Startup Finance
Startup Finance
Startup Finance
Chapter 14
Answer: Every start up needs access to capital for funding product development, acquiring
Capital assets or raw material, or paying salaries to its employee etc. The
innovative sources of funding focus on maximizing non-bank financing.
Some of the sources for funding a start up are:
a) Personal Financing
An entrepreneur shall put some money from his personal fund in the start up.
This helps the start up to get the trust of the investors in later stage of the
business when the business reaches the breakeven.
b) Personal Credit Lines
Another source is to use the personal credit efforts available from banks.
However, banks provide this facility only when the business has enough cash
flow to repay the line of credit.
c) Family and Friends
The family and friends are among the people who finance the start up in the
very initial phase. However, the loan obligations to friends and relatives
should always be in writing as a promissory note or otherwise.
d) Peer to Peer lending
Here, small and ethnic business groups having faith or similar interest
come together and lend money to each other to support each other in
their start up.
e) Crowd funding
Crowd funding is the use of small amounts of capital from a large number of
individuals to finance a new business initiative. This can be done through
social media or websites available as it requires accessibility to vast network
of people.
f) Microloans
Microloans are small loans that are given or issued by single individual or
group of individuals at a lower interest to a new business ventures.
g) Vendor financing
Vendor financing is the form of financing in which a vendor lends money to
the business such that it can buy products from the vendor itself.
It is provided only when manufacturers and distributors are convinced to
defer payment until the finished goods are sold by the business.
Here, the vendor takes shares in the start up.
h) Purchase order financing
Purchase order financing companies often advance the required funds
[Reading Only]
Purchase Order Financing
Answer: Meaning
Pitch deck presentation is a short and brief presentation (not more than 20 minutes
and basically using PowerPoint) to investors explaining about the
Prospects of the company i.e. quick overview of business plan; and
Why they should invest into the start up business i.e. convincing the investors
to put some money in business.
Angel Investor (also known as a private investor, seed investor, business angels, informal
investors or angel funder)
Meaning
An angel investor is a high net worth individual who provides financial backing
for small start-ups or entrepreneurs, typically in exchange for ownership
equity in the company.
Who are they?
Often, angel investors are found among an entrepreneur's family and friends.
Angel investors usually represent individuals, the entity that actually provides
the funds may be a limited liability company (LLC), a business, a trust or an
investment fund, among many other kinds of vehicles.
Sources of funding
Angel investors typically use their own money (unlike venture capitalists who take
care of pooled money from many other investors and place them in a strategically managed
fund).
Some angel investors invest through crowd funding platforms online or build
angel investor networks to pool in capital.
Other Points
The funds that angel investors provide may be a one-time investment to help
the business get off the ground or an ongoing injection to support and carry
the company through its difficult early stages.
Answer: a) Long time horizon: The fund would invest with a long time horizon whereby
minimum period of investment would be 3 years and maximum period can be
10 years.
b) Lack of liquidity: While making the investment choice and form of
investment, VC takes into account the liquidity factor. Based on liquidity, VC
adjust liquidity premium against the price and required return.
c) High Risk: VC works on the principle of high risk and high return. It sharing
both the risks and rewards. So, high risk investment project may not affect
the investment choice for a venture capital.
d) Equity Participation: VC may invest in the form of equity of a company. This
would help the VC to participate in the management and help the company
grow.
Answer: Provide a solid capital base for future growth by injecting long term equity
finance
Provide practical advice and assistance to the company based on past
experience with other companies which were in similar situations.
Has a network of contacts in many areas that can add value to the company
Provide additional rounds of funding when required for finance growth
Help in the process of preparing a company for an initial public offering (IPO)
of its shares onto the stock exchanges
Answer: The entire VC Investment process can be segregated into the following 6 steps:
a) Deal Origination
It is basically related to sourcing the deal. There are two approaches for deal
sourcing:
Company approaches VC directly: i.e. company will give a detailed
business plan which consists of business model, financial plan and exit
Answer: The stages and other related information like risk matrix related to funding for VC
can be summarized as:
Answer: Start up India scheme was initiated by the Government of India on 16th
January 2016.
