things necessary to grow quickly and buildthe talent base, processes, and infrastructure that is necessary to support a highgrowth business. This is usually good when all goes well, but during rough times,it’s difficult to manage.The right venture investor can be VERY helpful to building your business. Theirexperience, advice, and connections have been invaluable. But it’s a little likemarriage so choose your partner carefully; it’s pretty hard to get your venturecapitalists out of your company if you decide later that you don’t like them.- So do your due diligence on them!! Source: www.socialedge.org/blogs 16
EquityPros:This is looked upon as the best source of financing mainly by companies with high profitabilityor those with poor credit ratings.Angel Investors & Funds bring a lot of experience, connections and domain expertise which canadd value to the business such as potential customers, key hires etcAlso help in further rounds of financing and capitalization of the company. INIACons:The involvement of more number of investors can mean more loss of ownership and control.Venture Capitalists or angel investors may opt to have a say in every important businessdecisions.If there is no alignment things can go haywire!!! 17
Convertible Debt – Early Stage Financing What is it? Convertible debt is simply a loan (a debt obligation) that can be turned into equity (stock ownership), generally upon the occurrence of future financing. INIA Pros: Way to secure investment funds without setting a valuation on a company --an uncertain and disruptive process for the early -stage or pre-revenue company--that can protect early investors from dilution in the next round of financing. Avoid a possibility of a down round for the first set of investors Cons: Convertible debt often includes terms to provide a discount or bonus upon conversion into equity. 18
Comparing Grants/Debt/Equity Grants Debt EquityAmount · Varies · Typically no more than 3-5 · Varies times equity although highly dependent on the type of social enterprisePurpose · Grant monies are often restricted to a · Operating, working and · Operating, working and specific project rather than being able to capital expenditure INIAcapital expenditure. be used broadly by a social enterprise for operating and capital expenditureRepayment and · No repayment required · Principal must be repaid · Exit strategy that allowsServicing according to an agreed investors to realize return of schedule along with agreed investment interestCovenants · Reporting · Reporting and Financial · ReportingEvents of Default · Typically limited to compliance with the · Non-payment of principal or · Downside protection grant purpose and laws interest, non-compliance with covenants, cross default, etcSecurity · NIL · Fixed or floating asset · Typically NIL charges may be requested by a lenderBoard · Some grant makers will require a board · NIL · Board seat or ability toRepresentation seat especially if they are one of the nominate a board member to primary funders of a social enterprise provide influence over key strategic and management decisionsOwnership · NIL · NIL · Yes along with voting rights in 19 proportion to ownership
Funding Institutions vs Business Life Cycle Growth Challenges CAPEX IPO Investor Pressure Change ManagementMA Market Validation Late StageT Customer Acquisition WorkingU No or low Revenues capital Low or –ive Cash Flow Bank loansR Operational Private equityI Challenges Venture CapitalT IncubatorsY Angels Faith Money Grants Time/Revenue
Approaching Impact InvestorsAn idea is worth the paper it’s written on, unless backed by a business. And a businessusually is:Tied to Solving a Large Problem, which If Solved, would Result in Huge Value to Someone,who (collectively) Would be Willing to Pay a Large Sum for the Solution. INIAInvestors (especially venture investors) expect the bold questions in the statement above to beanswered with crystal clarity. In addition, they like to have the following questions answeredas well. Why hasn’t the problem above been solved before? What makes you and your team experts at solving the problem? Why can’t other companies solve the problem? Why can’t a company with $100M in capital solve the problem better than you?Investors (especially venture investors) invest in businesses that are innovative and teamsthat can execute well. If a large company like Unilver, Mahindra, or Reliance can do whatyou’re proposing, they have 100x more capital than you ever will to pull it off. Be prepared toanswer why you’re likely to succeed in spite of the competition.
Approaching Impact Investors A TEAM is of paramount importance to a technology startup. Without a team, there’s a very small chance of raising venture financing, unless you’re a recognized name and have built successful businesses in the past. Impact Investors look for a team of founders. The reasons are simple, but often not INIA obvious. 1. A team is always better than an individual. A team will have better ideas, complimentary skills, and the ability to support one another during tough times. 2. A team reduces the level of risk, especially a good founding team that compliments each other. Think of a team with a marketing, engineering, and sales background, not necessarily 3 engineers . 3. A team that has worked together for a period of time has worked out teething pains. They’ve learnt to work together and are likely to stick together. Impact Investors bet on a team’s ability to solve the identified problem. Chances are the initial solution is partly wrong, and a good team will figure out what’s wrong with it and fix it.
