Funding for startups July 2014 By Prof. Sabarinathan G


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Funding For Startups

It is rarely possible for start-ups to raise sufficient capital to kick-start their operations, launch products and break even. Although a ‘one-time investment’ strategy is theoretically possible, it is hard to cite examples of any successful start-up that has gone this route.

Equity financing is one of the best ways to raise funds for a Start-up.

Equity financing is money lent in exchange for ownership in a company. New businesses can use equity financing to finance operations for their start-ups, or when they need to offset existing debt. Equity funding allows the entrepreneur to obtain funds without incurring debt, improving cash flow. This will allow business owners to focus their attention on making their product(s) profitable rather than paying back their debtors.

The amount of equity an investor (angel/VC) holds is a factor of the company's stage of development when the investment occurs, the perceived risk, the amount invested, and the relationship between the entrepreneur and the investor.

How do investors categorize start-ups? What are different stages of equity funding? What are key points of a Term Sheet? What are Angels and VCs and how are they different from each other?

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Funding for startups July 2014 By Prof. Sabarinathan G

  1. 1. Dr. G. Sabarinathan Funding for Startups Presentation at Forstartups August 2, 2014
  2. 2. Agenda 1. Disclaimers 2. Funding alternatives 3. Funding Hierarchy 4. How much funding do companies need to plan for? 5. Interiorisers – An Illustration 6. Attributes of funding sources 7. Planning for mobilising funds 8. Approaching funding choices 9. Equity as a funding instrument 10. Trouble with aphorisms 11. Closing thoughts Funding 4 Startups - Dr. G. Sabarinathan
  3. 3. Disclaimers • No canned solutions • Pointers to think • Questions to ask 3Funding 4 Startups - Dr. G. Sabarinathan
  4. 4. Funding Alternatives • Often equated with equity – somewhat inaccurately? • Many other forms that are not uncommon – Formal debt – Informal debt – credit cards, overdrafts – “Spontaneous” liabilities – Grants: Governments, developmental agencies • General purpose as well as specific – Funding in kind – development platforms, kits – Services fees / contracts – Contract development work + licensing fees as in pharma industry – Promotional offers from infrastructure providers – Monetising “unproductive” assets Funding 4 Startups - Dr. G. Sabarinathan 4
  5. 5. Funding hierarchy • Own Funds • OPM – “Free” Money – eg., grants – Tied resources – development kits – Spontaneous Liabilities – Debt – Preferred Shares – Equity • Elements of Cost – Financial Cost – Control over enterprise – Disclosure • Tradeoff: Cost vs Added Value 5Funding 4 Startups - Dr. G. Sabarinathan IncreasingCost
  6. 6. How much funding? • Too little funding – Starves business of “energy” – Delays establishing / consolidating market beachhead – Affects early stage hiring • Too much funding – Distracts from focus: Penury  Parsimony (often, at least) – Reduces sense of urgency on revenue generation – and hence customer validation of product / service – Dilutes equity and so kills financial incentive for founders • Extent and type of funding a function of – Nature of business – Founders’ priorities – Availability – Beware of “Vedic” pronouncements! 6Funding 4 Startups - Dr. G. Sabarinathan
  7. 7. Attributes of Funding Sources • Not all funding sources are the same • Attributes to look for – Flexibility – Appropriateness for industry – Reliability of release of funds – Effort required to secure funding / ease of mobilisation – Post funding obligations – Respectability and certification value – Other AddedValue – Motives : • Financial return vs Others • Quick vs patient return • Attributes depend on source to a large extent 7 Funding 4 Startups - Dr. G. Sabarinathan
  8. 8. Planning for funding • It is only as good as your business forecast • Focus on refining your business outlook as meticulously as you can. – Meticulousness ≠Risk aversion – SystematicThought ≠ Rigidity • Develop a range of possibilities from “Must Have” to “Absolute Luxury” • Fill up the need using a funding hierarchy • Revisit funding planning at least once a month – Early stage fund raising can occupy several hours every month • Specialist intermediaries can be helpful in raising professional money – Identifying investors – Providing “market intelligence” – Modulating the investment pitch – Fronting for the promoter in interaction, follow-up, negotiations 8Funding 4 Startups - Dr. G. Sabarinathan
  9. 9. Approaching funding decisions • Systematic thinking ≠ Rigid Thinking • Think deeply about what the enterprise will do in terms of – Product /service features – Target markets / customers – Development effort – Marketing effort – Infrastructure required – human and physical • Alternative approaches to all of the above • Learn from role models • Translate these into alternate funding plans • You can plan for / control expenses, NOT revenue 9Funding 4 Startups - Dr. G. Sabarinathan
  10. 10. Equity as a Funding Instrument • Sources – Founders, Friends and Family – Incubators,Accelerators – Angels – Networks,“LoneWolves” – Seed stage institutional investors – Early stageVC investors – Emerging / Late stageVC investors – Depends lot on location – you are lucky to be in Bangalore! • Considerations – How much to raise? How often to raise – it is effort intensive – Terms of funding – equity comes with strong investor rights – Dilution – Availability and timing 10Funding 4 Startups - Dr. G. Sabarinathan
  11. 11. The trouble with aphorisms • Pair # 1 – Money is the least of all worries – there is plenty of it – Grab as much capital as you can when you get it • Pair # 2 – Don’t worry so much about valuation – Conserve your equity – it is the most valuable thing you have • Pair # 3 – Finance follows strategy – Get your strategy right first – Funding determines strategy – cut the coat according to the cloth • My aphorisms for you: – There is no universal truth – Every step of an entrepreneurial journey is highly unique – Others’ experiences can at best inform you, CANNOT decide for you Funding 4 Startups - Dr. G. Sabarinathan
  12. 12. Closing Thoughts… • Funding decisions often have irreversible consequences • Awareness of startup funding is very low in India – Funding choices can significantly affect sleep levels  • Capital is scarce in India – we are still a poor and highly regulated economy! • Talk, talk, talk – it can help you avoid costly mistakes – Conversation ≠ Dropping guard • Beauty – and therefore choice – can sometimes be a curse • “Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” Hamlet Act 1, scene 3 – May the Lord bless you all that you may sleep well… 12Funding 4 Startups - Dr. G. Sabarinathan
  13. 13. THANKYOU Funding 4 Startups - Dr. G. Sabarinathan