Funding for Startups

Securing funds by startups in recessionary times
Sourabh Maggo
Shubhanshu Gupta
Vijaykumar Ramalingam
Shubhrangshu Barman Roy
Professional Services Training & Consulting
A Live Training Project in ZENeSYS Certification Program
See the teamwork discussion on how the study evolved on
http://zenesys.ning.com/forum/topics/team-3-advice-to-startups?id=2514113%3ATopic%3A8033&page=1#comments

Executive Summary
Methodology Adapted
Assumptions Made
Strategies & Challenges
Recommendations
Summary
Contents

1. Executive Summary

It is said that “Recessionary times are best time to begin a new start-up”
However to Secure funding for a new start-up in lean times is a challenge.
In next few slides this study will guide you through the various challenges and strategies relating to funding a start up in lean times. The Summery of same is up next.
Executive Summary

Investors Offerings
Funding is available for growth sectors.
Investors are proactive and rationally invest in business venture.
Need well formulated business growth projections to facilitate investors with their exit strategy.
Expect future vision and courage to transform dreams in promoters.
Fair practice in controlling measures to minimize in interventions in managerial decisions.
Business Initiatives
Diligently chose a startup venture and business vertical.
Gather sufficient historical data and forecasting analysis to secure funding.
Business scalability is key to insure returns on investment for investment.
Wise selection of board of promoting team.
Offer fair and transparent financial and operational controls. Better attain some global quality standards.
Executive Summary

Investors Offerings
Innovative solutions having scope in creating demand in marketplace.
Investor aim to double total investment in 4 ~ 5 Years time.
Business Initiatives

To minimize risk factor business should consider market research.
Minimum growth business should have is 40 % per annum to break even in 4 ~ 5 years. It should target more to grow fast and expand business.

Executive Summary

2. Methodology Adapted

Methodology Adapted
Following is the approach used to bring about results:

3. Assumption Made

Assumption Made
This study has been subject to following assumptions:

4. Strategies and Challengesin Securing Funding

Strategies and Challenges in Securing Funding
Research Findings

1. Growth sector initiatives are likely to be unaffected by recession
Findings
Investors prefer to safeguard their funding in recession by investing in recession proof verticals. Resources are available for accurate forecasting, however investors does not invest in research. Their exit plans are mainly mergers, acquisitions and IPOs
Exit plan for investor:
In the growth sector, investor mainly look for revenue growth, that contribute as value to the investment.
It is evident that despite slowdown and availability of the number of exit options for investors, they invest in growth oriented verticals.
Leveraging Opportunities
Market Evidence
Choice of planned exit strategy enable investment.

Source: www.go4funding.com
Investors are proactive rather than protective

Lack of forecasting analysis keep the investors protective.
In growth sector the investors positively invest as this vertical will keep them returns despite slowdown.

Which investor is good

Since in recession the revenue growth can not be predicted thus based on business projection the investor return on investment is compared and suitable investor is selected.
Based on capital Investment requirements investment is chosen.

Investment in services sector constitute about 60% of total funding where Investor have been able to protect their returns.
In 2008, despite slowdown the angel investor has invested in below mentioned verticals:
High Investment means bigger investor
Market Evidence

*Source – (*01), (*02), (*03)
Recession Proof Robust sectors

As per market trends the choice of startup in recession proof industry will be complementary for funding in lean times
Such possible verticals are mentioned below:

Survey by MasterCard Worldwide in 2008 shows Online shopping in India has grown by about 15% YOY . The top three most online purchases include Airline tickets , Home appliances and CD’s/DVD’s..(*01)
Although Venture Capital Investments have fallen 250% in India in H1 2009 but the investments continued in IT /ITeS sectors (65% in Value Terms) and domestic demand driven sectors like financial services (microfinance), Healthcare & education..(*02)
About $1.8 billion VC investment had happened in Healthcare in India…(*03)
Market Evidence

Conclusions
Investors readily provide funds for growth oriented verticals. Service sectors have managed to secure funds in recessionary times as well.
Online services, Financial services, Healthcare & Education sectors are the preferred sectors
Business should take up consulting services to know market trends and forecasting, which can get them right investment with ease of availability.
* With extensive research the team has rated a suitable funding style on the scale of  ~  where  is highest and  is least.