ImpactWhat is the impact Social Economical INIA EnvironmentalWhom is the Impact for The Target Population Specific GeographyHow is Impact Delivered Delivery of quality goods/services Sourcing products/services from BoPImpact Core to the Business Is the Impact Component locked in the Business Model
WhatWhat is the space Not telecom / entertainmentWho are the market leaders INIA Their size The opportunityMarket potential from external sources Very, very brieflyWhat is your product / service Does it need seedingHow does it fit in the landscape
WhyWhy is your product / service necessary What pain is it removing for the customer Is it adding a service which will enhance a product / service Is the process different increasing productivity, reducing cost, etc. etc. INIAIs it doing something Different / DifferentlyIs it “need to have” / “nice to have”Is there an IPWhat will the customer exactly get / see
WhoIdentify exactly who the customer is Is it creating a new customer base Enhancing a customer base Is your target the real customer ? INIAWhat are the parameters of your customer? Geography Age Urban / rural Etc etc.
MarketMarket size A billion dollar market is not YOUR market size - what is your market potential “1% of USD 1500 bn market” - ??How has the market been validated by you? INIASpecific markets / geographies / segments which will beaddressed
CompetitionWho is your competition? Product / service Company Alternate processSize up your competition INIA SWOT of competition Lessons learnt from competition Trends in competitive companies “Never say None” Potential buyers could continue without your product / service
CompetitionExisting and future competition First mover advantage – rarely sufficient Needs more vision and could be IP driven INIA market entry strategy Innovative commercial modelYour vision for the venture
USPWhat are your differentials What is your USP of your proposition Any validation of your product/service Pain point in competition being addressed by you INIA Product life cycle Specific market / selling modality Cost differentialIs too common / too unique ?
Cross check idea / competition• Who are the audiences you are addressing with your idea?• What pain points you are addressing for these audiences?• What evidence do you have that these pain points are real?• What are the current solution approaches? INIA• What’s lacking in these approaches?• How is your solution approach better?• How big is this difference and what is it worth to customers?• What’s in it for other stakeholders besides end-customers?• Why hasn’t someone else thought of your idea yet?• Are you sure nobody has thought of your idea yet?• What is proprietary about your idea?
CustomerHow will you acquire customers Reflect market realities Customer behavior Partnerships – conflict situations Demo / reference sitesCurrent customers INIA How did you acquire them Sales cycle time Why did they come to you vs competition Why did they go to competition vs youQuantification average revenue / client or target Acquisition Cost / client No of customers to break even
CustomerPricing model Vs cost Vs competition PilotHybrid sales model INIARetention of customers Plan for retention of customers before acquiring them Average cost of generating business is 5 times from new customers vs existing customer !Customer / Order profile Are they one time / repeat orders Stickiness for customer Why did you lose customers After sales support strategy
Delivery modelHow will you deliver Build yourself Technology used Service provider partnerships INIA Branding After sales strategy Any relevant certifications Permissions reqd./ received
Team Who is the team behind this venture Background and experience Contribution till date Brief Job role Gaps in team INIA Time contribution Advisors Roles Non compete Team and Advisor Compensation Cash Equity ESOP Mentor Team expansion Attract Motivate Retain
Cross check on your team • Is the team leader strong and passionate? • Will leader and team attract “A” players? • Is the team appropriate for the stage of the company? • Has the team worked together before? INIA • What are the team’s values and what type of culture will they create? • Is there a strong technical leader? • Is there a strong marketing leader? • Does the team have deep domain or technical expertise? • Does the team listen and take criticism in a positive way? • Does team have a good blend of “thinkers” and “doers”? • If current plan doesn’t work out, will team adapt? • Will the founders give up control if that is what the venture demands? • Passion, Integrity, Resourcefulness, Perseverance, Risk taking ability, Mental horsepower
FinancialsCurrent / Projected for next 5 years Topline / bottom line Headcount ProjectedWhen will it break even INIA Profitable businesses are more attractiveSelf investment & funding received till date Skin in the gameInvestment sought For what Where will it take your venture Next round requirement Cash flow based workings No debt retirementValuation expectation
Risks and Mitigating themAre they risks to your plan “No” is not an optionWhat are the risks to your plan INIAHow will they be mitigated Examples of early set backs and their handling is a good idea
ExitInvestors will monetize their investment How When What INIABuilding an exit option is necessary for yourself, your team, andyour investors
