Translating a business idea into a functioning enterprise can be a daunting prospect for young and cash-strapped entrepreneurs. But if the right avenue is pursued, funding businesses is a cakewalk.
While a startup essentially starts with a potentially game-changing business idea, it can go nowhere without funds. Starting a business requires money, so does expanding it. From finding venture capitalists interested in their business, reliable investors who share their vision, to even relying on bank loans and credit cards for initial investment, startups in India face many hurdles in the beginning of their journey. Fortunately, today there are a series of avenues for budding entrepreneurs to market their idea and seek funding. If your business idea has the potential to fill a market/service gap or create an attractive business avenue, a number of investors might readily invest in your startups. All you need to do is know what kind of funding will suit your business type.
Here are some funding options that can help your startup take off and thrive.
Relying on your own funds or savings to kick-start your business is the best way to launch a startup in two cases. First, when your idea requires a relatively small amount of initial capital that you can afford to shell out from your own pocket. Second when you are unable to find investors who share your vision for the startup. Self-funding, also known as bootstrapping, can propel your business in the initial stage until it has grown to a stature where investors would readily pull in. Often, people work for several years to save money for launching a business idea they have been nurturing. Some people convince their parents, close family members or friends to lend them the money. In many cases, two friends or family members come together to co-found an organisation. This is how a large number of businesses in India still start. It also comes with the advantage of non-interference from any investor and allows you to pursue the business exactly the way you want without being accountable to anybody.
If you live and operate in a major city in India, your search for funding is likely to lead you to platforms called incubators and/or accelerators. The sole purpose of their existence is to guide businesses in the very early stages. Incubators allow startups access to space, training and value chain networking in a bid to help them develop. Accelerators simply do the same thing on a larger scale and often help existing businesses reach maturity faster. These platforms, however, offer short-term assistance but give you the opportunity to connect and relate with your peers, investors and mentors.
At JITO Incubation & Innovation Foundation, we run a dedicated incubation centre where budding entrepreneurs can pitch their ideas, seek funds, networking and mentorship. Chalo.com, an innovative startup that addresses transit problems has been a shining example of JIIF’s incubation success with Chinese smartphone major Xiaomi planning to buy a 10% stake in it for about Rs 50 crore. Other examples include Onn Bikes, an app based platform for renting two-wheelers; Toch, an AI blockchain curated video content platform; and HappyEMI, a point of sale lending platform for offline stores, among others. In total, 27 startups are incubated at JIIF out of which three are raising funds.
Another variety of financers is angel investors, who may be individuals or groups with surplus cash. They may be successful businesspersons with an interest in supporting upcoming startups. You would still need to create convincing pitches and presentations. As with VCs, the advantages of angel investing exceed mere funding formalities. Business advice, tutoring and access to social networks are just some of the benefits that a good angel investor will spare.
Not every idea is picked up by a venture capitalist as the “next big thing”. More and more investors are looking for very specific ideas, with their interests confined to a growing, marketable industry. Thanks to the Internet, the concept of crowdfunding has received a boost in India. Crowdfunding offers a unique way to raise a large sum through small investments from a large number of people. You can either choose to part ways with equity in lieu of funds or base your crowdfunding approach on a “pre-order” model under which people book your product before you have started making it and pay for it in advance. The entrepreneur has to put up a detailed business plan on the crowdfunding platform. People read the business proposal and give money if they like the idea. This form of fund-raising allows keeping control of your company, but it comes with a realistic threat of your business idea being stolen or copied.
Venture capitalists are investors that provide funding to promising businesses in return for equity stake. VC firms do not just provide funding; they bring their own expertise and rationale to the business. They conduct their own reviews, scalability evaluations and once on board they play a frontal role in choosing the direction your organisation is taking. This is both a plus and a minus. While it will bring mentorship for your company, you will have to be accommodating enough to accept strict monitoring. VC firms have been traditionally more cautious in funding businesses at their inception stage without any record of accomplishment of functioning. Turning to venture capitalists is therefore the best option when your startup has taken off and is prepping for another phase of expansion.
Seeking a loan from a bank is the most natural idea an entrepreneur will get to raise money for his/her business. Most banks offer highly useful loan schemes for entrepreneurs and small businesses. They also come with tax benefits and allow you to retain control over your business. However, they require a lot of documentation and are very difficult to get, particularly for a young entrepreneur with no proven record of accomplishment or security.
Collateral free loans by government institutions
With an intent to promote entrepreneurial culture, the government has initiated a series of financing schemes for small businesses that come without collateral. Standup India Scheme, Credit Guarantee Scheme, Mudra Loan Scheme, Bank Credit Facilitation Scheme, and Market Development Assistance Schemes for MSMEs are some such programmes being run by government institutions.
The author is chairman of JIIF-JITO Incubation & Innovation Foundation, and owner of MTC Group and Madhuban Toyota