2. Business scalability helps secure funding
*Source – (*04)
Most internet startups were “thought” to be scalable , but many web based business models did not take into account the enormous marketing costs associated with the scale up , as a result the companies burned cash they had raised, could not get further funding and went bankrupt …(*04)
Findings
Startups can scale up (Vertical) or scale out (Horizontal). Scalability of business is key to securing funds in lean time as there are costs associated with scaling up. To ensure future flow of funds business must meet its planned growth as well.
Exit option visibility
If a business is not scalable, investor will typically not invest as its difficult for him anticipate the costs associated, his ROI and hence his to plan his exit
The ultimate goal for a VC is conversion of their illiquid investment of private company stock into either cash (by a sale) or freely tradable stock (by an IPO or merger of the start up into a public company)
Market Evidence

2. Business scalability help secure funding
*Source – (*05) – “Business Week” August ,2009
2. Strong forecasting analysis
A strong forecasting analysis with a focus on cash flow, profitability & reduction of losses with respect to scalability will help investors visualize the life cycle of the start up.
A plan for vertical or/and horizontal scalability will enable the start up and the investor to estimate the burn rate of the funds and in turn will help secure funds accordingly.
When Google started Gmail, account opening was only through invitation so that they could use their current server capacity. With the limited funds they had they controlled their burn rate and did not invest in new servers, as it would mean high investment / cost. As Gmail picked up, securing funding became all the more easy…(*05)
Market Evidence

Conclusions
Proper estimation and future growth plan in place makes a business scalable.
Horizontal scalability is preferred than vertical scalability as cost pressures are low in the former.
Define proper exit strategy for investor.
2. Business scalability help secure funding

3. Credentials of Management
*Source – (*06)
An analysis of reasons suggest that over 60% of business failure is due to poor management practice .(*06)
Findings
Credentials of management is a relief for inventors to entrust their money. It reduces investor’s intervention, increase the reliability and boost growth confidence. It ensures that a skilled pilot takes off the business flight.
Good governance is the key
A clear demarcation between ownership & governance goes in favor of the start up in context of securing funds, resources and ability to execute.
Single owner / founder driven startup has a negligible chance of securing funds
Market Evidence

3. Credentials of Management
*Source – (*7), (*8), (*9), (*10),(*11),(*12)
Building confidence of the Investor
Having experienced people with relatively good CV’s on the team helps build the confidence of the Investor irrespective of the type of the investor.
Bootstrapping (Family/Friends/Founder) or Y-combinators are lesser of a challenge while securing funding as they do not focus as much on the management’s credential.
Recession Proof Robust sectors
It is team that makes a business work even in no market or downturn economy. The vision and road ahead is decided by the leaders rather
Getting a set of customers before raising money gives confidence to the investor..(*7)
Zebu Group, a marketing start up managed initial seed capital by boot strapping and asking the customer to pay in advance for the work..(*8) (*9)
Small business owners will need sophisticated management skills to be successful in an increasingly complex global marketplace. In addition, technology will play a bigger role in operating and managing small businesses.....(*11)
Research suggests that entrepreneurship graduates are three times more likely to be self-employed and three times more likely to be involved in forming new ventures than those with non-entrepreneurship business degrees...(*12).
IIM-A, 35 startup, 7 achieved scale, 3 got listed
Serial entrepreneur have high chances of getting funds: HBR case study
It is a myth that to succeed in business, you need a VC. Some of the biggest names such as Infosys, HCL, didn’t have it. …(*10)
Market Evidence

