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ISBA 2012 SIXTH ISBA CONFERENCE 17-19 March 2012, Pune Funding Options for Building Successful Start-ups 18 th March 2012 Department of Scientific & Industrial.

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Presentation on theme: "ISBA 2012 SIXTH ISBA CONFERENCE 17-19 March 2012, Pune Funding Options for Building Successful Start-ups 18 th March 2012 Department of Scientific & Industrial."— Presentation transcript:

1 ISBA 2012 SIXTH ISBA CONFERENCE March 2012, Pune Funding Options for Building Successful Start-ups 18 th March 2012 Department of Scientific & Industrial Research, Ministry of Science & Technology

2 To be a start-up - a company has to search for a repeatable and scalable business model; it has to have one product / service selling to many people, rather than doing custom work for individual clients (as in consulting business); it must build a prototype that gives one an idea of what their product / service will do. Start-up must have a skeleton business plan, addressing the five fundamental questions: what they're going to do? why users need it? how large the market is? how they'll make money and who the competitors are? why this company is going to excel despite competitors? Features of a Start-up Company

3 Stages in New Venture Creation or Building a Start-up Company Problem identification & Technology Idea; Idea validation stage, where the do-ability or proof of concept of the technology is studied; Prototyping and demonstrating the technology at a lab scale; Scaling up and Pilot Production; Commercial production and marketing;

4 Funding Options UpsideDownside 1. Boot Strapping Self-financed Freedom for Business decisions Suitable for second or third time entrepreneurs 2. Debt Financing Dont have to give up equityMust pay interest May require personal collateral such as home 3. Equity Financing from Friends and Family Convenient and available quickly Fewest contractual strings attached Limited one-time source of funding risk of ruining personal relationships by mixing together business and personal life Friends & Family will probably not be as well connected as angels or venture firms Friends & Family may not be accredited investors, which could complicate life later. The average amount invested by friends and family is between $20,000 and $25,000 in US and 58% of the fastest-growing companies in the U.S. started with $20,000 or less. $100 billion funds are raised thru friends and family annually to fund 3 million start ups in US compared to only $25 billion raised through venture capitalists.

5 Funding Options UpsideDownside 4. Angel Investors – they are High Net Worth (HNW) individuals More than money, they provide networking opportunities Relatively patient about their investments Angels are not bound by all the rules that VC firms are. Not easy to find Angel Investor Because they operate as angel networks, hard to manage the divergent interests of group of angels Angels only consider companies that have an exit strategymeaning companies that could get bought or go public. Despite 100+ Angel networks in India (eg. Indian Angel Network & Mumbai Angels), each year sees only tens of deals. Although, these angels have their own HNI/VHNI to tap into, yet few startups get funded. In US, angel funding is more than all VC funding, may be because of tax benefits, mature ecosystems, risk-seeking, etc.

6 Funding Options UpsideDownside 5. Venture Capitalists - VC firms are organized as funds, much like hedge funds or mutual funds. Professionally managed VCs bring not just money but also experience and advisory role Suitable for fast growth companies going to launch IPO Typically have larger funds to invest but take lesser risks Founder must be interested in selling the business or going public within three to five years Founder must be prepared to share control VCs hand over a term-sheet; A term sheet is a summary of what the deal terms will be when and if they do a deal; Founders are usually required to accept "vesting i.e. to surrender their stock and earn it back over the next 4-5 years. VCs don't want to invest millions in a company the founders could just walk away from. One of the most difficult problems for startup founders is deciding when to approach VCs. You get only one chance, because VCs rely heavily on first impressions. (a)they ask who else you've talked to and when and (b)they talk among themselves. (c)If you're talking to one VC and he finds out that you were rejected by another several months ago, he also might turn away. There are about 200 VC firms operating in India. However, in a boom year, there are only a few hundred deals.

7 Funding Options UpsideDownside 6. Seed Funding Firms - Seed firms differ from Angels and VCs in that they invest exclusively in the earliest phasesoften when the company is still just an idea. Seed Firms are often called Incubators 7. Strategic Investors Enhances your credibility in the industry Money can come with access to benefits like manufacturing, distribution, and marketing Strategic Investor can force you to recalibrate your entire business to serve them Dependency can be risky Strategic Investor can prohibit you from selling to their competitors 8. Bankers - 'A banker is a fellow who lends you an umbrella when the sun is shining, and takes it away from you when it rains' 9. Crowd Funding - the process of aggregating small amounts of money from a large number of people in order to accomplish an objective Collaterals and credit score check is not required Websites are easily setup by agencies for raising funds for a cause, to which audience is directed Agencies behind the website take a certain percentage of money as their service fees Fund raising is time consuming

8 Funding Options UpsideDownside 10. Royalty Financing - in which a company pays back a loan using a percentage of revenue. Traditionally found in industries such as mining, film production and drug development, royalty financing is being seen more among technology companies and other early-stage firms with growth potential 11. Government Funding / Grants - can be used to augment entrepreneurs own funds to run a successful business venture Free moneyHighly competitive How you use the funds is strictly defined Applying for funding often arduous Restrictions on use of grant found burdensome by beneficiaries

9 Government Funding The government offers funding primarily for technology startups, from early-stage development to full-scale commercialization Government funding can be categorized into: Technology Development Funds: TePP, SBIRI, SINE (IIT-B), CIIE (IIM-A), SIDBI Innovation & Incubation Centre (IIT-K), NSTEDB - TBIs Funds for patent protection NRDC, M/o MSME thru NMCC, DIT (Intl Patent Protection in Electronics) Funds for Technology In-licensing: Incubator related seed funds Technology scale-up/validation/de-risking funds: NMITLI, TDDP Market entry funds: Network of Angel Investors, NIF-Micro-venture Innovation Fund, TIFAC-SIDBI (SRIJAN) Expansion funds: IVCA, SIDBI

10 Thank you

11 SIDBI SIDBI promotes 'riskier' lending to MSMEs, such as: Provision of credit guarantees up to Rs 1 crore - Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This is like insurance for lenders. Creation of a credit rating agency for MSME - SME Rating Agency of India (SMERA). Creation of an asset reconstruction company for MSMEs - India SME Asset Reconstruction Company (ISARC). Creation of a VC firm that provides early-stage & second round financing for MSMEs with a track record of proven technology or business model and opportunities for growth and earnings - SIDBI Ventures. Moreover, SIDBI has contributed to the corpus of over 33 VC funds across India. World Bank sponsored scheme - SME Financing and Development Project [SMEFDP]- to provide 'riskier' loans, averaging ~ Rs 55 lakh. SIDBI Risk Capital Fund - a Rs 2000 crore fund that provides long term-risk capital to MSMEs, using structured, convertible and collateral-free debt

12 Advice normally given to Start-ups Entrepreneur must do his homework and ask for the right amount from the right source at the right time, If you're starting a startup you would do well to remember that – Birds fly; fish swim; deals fall through! Be prepared to accept failures! Fear of failure normally prevents people from starting things, but once they publish some definite ambition, it switches directions and starts working in their favor.

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