What is a Startup?
Before knowing about How to get Funding for Startup in India, one needs to know about what is a Startup? Would starting a new business be considered as a Startup? I mean, if I start a grocery shop, will it be called a Startup? Certainly not. As they are not similar in many ways.
In this post, I will try to answer every possible issues in a very lucid and concise manner on What is a Startup and how to get Funding for a Startup in India or in other words what are the sources of funding for Startups?
In simple words, giving a unique idea or concept into reality of Venture or Business or giving a shape to your dreams or a specific problems can be termed as Startup.
But it doesn’t mean that starting a new business every time would be considered as a Startup. Transforming many problems into various solutions in terms of Goods or Services is termed as a Startup.
You should keep in mind that there is a huge fundamental difference between a Business and a Startup. It is very easy to get confused and very often we may use these two concepts interchangeably.
Therefore, it can be said that initially a Business is meant for earning income and maintaining a livelihood. Whereas, a Startup is initially meant for “Transforming a problem into Solution”. Highlighting the solutions and not the problems are the main motto of a Startup.
It is solely meant for targeting the problems that everyone goes through and providing them a product or service to combat with the problems with ease.
Therefore, startup transforms a new business idea or concept into a product or service for a particular problem or crisis .
For example, the problem of getting food delivery at home from reputed restaurants, have been solved by Zomato and Swiggy by creating a a new venture or Startup. Obviously this was a unique idea that got the shape of new Business Idea.
How to get Funding for Startup in India?
While discussing the idea on How to get funding for Startup in India you may primarily rely on the following popular sources of funding for Startups. There may be other sources as well but the below sources are very popular, easily accessible and available.
Popular sources of Funding for Startups in India:
Below are the some popular sources of funding Startups in India which are very much convenient to access:
Personal Finance: The most important sources of funding Startups is Personal Finance. But unfortunately most of the entrepreneurs did never thought of saving money so that it can be used later to fund their Startups.
But it is quite imperative to note that most of the investors would think twice before investing in your Startup if they find that you did not contribute even a single penny in your own Startup. How would the trust develop if your own contribution is zero?
This may give rise to some credibility issue. Your Startup may land ended before it starts off. So, utilising your personal finance to fund your Startup is a crucial sources of funding Startups.
This type of Financing is popularly known as Bootstrapping in India i.e financing your Startup using your own accumulated funds.
Personal Credit Facilities: One can avail this personal credit line facilities extended by various Financial institutions. This is another sources of funding Startups.
A good example of this arrangement is Credit card. But this facility can be availed only when your Business has sufficient cash flows to repay this personal credit line facilities.
This would also reveal the credit worthiness of your Startup which is very much crucial to get funding for Startup in this way.
Family and Friends: Another most affordable and accessible sources of funding Startups is Family and Friends. They are quite likely to keep faith on you and allow you funds to finance your Startup when you are in needs.
But all these monetary transactions should be in writing and can be used later on while repaying their contributions. Otherwise this might cause you troubles in future when you are focussed on your Startup ideas.
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Crowdfunding: Crowdfunding is one of the most popular sources of funding Startups. It means collecting a small amount of funds from large number of individuals connected through social media platforms. Yes, in today’s world you would be amazed to know that getting funds for Startups is possible from social media platforms.
This kind of funding is easily accessible if the new business idea or concept is liked by the most of the liked minded individuals. You can check out Indiegogo and Ketto as the most popular crowdfunding platforms in India.
This type of funding also becomes very helpful sometimes as they also promote or advertise the product or service at free of cost in various social media platforms along with funding the Startups.
Micro Loans: This kind of sources of funding plays a crucial role in providing a small amount of capital to the entrepreneurs at a very nominal interest rate.
This kind of financing is extended by individual or a group of people who believe in that particular venture. Each contribute a little amount to the total amount to make the Startup a reality.
Vendor Financing: Vendor Financing is a typical type of Startup financing where the Entity itself extends loans to its customers. So, that they are in a position to complete their sales. This concept can also be referred as Deferred Credit.
