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Where and how to find the money for yourentrepreneurial dream

The signs are everywhere. Students, women, yuppies, the unemployed, those facing a mid-life crisis, and

a whole lot of other categories have succumbed to the e-bug. Frankly, the environment has never been

more conducive. Of course, the risks associated with start-ups remain (see Hurdles you will face), with

more than 50% of all start-ups failing within the first five years.

It's just that landing funds to fuel your venture is easier than ever before. Venture Intelligence, a research

firm focused on venture capital and private equity deals in India, says there are 43 angel networks, 111

venture capital investors and 37 incubators in the country

Also read:  It's worse to borrow from your father-in-law than a VC: Anand Lunia, Seedfund. 

Hurdles that budding entrepreneurs face and how to overcome them 

We have certainly come a long way from the days when bootstrapping-falling back on savings, fixed

assets, and money from friends and family-was the only option. Nonetheless, this is still the mostpreferred starting point for a majority of new businesses.

The trouble with bootstrapping is that it usually means scrimping on capital, which, in turn, curtails the

start-up's flexibility and ability to grow. There is also a very real risk of fledgling entrepreneurs

overleveraging themselves. Says Nishant Verman, associate, Canaan Partners: "It is not uncommon to

see entrepreneurs taking a huge credit card debt for their start-ups. They should take calculated risks and

not become reckless."

A less risky way to raise seed capital is to pool resources with a group of people who have shared

interests and work together to escalate a business idea to at least a prototype. This is how the Bangalore-

based CustomerXPs, a software product company, stockpiled its seed capital of Rs 2 crore.

"I came across Aditya Lal, Balaji Suryanarayana and Sandhya V, all people with whom I had worked

earlier, and decided to set up my venture with them. All of us invested equal amounts of money in the

start-up and have equal stakes," says Rivi Varghese, CEO, CustomerXPs.

However, if you are sure of the scalability of your venture and are not obsessive about retaining

independent control, private funding could be the best option. This type of funding comes in various

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forms, each typically catering to different stages of a start-up, such as the seed stage, early stage and

growth stage. Here are some of the options.

ANGEL INVESTORS 

These are high net worth individuals, who invest in a start-up in return for a minority share in the

business. They are usually serial entrepreneurs or heads of major multinational firms. They can also be a

group of individuals who pool in funds to invest. The key networks include Mumbai Angels, Indian Angel

Network, Hyderabad Angels, Pune Tech Angels, Business Angel Network of Kerala and East Angels.

The duo zeroed in on the angel option for their company which digitises documents. "We got Rs 1.5 crore

within 30 days of sharing the business idea," says Mahajan. He feels this route is quicker than a bank

loanand easier than the venture capital option. "The more unique a business idea, the harder it is toconvince a venture capital firm or a bank. An angel investor invests in the entrepreneur's credentials, not

the company's," adds Chand.

How angel investing works 

Angels typically come into the picture at a start-up's seed stage, when the business idea is just a concept.

The wannabe entrepreneur has no team, no product and no customers. The business plan itself is very

iffy. So what draws an angel's attention? Business ideas that have the potential to generate solid returns,

as well as the person behind it, but they are basically in it for altruistic reasons. Says Saurabh Srivastava,

co-founder, Indian Angel Network: "Angels like mentoring an entrepreneur and nurturing a start-up in its

initial stage."

Since all start-ups are risky propositions at this stage, angels typically don't put in a huge sum. "We invest

in start-ups that are unlikely to draw the interest of venture capitalists since the size of investment israther small, from Rs 50 lakh to Rs 5 crore, depending on the angel approached and the business idea.

Only in special circumstances will the deal size stretch to Rs 10 crore," adds Srivastava. In return, they

take a 20-30% stake in your firm.

Benefits 

Angels are patient investors; they typically remain invested for 7-8 years. They review the progress

regularly and are even willing to go back to the drawing board, if required. "Angel investing provides an

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immediate induction of more minds, which helps in efficiently strategising for the challenges that can be

faced by start-ups," says Siddhartha Nigam, partner, M&A, at Grant Thornton, a managed accounting and

consulting firm.

No wonder Sasha Mirchandani, co-founder of Mumbai Angels, claims that angel-backed companies tend

to do better than the ones that directly approach venture capital investors. You can also expect quick

access to funds. It can take anywhere between a day and three months to close a deal.

Drawbacks 

The concept of angel funding is still at a nascent stage in India, so they are difficult to find. You need to

boast the right contacts/professional network to bag such funding, besides having the right credentials.

Says Srivastava: "Factors like the entrepreneur's reputation, integrity, clarity of mind and his response to

feedback are important for me. He should also be a good listener." 

Mirchandani, on the other hand, is more concerned with the capital efficiency of a business idea. "We

write small cheques, so the start-ups approaching us need to be extremely careful with the capital," he

explains. This is why so many IT start-ups, typically both capital-efficient and easily scalable, find favour

with angel investors.

However, as Verman stresses, easy funding is still difficult to come by. "India is no Silicon Valley, where a

super angel like Mike Maples will invest in a product when it's no more than a blueprint sketched on a

notepad, as in the case of Twitter," he warns.