For the purpose of this scheme, Start Up means an entity
Incorporated or registered as either a Private Limited Company or a
Partnership Firm or a Limited Liability Partnership in India
Not prior to 5 years
With annual turnover not exceeding Rs. 25 crore in any preceding financial
year and
Working towards innovation, development, deployment or
commercialization of new products, processes or services driven by
technology or intellectual property.
Further it is provided that
Such entity is not formed by splitting up, or reconstruction, of a business
already in existence.
An entity shall cease to be a Start up if its turnover for the previous
financial years has exceeded Rs. 25 crore or it has completed 5 years from
the date of incorporation/ registration.
A Start up shall be eligible for tax benefits only after it has obtained
certification from the Inter-Ministerial Board, setup for such purpose.
Abb baat aati hai finance ki – 5 mode hote hai finance ke – general terms mein – sabse phla
hai – FFF i.e. family friends and fools – yeh basically means phle khud ke paise lo – fir family
ke lo – fir friends ke lo – isse bolte hai seed finance.
Fir jab hum break even par pauch jate hai – toh bahar walo ka bharosa aa jata hai hum par –
and woh humko loan de dete hai subsidized rate par – iss bolte hai angel investors.
Fir jab hum ek achi position mein aa jate hai – toh humara saath den aa jate hai venture
capitalist – venture means short term- matlb aise log jo short period ke liye hume bahut
paisa de dete hai via company mtlb hmri company ko deta hai – obviously series ya
tranches mein – aur humara naam karwa dete hai duniya mein – ultimately humari value ko
bahut high kr dete hai – bahut hi jyda.
As we said earlier, ki VCF series mein paise deta hai – toh har series ke payment ke time –
ya for very investment – revaluation of the startup firm is made. Yeh valuation koi
professional karta hai.
Iss valuation ka bhi apna process hai. Valuation ka wahi principal hai – Present value of
expected future revenue – Discounting Method. Yaha sabse difficult kaam – future revenue
ko project karna hai. Generally trending revenue lete hai badhte hue and cost ko low trend
mein lete hai – and profit nikl lete hai – yeh trend past information se nikl lete hai.
Abb valuation aate hi – VCF action leta hai – phle toh negotiate krega – ki jaa like 3 saal ke
liye deta hu paise – itna return de skte ho – ya equity de do – ya preference de do – kya de
skte ho tum mere ko – aisa startup se bolega. Ek type se conditional loan hota hai.
Fir yeh conditions zaruri ni hmesha rahe – ho skta hai – agar kaam pasand aaye toh
conditions kam kar de.
Question: Find ownership %ge required by the VCF to get its desired return?
Solution:
Desired value of investment after 5 years = Rs. 60 Cr * (1.30)5 = Rs. 222.78 Cr.
MV of start up at end of 5 years = Earning * PE = Rs. 50 Cr. * 10 = Rs. 500 Cr.
Therefore,
Degree of holding to be negotiated = Rs. 222.78 Cr / Rs. 500 Cr = 44.56%
This implies that,
By giving Rs. 60 Cr; VCF would own 44.56% of the start up.
Practical A start up needs Rs. 25 lakhs from VCF by a professional value. Start up was
Question: valued at Rs. 100 Lakhs. Now this value of 100 Lakhs can be understood as
Pre Money Valuation i.e. 100 lakh is excluding the effect of Rs. 25 Lakhs
Start Up Value 100 Lakh 80% of Holding
VCF 25 Lakh 20% of Holding
Total 125 Lakh 100% of Holding
Abb yaha holding mere hisab se aai – VCF ke hisab se ni.
Post Money Valuation i.e. 100 lakh is including the effect of Rs. 25 Lakhs
Start Up Value 75 Lakh 75% of Holding
VCF 25 Lakh 25% of Holding
Total 100 Lakh 100% of Holding
Abb yaha holding mere hisab se aai – VCF ke hisab se ni.