What is a start-up?
A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable economic model While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to new businesses that intend to grow large beyond the solo founder. Startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential.
What is startup funding?
Startup funding — or startup capital — is the money needed to launch a new business. It can come from a variety of sources and can be used for any purpose that helps the startup go from idea to actual business.
A startup might require funding for one, a few, or all of the following purposes. It is important that you, as an entrepreneur, are clear about why you are raising funds. You should have a detailed financial and business plan before you approach investors.
• Prototype creation, product development, website/app development
• Team hiring
• Legal and consulting services for your startup
• Raw materials and equipment
• Licenses and certifications
• Working capital
• Marketing and Sales
• Office space and other admin expenses
Type of Fund required for a business
There are three types of cost involved in every type of business, i.e., capital cost, Fixed Cost, and variable cost. You should know beforehand how much fund will be required to start a business so as to determine the source of fund i.e., the amount you need to borrow as loans, to rely on angel investors, or to try venture capital, being sure of your finances will also make it
easier when pitching to investors.
▪ Capital costs: The entrepreneur needs Capital in form of assets to start with, which may differ from business to business. Common capital costs include Purchase of buildings or land, Permits and Licenses, Machinery, Vehicles, Shop fittings, furniture, branding, a website, domain name, and server space (for an Internet-based business).
▪ Fixed costs: Fixed costs need to be paid regardless of the number of sales made or the service provided. Fixed costs include Wages, salaries, electricity, rent, Internet, phone, and in some cases, mortgage repayments.
▪ Variable costs: Variable costs vary based on business output. Common variable costs include Raw ingredients, Production materials, Stock orders, etc.
How to secure appropriate funding?
The startup costs will obviously vary from industry to industry, so your company may require more or less funding depending on the situation.
Why is startup funding required?
There are many sources of funding your business, for example, bank loans, family, friends, angel investors, venture capital, government funding etc.
The most interesting part of this article is that at last Part, apart from these common sources of funding will discuss one more source of funding which can be availed i.e.in which you fund your own business endeavors. Let us discuss it one by one:
- Personal sources:
▪ Borrowing from friends and family: Arranging money from Friends and family who are supportive to the business idea can be quicker and cheaper. Interest and repayment terms, if any, may be more flexible than a bank loan.
▪ Credit cards: Credit cards are the most common source of finance amongst small businesses. Entrepreneur uses credit card to pays for various business-related expenses. Using the model of payment term of credit card, businessman gets access to a free credit period of around 30-45 days.
- Equity funding:
If an entrepreneur is willing to share ownership of business, equity financing is one of the options of raising funds. Equity financing is a wide term that includes financing from friends and family by giving them some shares in the company, to giant initial public offerings (IPOs). Founders of Dropbox and Airbnb exchanged somewhere between a 7% and 10% stake to receive a small amount of funding.
- Bank Loan
Banks follow strict criteria in granting loans and to Startups; they never take risks no matter how exciting the idea is, until and unless any collateral security is provided to them in the shape of land, building or any other asset of the owner or of the company. Bank also looks at the existence of business in the market, financial records, liquidity of an enterprise before granting any loan. Therefore, for Startups, Banks will almost never provide funding.
- Venture capitalists:
Venture capital firms comprising of professional investors that understands the intricacies of financing and building newly formed companies or startups. A venture capital organization take high risk by putting money in an enterprise, if the enterprise fails all money invested by them may be lost. They finance new startup which is often considered both high-growth and high-risk potential. It might take a long time to the institution to invest money before any profits and returns materialize. Entrepreneurs often turn to venture capitalists since traditional forms of financing, such as bank loans, aren’t readily available. Venture capitalists while investing in the business expect a high return to compensate for the high risk as well as shares in the company. A venture capital organization never retains its investment in a business indefinitely. While making investment in a business venture, it will also consider exiting out of the business eventually (after five to seven years, say) and realizing its profits.
- Angel investors
These Investors are normally friends or acquaintances of the entrepreneur. They buy equity in the firm and influence the decision of the owner. As in our real-life finding an Angel a difficult task, the same is the case in the finding of Angel investors. Indian Angel Network in India is an example of Angel Investor which contributes equity in early-stage businesses.
