How to fund your start-up dream4 min read . Updated: 27 May 2019, 02:31 PM IST
- Although there are many options for funding, always have a strategy to repay the money
- According to Nasscom report, India will be home to 10,500 start-ups by 2020
MUMBAI : “Ideas are cheap, execution is everything," said Chris Sacca, an early investor in Twitter and Uber. And, an important component which impacts the execution is money. Sahil Isai, co-founder (marketing) of Walkers Unltd, a dog-walking company which provides certified walkers and trainers for your dogs, says, “Our dog-walking company is founded by a group of dog lovers. We have invested our funds, and are also a part of the NMIMS incubator. Apart from mentorship and infrastructure, they will help us with investor connect in the future."
According to Nasscom report, India will be home to 10,500 start-ups by 2020. If you want to be part of it, here’s what you should know about funding:
Bootstrapping means tapping into funds already available to you or funds you get from family and friends. Usually, the money you borrow from your family and friends is interest-free or at least, at a slightly lower interest. If you have a plan to start your venture, you need to factor in the expenses and start investing to build a start-up kitty. If you have a long-term horizon of 10 years, you should invest through equity. However, if your goal is closer, consider fixed income. “Ensure that you put your savings into fairly risk-free and liquid investment options. Liquid funds and ultra-short funds are a good option. Don’t be lured by higher returns of the equity market; it’s too risky," said Ranjit Dani, a Nagpur-based financial planner.
Infusing your own capital into your business may not be enough. If you need to borrow money, you are better off getting a personal loan instead of using your credit card. “Going for a loan to start a business is better than going for
a credit card as the latter has a higher rate of interest than a loan with a 50-day grace period," said Gaurav Chopra, founder and CEO, Indialends. Credit card charges interest in the range of
24-48% per annum as compared to
11-20% on personal loans. Entrepreneurs also resort to loan against property (LAP) which is cheaper than credit cards. “Taking a loan or using credit cards are not usually advisable. Personal loan and LAP are uncool ways of funding business, but these seem to be much larger in nature," said Kaustav Majumdar, head of start-ups and incubation, SPJIMR.
These loans are much easier to get than a direct business loan from a typical bank for first time start-ups. “If you have a ready cash business or a distribution-based product and there is stock available, some banks may give you money against the stock. Most nationalised banks will give it as a cash credit or an overdraft based on stock. The interest rates are bearable and there is a certain level of discipline built as you have to repay a certain amount to the bank regularly," said Majumdar. For service-centric business with contracts from a large corporation, you can try to get bill discounting facility from banks.
A venture capitalist is an investor who provides capital to start-ups showing high growth potential in exchange for an equity stake. But, not all VCS fund at an early stage. “At an early stage, you can secure funding from kin, crowdfunding, angel investors and family offices of established ‘legacy’ companies or groups. As early-stage start-ups rarely have positive cash flows, traditional sources such as banks or lenders aren’t an option. Early-stage VC funds play a formative role, not just with financial capital, but also with experience," Sunil Goyal, managing director and fund manager, YourNest Venture Capital which funds early stage Start-ups.
There are a number of incubators in the country. Some are academic incubators like SPJIMR and NMIMS. Large corporate houses too have incubators, especially tech companies. Cash is not the only way that a start-up may get funding. It can even get it as a money substitute. “Incubators may offer you money, but there are many that offer facilities, expertise and mentorship. Incubators can play a role in providing an office space. If you go to a co-working office space you would spend ₹7,000 per seat, but an incubator might give that space at a lower cost or for free. Similarly, big companies like IBM, Google and Amazon offer you credit instead of cash. They all have incubator programs, where they offer free tech support or cloud credit," says Majumdar.
Angel investors are high-net worth individuals or groups of individuals who invest money on start-ups or early-stage small businesses. There are a number of angel investor groups or networks in India. There are city-level groups too, for instance, Mumbai Angel Network.
Usually angel investors take a larger risk, which means they may require you to give them a larger share of the firm. This is usually when they like your idea, your business plan and are willing to give you the needed funds to start the business. At times, they even handhold you to manage the funds. Agencies like Aha Ventures, Pie Ventures and Impact Guru are an assimilation of angel investors.
CROWDFUNDING AND GOVERNMENT SCHEMES
Crowdfunding is raising money for your start-up from a large number of people through online platforms such as Wishberry and Kickstarter. You have a number of choices when it comes to early-stage funding for start-ups. You can raise the target amount and can return the money in kind.
There are also many government schemes, both state and Central, that fund start-ups, for instance, Start Up India and MSME scheme.