3 Things to Keep in Mind While Deciding the Funding Path for Your Startup
The boom in entrepreneurship has initiated alternative financing methods
Getting funds for a business is challenging irrespective of the prevalent economic climate of the country or region. Be it capital for a start-up, or for expansion or for tiding offer difficult times, securing funds remains a tough affair.
The boom in entrepreneurship and start-ups have initiated alternative financing methods and today a number of financing options and routes are available for start-ups and small businesses. However, it is important to know and understand that the feasible methods of financing a venture will vary from business to business.
Options to raise funds in India
Crowd-funding (gift based) – family and friends
Seed-Angel Investment - 10L to 1CR
Incubator/Accelerator Program - 10L- 30L
Angel Investment Networks - 30L upwards
VC/PE Ventures - mostly 1 crore upwards
Traditional Bank Loan on profitability and cash flow
SEDBI –many schemes starting from 1L
"The sheer variety of funding option for start-up businesses these days can be misleading," shared Alok Patnia, Founder & CEO, Taxmantra.com. "It also becomes difficult to decide the category of funding which will be right for you. The good news is that one can easily understand the variety of options that exist in the market today," he added.
What to raise?
It is now a well-known fact that based on the type of business, one should decide whether he / she should go for Equity or Debt. According to Patnia, "debt does not dilute ownership in the company, unlike equity, as debt must at some point be repaid.
"While taking a decision on loans one has to keep in mind that interest is a fixed cost which raises the company's break-even point. Also high interest costs during difficult financial periods can increase the risk of insolvency. Cash flow is required for both principal and interest payments and must be budgeted for. Also the larger a company's debt-equity ratio, the more risky the company is considered," he notified.
It has also been seen that debt instruments often contain restrictions on the company's activities, preventing from pursuing alternative financing options. Besides, pledging of assets of the company is required as collateral, and business owners are in some cases required to personally ensure repayment of the loan.
"The good thing about debt is it ensures ease of operations as the company is not required to send periodic reports to investors, hold periodic meetings of shareholders, and seek the vote of shareholders before taking certain actions. However, the debt funding typically should be accessed only after 3-4 year of operations," Patnia pointed out.
When to raise?
The fundamental rule here is to invest equity and get a few paying customers before approaching an investor. Before going to the investor you must also have a functional team or at least a co founder.
So when should you raise? - Raise money when you do not need it or raise it when you really need it. "The answer lies in between somewhere," says Subir Dutta, Director, Doshi Chatterjee Bagri & Co. "We advise entrepreneur to have a runway of at-least a year and half and then start fund raising activities accordingly," he shared.
From whom to raise?
According to Abhishek Kaushik, Vice President and Product Manager - Current Accounts, Kotak Mahindra Bank, raising money is like getting married. "If you do not choose the right partner, it can prove to be disastrous, in the long run. Always keep five mantras while raising money- industry familiarity, finding investors you can trust, knowing what you want investors to provide for you or who can solve your current problems, be sure that investors who tell it to you straight are priceless and find investors who are aligned with your interests," counselled Kaushik.