Conclusions
Start-Up has to build a robust team extremely passionate and willing to persevere the business idea.
Management credentials are much more important when VC’s are involved as deal sizes are quite big.
Management should be experienced to handle new challenges and take risk and should have more than 100% passion and have bias for execution
Honest and sharp to deal with investors.
3. Credential of Management is important

4. Check and control on operations and finance
Source: (*13), (*14), (*15)
The ability of individuals to manage the resources of their business, sometimes referred to as "character," is a prime consideration when determining whether or not a loan will be made.
Entrepreneurs gain the insight needed to seize opportunities, sustain growth, maintain tight control over their company's direction, and avoid setbacks.(*13)
The due diligence by venture capitalist involves analysis of financial statements….(*14)
Setting up a budget with estimated sales and expenses will permit you to validate and communicate your companies financial condition to your banker, investors, customers and vendors....(*15)
Findings
Check and controls are like speedometer of growth, getting funding require clearly laid down policy and procedure connected to operations and finance to provide fair picture of business standing and hence decision making.
Exit Plan for Investor
Based on Financial controls a investor formulate its exit plan for capital investment in an enterprise.
It is mainly as follows:
Good Financial Reports > IPO
Not Efficient Reports > M&A
Strong forecasting analysis
The cash flow are predicted based on future operations and finances in mind, any deviation causes problems to investors
Market Evidence

Source: Book “Attracting Capital” Pg.21 (*16), Pg.5 (*17)
Which Investor to choose
Investor seeks Low involvement=Low Risk=Low investment on the contrary High Risk = High Involvement = High investment. As per need of capital the investor has to be chosen and accordingly have the transparent control on finance and operations.
To protect their investment some sources like Venture Capitalist (VCs), engage in active monitoring to protect their investment. Others like factoring companies and lenders, rely heavily on collateral. …(*16)
Institutional Investors have low involvement for their inability to monitor. if institutional investors are effective monitors, then the presence of institutional investors should reduce the frequency of M&A … (*17)
Market Evidence

Conclusions
Checks and controls determine direction of business, hence it is integral part to choose an investor and redeem an investor.
Business should monitor the usage of funds in the right direction with the appropriate maintenance of funds flow and debt equity for improving funding.
Operational efficiency reduces the cost and increase credit rating.

5. Social & Environment friendliness gets better funding
*Web-link: 18, 19, 20
Clean technology venture investments in North America, Europe, China and India totaling a record $8.4 billion, up 38% from $6.1 billion in 2007. …*18
Indian companies raised $277 million in 14 disclosed rounds, down 20% from 2007. India accounted for 3% of the global total. …*18
Increasing awareness to fund the business with social responsibility. …*19
In the largest deals of the past year, venture capital firms poured money into companies tackling the global problems of climate change and disease. (*20)
Findings
Lack of awareness about environment and clean-tech in India push the funding away. On the contrary, developed countries has positive effect on funding a venture with Nobel thinking.
Which investor to choose
“Going Green” Is the key now.
Venture capitalist increasingly invest in bio fuel, alternative energy, zero emission ventures.
Some Government also support clean-tech ventures.
Market Evidence

Conclusions
The business idea having future growth and global market has positive impact.
Govt. support is limited to subsidising the end product and reduced taxation. That helps increase demand analysis, hence attract investors.
5. Social & Environment friendliness gets better funding

6. Providing Innovative Solution
Source: Attracting Investors Pg.28 (*21), (*22)
A study shows Business Angels fund 30 to 40 times more ventures each year than Venture capitalists. ..(*21)
Findings
Requires great deal of acumen to involve in such projects. Quantitative analysis to forecast sales. Initial research is integral to venturing into new development products.
Lack of Forecasting Analysis
A successful business idea can create the market and new trends.
New product usually lack historical data and analysis
Which Investor to choose
Based on business plan and kind of innovation some investors provide the good source for startup to grow
Market Evidence

Conclusions
Positive market trends and innovation itself is good to convince investors.
Market research is must haves, which impact high seeding cost but lower risk.
Recession and lack of demand market may delay the startup.
6. Providing Innovative Solution

5. Recommendations

Recommendations
a. Start small & bootstrap your startup

Raise initial seed capital from Family and Friends and own resources.
Give them a share in your startup rather than a salary.
Y- Combinators
Institution funded Innovation Incubation centers
Close relatives
Credit cards / Loans

Recommendations
b. Selecting recession proof robust sectors.

