“Before we talk about the technicalities of financing a
startup, we need to know what a startup is. A
Startup is a company which has a minimal history of
operation. In other words, any venture which has
been recently started by a person or a group can be
termed as a startup.”
For example, companies like Google and Naukri.Com were
Definition of 'Startup'
A company that is in the first stage of its operations.
These companies are often initially rolled by their
entrepreneurial founders as they attempt to capitalize on
developing a product or service for which they believe
there is a demand. Due to limited revenue or high costs,
most of these small scale operations are not sustainable in
the long term without additional funding from venture
Financing a Startup
One of the major challenges faced by an entrepreneur is
financing his venture.
Entrepreneur should be able to recognize where the
organization is in its life cycle.
Also, specify which financing option has to be used.
“And then, decide whether a certain option has to be
sustained during further stages, or another option has to be
considered, based on the requirements of the organization.”
FUNDING THROUGH “SEED CAPITAL”
The small amount of money required to prove that the concept of
the startup is viable and feasible, is known as seed capital. It is
generally not used to start the business on a wide scale, but to
investigate its different possibilities. Seed capital is more like a
securities offering, wherein the parties who have some connection
to the startup, invest the necessary funds to start the business.
This is done to ensure that enough funds are generated in order
for the startup to sustain itself for a period of development, until it
reaches a state where it is able to continue funding itself, or has
created enough in value so that it is worthy of future funding. The
people investing in such ventures are known as Angel Investors.
Seed capital options can also be generated from crowd funding.
FUNDING THROUGH “VENTURE CAPITALIST”
Once a startup manages to emerge out of the Valley of Death and break-even, there are
two stages of financing.
1. Early stage financing:
In addition to the seed capital, a certain amount of funds are required to get the
business organized and operational. This start-up capital is also termed as first-stage
financing. Also needed is the initial working capital, to support the first commercial
sale of the start-up’s products.
2. Expansion/ Later stage financing:
This is the second stage of financing, and it is concerned with expanding
the business beyond the breakeven point and positive cash flow levels.
This supports trade debtors, stocks, supplies, and expenses. At this point,
however, the venture might not have achieved a positive cash flow.
For both these purposes, Venture Capital is preferred.
FUNDING THROUGH “PRIVATE EQUITY”
Private Equity funding is one of the least cost funding available for high
growth prospect companies. PE Funding do not require any fixed
commitment of returns and are looking for medium term capital
appreciation of their investments. This funding option are mostly viable
for high growth prospect companies requiring financial resources for
“Private equity firms pool money from investors to buy companies they consider
undervalued. Investors include financial institutions, pension funds,
foundations, endowments and sovereign wealth funds. According to the
industry trade group Private Equity Growth Capital Council, in 2009 private
equity firms invested mainly in five industries: business services, consumer
products, health care, industrial services and information technology. You can
raise money from private equity funds by finding a fit between your business
AFTER RECOGNITION AND ESTABLISHMENT OF
Listing of sme’s on Bse sme exchange
• It is mandatory for the companies with post issue face value capital less than rupees
10Cr. have to do the listing on the BSE SME Exchange / Platform.
• The criteria for listing on the Main Board norm has been changed from a minimum
post issue paid up capital of Rs.3Cr. to Rs.10Cr.
• The SMEs with post issue paid capital between Rs.10Cr. and Rs.25Cr. has been given
the option to list either on SME Exchange or on the main board.
• The issues shall be 100% underwritten and merchant bankers shall underwrite 15%
in their own account. This implies that the SMEs willing to raise the equity capital will
be successfully listed on the BSE SME Exchange, even if there is shortfall in
All the existing members would be by default the members of the SME
The minimum application and trading lot size shall not be less than Rs.1,
00,000/The merchant bankers shall be responsible for market making for a
minimum period of 3 years.
The merchant bankers to the issue will undertake market making
through a stock broker who is registered as market maker with the SME
exchange and there can be up to 5 market makers for a scrip
All the market makers put together are required to provide two way
quotes for 75% of the time in a day. The same shall be monitored by the
Minimum regulation and compliance requirements