Startup Funding

Professional Services Training & Consulting

A Report
Version 0.0

Sourabh Maggo
Shubhanshu Gupta
Vijaykumar Ramalingam
Shubhrangshu Barman Roy

1. Executive Summary
2. Methodology Adapted Opportunities

3. Assumptions Made
4. Strategies & Challenges
5. Recommendations
Threats
6. Summary

2 Copyright © Zenesys & Kuber Professional Services Training & Consulting

▶ It is said that “Recessionary times are best time to begin a new start-up”

• Why • What
•Less competition in market •Growth Sector initiatives
•Manpower availability •Social responsibility impact
•New Blood boost Growth •Clean-tech production
•Innovation development
Man Machine

Material Money

• How • Action
•Gather Trends •Business plans
•Calculate Cost •Meet investors
•Analyse investment •Viability Reports
•Generate Funds •Secure Funding

▶ 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.


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


Investors Offerings Business Initiatives
▶ Innovative solutions having scope ▶ To minimize risk factor business
in creating demand in should consider market research.
marketplace.
▶ Minimum growth business should
▶ Investor aim to double total have is 40 % per annum to break
investment in 4 ~ 5 Years time. even in 4 ~ 5 years. It should
target more to grow fast and
expand business.


▶ Following is the approach used to bring about results:

•Gathering Information for key drivers behind Investors mindset
1.

•Assuming various options and possibilities that are part of key drivers
2.

•Conducting the web based secondary research to identify the facts and
3. correlating with our hypothesis

•Utilising the filtered result to focus on challenges and opportunities for getting
4. funds in lean market

•Making reports of our analysis to recommend the best available funding in
5. downturn economy


▶ This study has been subject to following assumptions:

1. •The research was conducted based on global downturn economy.

2. •We looked at funding for startups projects only and not for
expansion projects

3. •This study is meant for big projects wanting high investment

4. •All the data is collected through secondary research only

5. •Recommendations is based on funding of startup in India


▶ Research Findings

1. Growth sector initiatives are likely to be unaffected by recession

2. Business scalability help secure funding

3. Credential of Management is important

4. Checks & Controls on Finance and Operations

5. Social & Environment friendliness gets better funding

6. Providing Innovative Solutions


▶ 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
Leveraging Opportunities Market Evidence

1. Exit plan for investor: ◉ Choice of planned exit strategy enable
investment.
⊲ In the growth sector, investor
mainly look for revenue growth, For Venture Capitalists For Angel Investors
that contribute as value to the
a) IPO a) Trade Sale or acquisition
investment.
b) Acquisition b) Sale of shares to other shareholders
⊲ It is evident that despite slowdown c) Secondary Sale c) Sale to third parties
and availability of the number of d) Liquidation d) Going public (IPO)
exit options for investors, they
e) Company Buy Back e) Liquidation of assets
invest in growth oriented verticals.



2. Investors are proactive ◉ Investment in services sector constitute about 60% of
rather than protective total funding where Investor have been able to protect
their returns.
⊲ Lack of forecasting analysis keep the ◉ In 2008, despite slowdown the angel investor has
investors protective. invested in below mentioned verticals:
⊲ In growth sector the investors positively

Industrial &
Equipment
Healthcare
invest as this vertical will keep them returns

& Medical

Software

Biotech
despite slowdown.

Energy

Media
Retail
Verticals
3. Which investor is good Angel
16% 13% 12% 11% 8% 7%
Investment:
⊲ Since in recession the revenue growth can
not be predicted thus based on business ◉ High Investment means bigger investor
projection the investor return on
investment is compared and suitable
investor is selected.
⊲ Based on capital Investment requirements
investment is chosen.

Source: www.go4funding.com


4. Recession Proof Robust ◉ Survey by MasterCard Worldwide in 2008 shows Online
shopping in India has grown by about 15% YOY . The top three
sectors most online purchases include Airline tickets , Home
appliances and CD’s/DVD’s..(*01)
⊲ As per market trends the choice of startup ◉ Although Venture Capital Investments have fallen 250% in
in recession proof industry will be India in H1 2009 but the investments continued in IT /ITeS
complementary for funding in lean times sectors (65% in Value Terms) and domestic demand driven
sectors like financial services (microfinance), Healthcare &
⊲ Such possible verticals are mentioned education..(*02)
below: ◉ About $1.8 billion VC investment had happened in Healthcare
in India…(*03)

Essential Goods & Affordable Luxury
IT Life Sciences Clean Tech Education
Services Goods /Services

• Fast food Joints •Budget Services •Virtualization • Bio Technology • Energy Efficient • Online education
• Second Hand Car • Luxury goods at • Open Source Software • Medical Devices products & services • Educational Solution
sales affordable and smaller • Green IT • • Alternate Fuels providers.
• Takeaway Joints sizes e.g. packaged • Online collaboration • Transportation
• Home Maintenance water in smaller sizes, tools • Waste Management
Rent a bag etc
• Food Manufacturers •Online Retail
• Domestic Tourism
• Funeral Parlors • Mobile Computing
• Garden Supplies &
• Legal Services • SaaS
Seedlings
• Healthcare Services

*Source – (*01), (*02), (*03)



▶ 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.