Identify innovative as well as high growth areas.
Areas related to essential services and societal needs are a few options
Have an clear exit option for the investor.
IT/ITeS (essential services / Online retail etc)
Healthcare
Cleantech
Education
Innovative products / services

Recommendations
c. Having skilled & experienced Management Team

Securing funds is easier for a team of people than an individual.
The partners/ directors having good CV’s help build confidence of the

investor.

The clear demarcation of ownership & governance is essential.
The passion for success is the key.
Experienced / Retired people
Approaching an Business Angel, so that he also becomes a part of the team
Seniors from your ex-employer
Honorary people from institutions (IIT/IIM/IIPM etc)

Recommendations
d. Robust process to monitor cash flow

Proper checks & controls on cash flow will enable better forecasting analysis.
Investors prefers a control on cash especially in recessionary times.
Helps build investor confidence
Robust but transparent process
A business plan showing cash burn rate for next 5 years will be useful

Recommendations
e. Business should be scalable

A scalable business helps investor to forecast his cash-flow, ROI & exit plan
It’s an indicator of the aggressiveness and growth orientation of the

entrepreneur .

Clean tech
Healthcare
Education

All of the above have high scalability, as they are related to growth of the society

Recommendations
f. Identify the Investor

Family & friends
Y- combinators / Institutions
Business Angels

Recommendations
Research Evaluation
With respect to our analysis for each finding the preferred funding rating assigned previously are linked here to reach a common solution.
*highest total is best type in lean time

6. Summary

To fund a startup venture in recession take notice the following points:
Consider market research and prepare a business analysis and projection report.
Estimate cost and expansion plans for few years.
Plan to pay back investors and formulate exit strategy.
Decide about Management leadership.
Adapt proven and functional, financial and operational controls.
Care about environment, Give back to nature by “Going Green” that is buzz for getting favorable credit to the company.
Innovative product requires greater awareness to create market. Hence research well and promote exhaustively to garner greater returns.
For any idea to be successful funding is not the constraint, It is all about promoting it well to grow and prosper. Funders always look for something that works.
Summary