Venture capital vs. angel investor
While angel investments come from individuals, Venture capital comes from a firm or a business. Venture capitalists invest millions of dollars in new startups while angel investors never put more than $1 million into a project. Venture capitalists will generally invest in startups which they feel has the potential to make them money, while angel investors generally make investments in firms that work in industries, they are personally familiar with.
Crowdfunding is a form of alternative finance, which has emerged outside of the traditional financial system. Monetary contributions are raised from a large number of people i.e., (i) from the project initiator who proposes the idea of business, (ii) the other individuals or groups who support the idea, and (iii) a moderating organization that brings the parties together to launch the idea.
- Government funding
Pradhan Mantri Mudra loan Yojana is one of the examples of government funding. Small Business Segment which comprise proprietorship, partnership firms’ shopkeepers, fruits/vegetable vendors, truck operators, small industries, food processors, repair shops, machine operators, are provided assistance under Mudra. Its cover loan amount, starting from Rs. 50,000 up to 10,00,000.
The government also provides finance to companies in shape of cash grants as part of its policy for developing national economy. The government especially provide grant to high technology industries and to the business that set up their industry in rural areas where there is high level of unemployment.
- Funding through Self-fueled growth model:
Last but not the least, New Entrepreneurs should not sacrifice the quality of work in trying to launch a multi-million dollar corporation overnight, Instead they should focus on initial core customers, work to find new customers, and consistently strive to be remarkable to those customers you already serve. Your quality of work will spread, and more customers will come looking for you. Fund will start coming and you can use those funds in the growth of your business. This is the best strategy to adopt for small business entrepreneurs. But still, if you do feel you need funding, you must make sure you’re not giving up too much of your business to get it.
Stand-Up India for Financing SC/ST and/or Women Entrepreneurs
Small Industries Development Bank of India (SIDBI)
Stand Up India Scheme facilitates bank loans between 10 lakh and 1 crore to at least one scheduled caste (SC) or Scheduled Tribe, borrower and at least one women per bank branch for setting up a greenfield enterprise. This enterprise may be in manufacturing, services or the trading sector. In the case of non-individual enterprises, at least 51% of the shareholding and
controlling stake should be held by either an SC/ST or Woman entrepreneur.
- SC/ST and/or women entrepreneurs; above 18 years of age
- Loans under the scheme is available for only greenfield project. Greenfield signifies, in this context, the first-time venture of the beneficiary in the manufacturing or services or trading sector
- In case of non-individual enterprises,51% of the shareholding and controlling stakes should be held by either SC/ST and/or Women Entrepreneur
- The borrower should not be in default to any bank or financial institution
The government has made continuous efforts to improve the social and economic aspects life in rural areas of India. Since 56% of the Indian population lives in the rural areas, the government is promoting entrepreneurship and innovation in this sector. The ASPIRE scheme aims at increasing employment, reducing poverty, and improving innovation in rural India. However, the main idea is to promote the agro-business Industry. The Ministry of Medium and Small Enterprises has tried to get economic development at the grassroots level. The total budget plan is of Rs. 62.5 crores for the years 2014-2016.
Micro Units Development Refinance Agency (MUDRA) Bank has been created to enhance credit facility and boost the growth of small business in rural areas. The government has introduced this scheme to support small business in India. In 2015, the government allocated 10,000 crores to promote startup culture in the country. The MUDRA banks provide startup loans for Rs. 10 lakhs to small enterprises, business which are non-corporate, and non-farm small/micro enterprises. It comes under Pradhan Mantri Mudra Yojana (PMMY) which was launched on 8 April 2015. The loans have been categorized into Tarun, Kishore, and Shishu. The assets are created through the bank’s finance and there is no collateral security.
Ministry of Skill Development and Entrepreneurship
This task of promoting entrepreneurship was earlier given to different departments and government agencies. In 2014, the Prime Minister decided to dedicate an entire ministry to build this sector as he felt that skill development required more push from the government’s side to promote and encourage it among the people. Furthermore, the idea is to reach 500 million people by the year 2022 by providing gap funding and skill development initiatives.