Investor PerspectiveAlternative investment options Angel investing is an alternate asset class This space / sector is one of many Your plan’s niches is just one of the many niches INIA Your plan is in competition with anotherRemember idea may be sold but investment may not happen 3BHK in Delhi vs 3BHK in Bangalore
Investor Pitch Template (Source: The Art of Start (Guy Kawasaki)Slide Content CommentsTitle Organization Name; your name and The audience can read the slide – title; and contact information this is where you explain what your organization does. (We sell solar lamps. We run a rural BPO. We are a INIA school. Cut the chase!Problem Describe the pain that youre Avoid looking like a solution alleviating. The goal is to get searching for a problem. Minimize everyone nodding and “buying in”. or eliminate citations of consulting studies about the future size of your market.Solution Explain how you alleviate this pain This is not the place for an in-depth and the meaning that you make. technical explanation. Provide just Ensure that the audience clearly the gist of how you fix the pain – for understands what you sell and your example, “we provide solar lighting value proposition solutions for off grid low income people in North India .” 41
Investor Pitch Template (Source: The Art of Start (Guy Kawasaki)Slide Content CommentsBusiness Model Explain how you make money, who Generally, a unique, untested pays you, your channels of business model is a scary distribution, and your gross margins. proposition. If you truly have a revolutionary business model INIA explain it in terms of familiar ones.Underlying Magic Describe the technology, secret The less text and the more diagrams, sauce, or magic behind your product schematics, and flowcharts on the or service. slide, the better. White papers and objective proofs of concept are helpful here.Marketing & Sales Explain how you are going to reach Convince the audience that you your customers and your marketing have an effective go-to-marketing leverage points. strategy that wont break the bank. 42
Investor Pitch Template (Source: The Art of Start (Guy Kawasaki)Slide Content CommentCompetition Provide a complete view of the Never dismiss your competition. competitive landscape. Too much is Everyone – customers, investors, better than too little. employees – wants to hear why youre good, not why the competition is bad. INIAManagement Team Describe the key players of your Dont be a afraid to show up with management team, board of less than a perfect team. All start- directors, and board of advisors, as ups have holes in the team – whats well as your major investors. truly important is whether you understand there are holes and are willing to fix them. .Financial Projections & Key Metrics Provide a five-year forecast Do a bottom up forecast. Take into containing not only dollars but also account long sales cycles and key metrics, such as number of seasonality. Making people customers and conversion rate. understand the underlying assumptions of your forecast is as important as the numbers youve fabricated. 43
Investor Pitch Template (Source: The Art of Start (Guy Kawasaki) Slide Content Comment Current Status, Accomplishments Explain your current status of Share the details of your positive to Date, Timeline, and Use of your product or service, what the momentum and traction. Then Funds near future looks like, and how use this slide to close with a bias youll use the money you are toward action. trying to raise. INIA Type of Impact and Targeted at Highlight the type of Impact you Try and bring out broad numbers Who are creating and define the target in terms of target number of group. households, number of people employed etc. 44
Some Tips Be brief and direct; get to the bottom line quickly Identify what the business is immediately Define the customers quickly and the customer problem clearly Define what’s compelling and unique Describe how you will make money INIA Provide a phased snapshot of your company 12, 24 and 36 months out Describe how you propose to take your product to market Make bottom-up as well as top-down projections Know what 4 to 5 assumptions your plan pivots on Discuss the key risk factors State how much money you will need and how you will use it State your possible exit strategies Presentation should be self explanatory – there will be investors who may not be in the room Clarity in text / relevant graphs more important than pictures Blue sky points not relevant Investors are quite knowledgeable !
And FinallyPut some of your skin in the gameGetting a high valuation early can be fatalSize of the pie wins every time over share of the pie INIA
Investment ProcessVery selective process – One in hundred company completes the whole roundPreliminary Business Due ClosureEvaluation Diligence• Meet the entrepreneur • Detailed business due • Issue the Term Sheet• Discuss the business diligence, market • Accounting dueopportunity estimations & analysis, diligence references• Preliminary evaluation of • Legal due diligencethe business and specific • Meet the core team inindustry multiple meetings and • Definitive agreements understand the business• 1-2 weeks • 4-6 weeks • Entrepreneur presents to multiple partners • 4-6 weeks
Thank You Digbijoy Shukla INIA Email: firstname.lastname@example.org Twitter:@digbijoy Join the Global Network of Entrepreneurs, Investors, Experts for FREE@www.ennovent.com