In general when the Manufacturers and Distribution Partners agreed upon, they enhance their credit terms so that the sales volume of their products get increased but the consideration is received later on on a deferred credit basis.
Factoring the Debtors or Account Receivables: Factoring the Account Receivables or Selling your own Debtors balance to other parties for immediate Cash Flows is known as Factoring. This is another source to get funding for Startup.
This concept has been able to help the Startups for meeting their operating cash flows as it manages immediate money with little bit discount which are due for receipt at a later date.
Is not this Idea a unique one? For example you have sold Goods to a Debtor on a credit terms of 3 months. This means you would receive the due amount after 3 months. But you are in urgent need of money currently. So, you sold your outstanding Account Receivables to a third party called Factors after discounting the original consideration from the Debtors.
They are now the owners of your Debtors and in turn they provide you with immediate Cash Flows after keeping their charges aside. Their charges are called Factoring commission and the whole arrangement is known as Factoring.
Equity Financing: Under the Equity Financing arrangement, the founder has to make the investor as the co-owner of his Startup. In this case the financier would contribute sufficient amount of capital for the Startup initiative subject to getting equal rights in profit sharing, risk sharing and in various decision making situations as well.
Therefore, in a nutshell in case of Equity Financing, the founder remains no longer the sole owner of his Startup and he has to share his business idea with another co-owner who has equity financed in your new business idea.
Angel Investor: Since, finance is the heart of any business, the success of a Startup business primarily depends on the initial fund arrangements. Here comes the Angels to play a vital role.
Angel investors are those investors with huge surplus cash and are always eager to invest in new business ideas or Startups. But before financing in a Startup, Angel investors make detailed analysis about the prospects/potentiality of the Startup and if after their thorough analysis, they like your idea, you will be blossomed with huge funds along with necessary guidance for the betterment of the Startups.
There are many instances whereby Angel investors have made successful funding in many today’s giants like Google, Alibaba, Yahoo, Flipkart and many more. But their expectation sometimes becomes as high as 30% on Return on Equity. They take high risks for earning high returns from the Startups.
Venture Capital: This type of funding is generally made by professionally managed individuals known as Venture Capitalists. VCs provide funding only when they find huge growth potential in a company. You can find it like “Huge Potential” -“Huge Funding”.
Getting a venture capital is not as easy as other popular sources of funding Startups. Because venture capital is not a very long term funding solution. They often come with an exit strategy to recover their invested amount within four to six years.
Also when there is an IPO available, they exit recovering their capital along with their own equity. Venture Capitalists do not invest in low growth companies in any way. It has been seen in the past that VCs generally try to put their strong control on the company they have funded.
Bank Funding: Bank funding is the backbone of the economy of any country. Likewise, in order to get funding for Startup in India, one has to rely on the backbone of the country. But one major challenge every entrepreneur faces is creditworthiness and lack of good track records.
Since, the business or idea whatever you call it is at its inception phase, no Bank or Financial Institution is eager to extend credit to such newly born baby. But now with the permission of Central Govt., various Banks are coming up with Co-lateral free business loans.
Which is acting as a major relief to the Entrepreneurs seeking funding for their Startups. Bank funding are of two types such as Working Capital Loan-solely meant for meeting operational expenses such as day to day expenses and the other one is Infrastructural Loan- meant for setting up the businesses or Startups.
Government Funding for Startups in India:
With the advent of Startup India, the Government of India has taken many initiatives for encouraging many Entrepreneurs in India. As a result of this initiatives the Ministry of Commerce and Industry through its Department for Promotion of Industry and Internal Trade has facilitated the Startup India Online platforms.
The following are the leading Government Funding for Startups in India schemes available to the Entrepreneurs:
1.Venture Capital Scheme,
2. Stand up India,
3. Extra Mural Research Funding,
4. High-Risk High Reward Research,
5. Single Point Registration Scheme,
6. Support for International Patent Protection,
7. Biotechnology Ignition Grant,
8. Dairy Entrepreneurship Development Scheme,
9. IREDA NCEF Refinance Scheme,
10. Revamped Scheme of Fund for Regeneration of Traditional Industries