Hot sectors 

"Currently, angels are interested in funding education, mobile value-added services and apps, innovations

in healthcare and rural entrepreneurship," says N Muthuraman, director, RiverBridge Investment

Advisors, a boutique financial advisory firm.

VENTURE CAPITAL 

For the uninitiated, venture capital firms invest their shareholders' money in start-ups in return for a

minority share in the company.

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Before he got lucky with Draper, Kacker's idea of producing coffee-table books had been rejected by

about 15 venture capital firms. "Be absolutely sure of your business plan before you go to a venture

capitalist," he says. Incidentally, he recommends starting with angels. He too had approached angel

investors, but took the venture capital route as he needed more money.

How venture capital works 

They typically invest at an early stage of a start-up; unlike angels, precious few are willing to back an idea

at the concept stage. That's logical, because a start-up needs more funds at the early stage when the

working capital requirement is high. This is when the fatter cheques of venture capitalists come into play.

Venture capital firms have been known to help start-ups organise the next round of funding as well.

Says Arvind Modi, associate vice-president (investments), Gujarat Venture Finance Ltd, which provides

venture capital to tech start-ups: "We like ventures where the product or service is established and the

start-up requires funding for commercialisation or scaling up of operations. Venture capital players may

not invest in research and development activities."

However, there are exceptions. Many firms, such as Accel India Venture Fund, Sequoia

Capital, Seedfund, Ncubate Capital, Nexus India Capital and Draper Fisher Jurvetson (DFJ), are

increasingly willing to provide seed stage funding, but let us consider the thumb rules.

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A typical player is willing to put $2-8 million (Rs 10-40

crore) in return for a 10-40% stake in the start-up, say industry insiders. If the investment amount ishigher, the venture capital firm may choose to take a minority stake and invest the balance in convertible

instruments, such as debentures and preference shares.

If you are planning to approach a venture capital firm, be prepared to answer questions on the kind of

bond you share with your business partner or the rapport with your team. Don't balk. Seeing their

investment going down because of a silly feud between the core team members in a start-up is the last

thing they want.

Also, these investors usually don't believe in one-man shows; it is risky if everything depends on one

person. "Unless an entrepreneur is very experienced, he won't be able to deal with the challenges posed

by a start-up single-handedly," adds Verman.

You will also need to have an exit strategy. The basic purpose of any venture capital investor is to sell his

stake for a profit after 4-5 years. So, cover options for the next round of investment, typically from a

private equity player, the possibility of an IPO or a potential buyer, along with an approximate exit

valuation, in your presentation.

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Benefits 

This is practically the only option that gives entrepreneurs access to deep pockets at a time when they

are trying to build the company. Private equity's fatter cheques are typically reserved for mature

companies. You also get expert help and access to the firm's entire network.

Drawbacks 

Venture capital funds in India are risk-averse; they require proof of concept and decent revenue visibility

before investing," says Muthuraman. In addition, each player will have sectoral preferences. They don't

 just offer you funds for your business, but also bring along their expertise.

If they do not have prior experience in investing or running a business in your sector, they won't be able to

understand your business and, hence, will not invest in it. "So if you are a healthcare company, there is

no point approaching an early-stage tech-focused firm like ours," says Verman.

Also, a typical player expects an internal rate of return of 25% on the investment in 4-5 years. "To meet

the expectation, the company's compounded annual growth should be over 25%," says Modi. A business

with low scalability may not be able to provide them with the desired returns on their investment and,hence, will be rejected outright. The safest bets are the ones where there is a business and professional

connect. "It is a highly dilutive way of raising capital. It suits companies that have very high scalability and don't

need too much recurring capital," advises Muthuraman. Also, be prepared to wait for 3-6 months to close

a deal.

Hot sectors

Hot sectors 

The most sought-after sectors by this segment are biotech, mobile value-added services, education,

healthcare, e-commerce, IT-ITeS, infrastructure and green technology.

VENTURE DEBT 

This is a medium-term loan that is exclusively provided to companies backed by venture capital firms.

How venture debt works.

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Batra sought venture debt because he saw it as a cheaper way of funding his business. "This is a great

option for a services firm like mine," he says. The loan provider, Silicon Valley Bank, was comfortable with

his venture capital backers and, hence, getting funds was not difficult. His advice to aspiring

entrepreneurs: get into venture debt as early as possible.

How venture debt works 

The USP here is that no collateral is required to be eligible. Instead, venture debt providers evaluate

applicants on the basis of a start-up's fundamental enterprise value, assessing how it will grow and,

thereby, pegging its future cash flow and ability to repay the loan. You can expect funding of Rs 2.5-20

crore, depending on the growth stage of company and the nature of requirement.

Says Ajay Hattangdi, managing director, SVB India Finance: "An experienced founding team, a credible

business plan and a solid venture capital investor base are some factors that we would consider in our

assessment." He adds that the interest rates are fixed for the tenure of the loan and are competitive

compared with rates that SME clients can usually obtain from banks.