Preferred Funding *Ratings

1. Venture capitalist …
2. Angel investor …
3. Conventional capital …

* 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
▶ 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.


1. Exit option visibility
⊲ If a business is not scalable, investor will ◉ Most internet startups were “thought” to be
typically not invest as its difficult for him scalable , but many web based business models
anticipate the costs associated, his ROI did not take into account the enormous marketing
and hence his to plan his exit costs associated with the scale up , as a result the
companies burned cash they had raised, could
⊲ The ultimate goal for a VC is conversion
not get further funding and went bankrupt …(*04)
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)

*Source – (*04)


2. Strong forecasting ◉ When Google started Gmail, account opening was
analysis only through invitation so that they could use
⊲ A strong forecasting analysis with a their current server capacity. With the limited
focus on cash flow, profitability & funds they had they controlled their burn rate
reduction of losses with respect to and did not invest in new servers, as it would
scalability will help investors mean high investment / cost. As Gmail picked
visualize the life cycle of the start up, securing funding became all the more
up. easy…(*05)

⊲ 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.

*Source – (*05) – “Business Week” August ,2009

▶ 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.


1. Institutional Investor …
2. Venture Capitalist …
3. Conventional Capital Sources …



3. Credentials of Management
▶ 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.


1. 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

◉ An analysis of reasons suggest that over 60% of business
failure is due to poor management practice .(*06)

*Source – (*06)

3. Credentials of Management

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

*Source – (*7), (*8), (*9), (*10),(*11),(*12)

3. Credential of Management is important
▶ 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.


1. Venture Capitalist …
2. Angel Investor …
3. Institutional Investor …



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

Source: (*13), (*14), (*15)


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

Source: Book “Attracting Capital” Pg.21 (*16), Pg.5 (*17)

▶ 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.


1. Angel Investor …
3. Institutional Investors …



▶ 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.


1. Which investor to choose
⊲ “Going Green” Is the key now. ◉ Clean technology venture investments in North America,
⊲ Venture capitalist increasingly invest in Europe, China and India totaling a record $8.4 billion, up
bio fuel, alternative energy, zero emission 38% from $6.1 billion in 2007. …*18
ventures. ◉ Indian companies raised $277 million in 14 disclosed
⊲ Some Government also support clean- rounds, down 20% from 2007. India accounted for 3% of
tech ventures. 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)

*Web-link: 18, 19, 20

▶ 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.


1. Venture Capitalist …
2. Grants …



6. Providing Innovative Solution
▶ 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.


1. Lack of Forecasting
Analysis
⊲ A successful business idea can create the
market and new trends.
⊲ New product usually lack historical data
and analysis

2. Which Investor to choose ◉ A study shows Business Angels fund 30 to 40
⊲ Based on business plan and kind of
innovation some investors provide the times more ventures each year than Venture
good source for startup to grow capitalists. ..(*21)

Source: Attracting Investors Pg.28 (*21), (*22)

6. Providing Innovative Solution
▶ 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.


1. Angel Investors …



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.

Our Recommendations:

 Y- Combinators
 Institution funded Innovation Incubation centers
 Close relatives
 Credit cards / Loans


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


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)


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


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


f. Identify the Investor


 Family & friends
 Y- combinators / Institutions
 Business Angels


▶ Research Evaluation
⊲ With respect to our analysis for each finding the preferred funding rating assigned previously
are linked here to reach a common solution.

Conventional

Institutional
Capitalist

Investor

Investor
Venture

Capital

Grants
Angel
Nos.

Research Contents

1. Growth sector initiatives are likely to be unaffected by recession 5 4 3 - -
2. Business scalability help secure funding 4 4 3 5 -
3. Credential of Management is important 5 4 - 3 -
4. Checks & Controls on Finance and Operations 4 5 - 3 -
5. Social & Environment friendliness gets better funding 5 - 3 - 4
6. Providing Innovative Solutions 4 5 3 - -
*Total 27 22 12 11 4
Though it is very business specific to choose from any particular funding style, still as a result of
this study it can be ascertained that best type of available funding can be ranked as Venture
Capitalist at the first slot and Angel Investors, Conventional Capital sources at next subsequent
slots.

*highest total is best type in lean time

▶ 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.


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


▶ Following are 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


Final Presentation on
Securing Funding in lean
times for a start up venture.

For Zenesys Consulting
Batch July 2009

From Team-3-Mates
 Shubhrangshu Barman Roy
 Vijaykumar Ramalingam
 Shubhanshu Gupta
 Sourabh Maggo


Startup Funding

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