Funding for startups July 2014 By Prof. Sabarinathan G

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    11-Aug-2014

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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?

Transcript

  • Dr. G. Sabarinathan Funding for Startups Presentation at Forstartups August 2, 2014
  • 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
  • Disclaimers No canned solutions Pointers to think Questions to ask 3Funding 4 Startups - Dr. G. Sabarinathan
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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 Dont 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
  • 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
  • THANKYOU Funding 4 Startups - Dr. G. Sabarinathan