In strategy and challenges
http://www.financialexpress.com/news/online-shopping-is-recessionproof-in-india/463054/
http://abodesindia.wordpress.com/2009/07/20/venture-capital-investments-down-250-in-first-half/feed
http://www.siliconindia.com/shownews/18_Billion_VC_investment_flows_to_Indias_healthcare_-nid-58430.html
http://books.google.co.in/books?id=XvemScn2vkYC&pg=PA105&lpg=PA105&dq=scalability+&+VC+investment&source=bl&ots=3rHZ7LVu1z&sig=i4t6a8Su5ZPrVODlr1b7HAZtC9Q&hl=en&ei=rrqYSqCvOpfO6QOun5TQBA&sa=X&oi=book_result&ct=result&resnum=4
http://books.google.co.in/books?id=XvemScn2vkYC&pg=PA105&lpg=PA105&dq=scalability+&+VC+investment&source=bl&ots=3rHZ7LVu1z&sig=i4t6a8Su5ZPrVODlr1b7HAZtC9Q&hl=en&ei=rrqYSqCvOpfO6QOun5TQBA&sa=X&oi=book_result&ct=result&resnum=4
http://work911.com/planningmaster/planningarticles/busfailure8traps.htm
http://economictimes.indiatimes.com/News/News-By-Company/Corporate-Trends/Team-not-VC-gives-wings-to-a-startup/articleshow/4452547.cms
http://www.thehindubusinessline.com/manager/2009/02/02/stories/2009020250291000.htm
http://designofbusiness.blogspot.com/
http://economictimes.indiatimes.com/News/News-By-Company/Corporate-Trends/Team-not-VC-gives-wings-to-a-startup/articleshow/4452547.cms
http://www.mba.co.za/article.aspx?rootid=6&subdirectoryid=1333
http://www.mba.co.za/article.aspx?rootid=6&subdirectoryid=1333
http://www.easimedia.com/hints,_tips_and_reports/finance/financial_management_:_your_business/
http://www.allbusiness.com/banking-finance/financial-markets-investing/11742312-1.html
http://www.examiner.com/x-13111-Allentown-Startup-Business-Examiner~y2009m7d8-Coordinate-services-legal-finance-and-human-resources-for-startup-operational-efficiency
http://books.google.com/books?id=J_gFlK5kSeEC&pg=PA18&lpg=PA18&dq=control+of+finance+for+investors&source=bl&ots=4efd154hNf&sig=ZgvT58C2JMKWl6sbnJvzGe6PaEs&hl=en&ei=FLWaSqn0BpOWkQW7wryrAg&sa=X&oi=book_result&ct=result&resnum=9
http://icf.som.yale.edu/pdf/seminar03-04/publicv3.pdf
http://cleantech.com/about/pressreleases/010609.cfm
http://www.onphilanthropy.com/site/News2?page=NewsArticle&id=5560
http://corporate.recyclebank.com/press/coverage/76-venture-capitals-favorite-startups-
http://books.google.com/books?id=J_gFlK5kSeEC&pg=PA18&lpg=PA18&dq=control+of+finance+for+investors&source=bl&ots=4efd154hNf&sig=ZgvT58C2JMKWl6sbnJvzGe6PaEs&hl=en&ei=FLWaSqn0BpOWkQW7wryrAg&sa=X&oi=book_result&ct=result&resnum=9
Appendix
Following is the list of links utilized in this study

In Recession proof sectors:
http://www.tworkshb.com/the-business-sectors-that-are-recession-proof/
http://www.businessreviewonline.com/os/archives/2009/01/what_are_the_10.html
http://www.businesswings.co.uk/articles/Recession-proof-industries
http://en.wikipedia.org/wiki/Open_source_software
http://en.wikipedia.org/wiki/Cloud_computing
http://blogs.watoday.com.au/executive-style/managementline/2009/07/27/healthcareand.html
http://en.wikipedia.org/wiki/Biotechnology
https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/09Q2MTPressRelease_FINAL.pdf
http://green.venturebeat.com/2009/07/29/cleantech-investing-surges-73-percent-in-q2-after-gloomy-q1/?obref=obinsite
http://www.google.com/hostednews/ap/article/ALeqM5jJa51lA26pRO8TOnd2F5GKh7rdtgD99O6L6G1
http://edurev.com/blog/2008/01/14/the-best-place-to-invest-your-money-isonline-learning/
http://www.masshightech.com/stories/2009/08/10/weekly9-Life-sciences-startups-launching-despite-recession.html
http://www.onflex.org/ted/2006/10/venture-capital-101.php
http://www.smallbusinessnotes.com/financing/venturecapitaldecisions.html
http://www.inc.com/magazine/19990301/741.html
http://www.indiavca.org/ven_business_plans.aspx
http://www.1000ventures.com/presentations/iquity_exit.html
Ownership & Governance
http://www.pluggd.in/entrepreneurship/should-indian-startups-really-delineate-ownership-and-management-938/
http://work911.com/planningmaster/planningarticles/busfailure8traps.htm
Appendix
Following is the list of links utilized in this study

Final Presentation on
Securing Funding in lean times for a start up venture.
For Zenesys Consulting
Batch July 2009
From Team-3-Mates