Benefits 

Venture debt financing is structured specifically to support seed and early-stage start-ups. Hence, it

understands that a venture is prone to volatility early in life and, consequently, provides more flexibility to

entrepreneurs. According to Muthuraman, this is a useful tool for an entrepreneur wanting to minimise his

equity dilution early on as it can bridge the gap between the funds provided by the venture capitalist and

his actual requirement.

These funds come with the least amount of restrictions and can be utilised for any business initiative,from basic operations and working capital to supporting capital expenditures and making acquisitions.

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Drawbacks 

Apart from the interest on the loan, venture debt providers typically require an equity kicker, or shares of

your company, to compensate for the higher r isk taken. "The kicker enables us to get a share in the

upside if the company does well. It also enables us to keep our loan interest rate down to a minimum,"

says Hattangdi.

LOANS FROM NBFCs AND BANKS 

This is a standard option for entrepreneurs but not for seed-stage start-ups. Says Sushil Munhot,

chairman and managing director, Small Industries Development Bank of India (SIDBI): "One should look

at bank funding only after the product has gone through seed or venture cycle and one wants to

commercialise it further."

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Instead of a business loan, he took a personal loan to fund his venture. Two PSU banks junked the idea

due to the dismal balance sheet. Finally, one bank gave him Rs 5 lakh in 2005. Now that his venture is

stable, he has borrowed `50 lakh against his Mumbai house. Shah likes the fact that he is not answerable

to an equity stakeholder, which is the case with angel investing or venture capital.

How bank loans work 

Usually banks and finance companies fund up to 80-90% of the loan-to-value ratio

(borrowed amount divided by the asset value you are purchasing or refinancing),

depending on the credit history of the borrower and the collateral put up, be it

property, machinery or marketable securities. Bank loans can be availed of for short

or long term, but the latter is usually given to established start-ups.

However, Muthuraman says banks now give importance to cash flow rather than the

primary security or additional collateral. Recognising the fact that the collateral

requirement deters many a start-up, particularly in the early stages, the government

and SIDBI have set up a Credit Guarantee Fund Trust for Micro and Small

Enterprises. The scheme lends up to Rs 1 crore to small enterprises for working

capital and capital expenditure without collateral.

Incidentally, finance companies also offer collateral-free working capital loans to

small enterprises with at least three years of operations. "Such loans are disbursed on

the basis of historical cash flows and ability to repay," says Kavi Arora, CEO,

Religare Finvest. These are available at interest rates of 16-20%, while loans against

property cost 12-18%.

Benefits 

It is usually the cheapest source of funding and helps in controlling costs. Besides, if a

start-up maintains a healthy credit track record while servicing the loan, access to all

other sources becomes easier.

Drawbacks 

Such loans typically go to existing small businesses which have shown over three

years of profitability and credit history.

Ultimately, the key to landing smart funding is to never lose hope. If you are

convinced that you have identified a genuine market need and that you can actually

implement your innovation, just put together a convincing business plan and start

scouting for suitors. This is one area where the more the cooks, the better the broth.

Sooner or later, someone is sure to say 'I will'.

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10 TIPS TO BECOMING YOUR OWN BOSS 

Essential lessons when you embark on the entrepreneurial journey.

Prepare your family "My wife wasn't too comfortable with my entrepreneurial zeal, so we agreed to give it a year. If I failed to

zero in on something within this period, I would return to a job." - Rivi Varghese, Customer XPs. 

Plan your finances 

"You might not earn anything in the first 2-3 years, so you need to plan your family's finances accordingly.

A capital cushion is essential to ensure that your family lives comfortably." - Ashutosh Garg, Guardian 

Lifecare  

Forget the job perks 

"As a manager in a company, you are accustomed to other people doing things for you. In a start-up, you

have to take care of everything yourself- from operational expenses to food bills." - Jiggy George, Dream 

Theatre  

Learn to cope with failure 

"I met 15 VCs before one agreed to fund me. One investor rejected my proposal within five minutes of a

presentation. Instead, he spent an hour trying to convince me to go back to my job." - Kunal Bahl,

Snapdeal  

Have a plan 'B' ready 

"After the first few months, we realised that service was not our core competence. Besides, the margins

were quite low. This was the time we concluded that it was better to focus on products." - Rahul Anand,

Happily Unmarried  

Don't take too much debt 

"If you are thinking of starting up, this is the best time. But don't take a home loan since it kills

entrepreneurship. You can never get out of it." - Binny Bansal, Flipkart  

Gain enough experience 

"I used to teach at a diving centre in Lakshadweep. After teaching more than 600 students for eight years,I decided to float my own diving company." - Anees Adenwala, Orca Dive Club  

Interact with like-minded 

"My partner Abhishek was running an e-commerce portal, which was acquired by a bigger website. He

expressed interest in working with me and we launched our site." - Chetan Bafna, Fetise.com  

Believe in yourself 

"Belief in one's idea can take you a long way. Our concept was ahead of its time, but I didn't give up on

my vision. At every step, there were people who ridiculed the idea. I had the last laugh." - VSS Mani, Just 

Dial  

Have a plan that is unique 

"The business plan should be unique and clutter-free. An entrepreneur must look into his area of core

competence and use it to devise a strong plan." - Kavindra Mishra, Zovi.com