A startup is a young company founded by one or more entrepreneurs to develop a unique product or service and bring it to market. By its nature, the typical startup tends to be a shoestring operation, with initial funding from the founders or their friends and families.
One of the startup’s first tasks is raising a substantial amount of money to further develop the product. To do that, they have to make a strong argument, if not a prototype, that supports their claim that their idea is truly new or a great improvement to something on the market.
Startups have no history and less profit to show. That makes investing in them risky. If an idea seems to have merit, potential investors may use any of several approaches to estimate how much money it could take to get it off the ground.
- The cost to duplicate approach looks at the expenses the company has already incurred to develop its product or service and purchase physical assets. This valuation method doesn’t consider the company’s future potential or intangible assets.
- The market approach considers the acquisition costs of similar companies in the recent past. This approach may be stymied if the startup idea really is unique.
- The discounted cash flow approach looks at the company’s expected future cash flow. This approach is highly subjective.
- The development stage approach assigns a higher range of potential value to a startup that is more fully developed. Even if it’s not profitable, a startup
that has a website and can show some sales and traffic is likely to get a higher valuation than one that merely has an interesting idea.
Funding Options for Startups
Option 1 – Bootstrapping Your Startup
Bootstrapping means self-funding your startup. This option is ideal for those entrepreneurs that have just started their business. Getting funding can be a difficult task for first-time founders unless they show some traction and a business plan that has the potential of making money in the long run.
Option 2 – Crowdfunding Your Startup
Of the many funding options for startups, this one is getting a lot of attention lately. Crowdfunding your startup means raising funds from more than one person at the same time. The concept is similar to that of mutual funds on a basic level. In this funding option, more than one investor is involved. These investors offer a fixed amount of funding depending on several parameters such as your business idea, goal, financial plan of action, and plans of making money i.e being profitable.
Crowdfunding can help you in more ways than one.
Firstly, it ascertains that your startup idea is believed by other experienced players in the ecosystem. Secondly, it can help you raise funding right from the first stage itself i.e turning your idea into a full-fledged business. And last but the least, getting your startup crowdfunded can get you the right feedback at the initial stage. Whether your product is solving a problem, will it have a demand in the market, is it generating enough interest? All these can be answered during the crowdfunding process.
And the best part is that you can involve common people and get your startup funded. You can gather funds from family, friends, and budding entrepreneurs that believe in your vision and are ready to support you in your startup journey.
Option 3 – Through Angel Investment & Option 4 – Through Venture Capitalists
Option 5 – Raise Funds Through Business Incubators & Accelerators
Early-stage Startup founders that are looking to start off on the right foot can raise funds through a startup accelerator or startup incubator by joining their startup programs. Often assumed to represent the same concept, startup incubators and accelerators have a few key distinctions between them. Accelerators “accelerate” the growth of an existing company, while incubators “incubate” disruptive ideas with the hope of building out a business model and company. So, accelerators focus on scaling a business while incubators are often more focused on innovation.
If an accelerator is a greenhouse for young plants to get the optimal conditions to grow, an incubator matches quality seeds with the best soil for sprouting and growth.
Raising funds through incubators and accelerators is useful for early-stage startups as these options are readily available in almost every major city. The programs of Incubators and Accelerators typically run for 4-8 months of duration during which a startup founder is introduced to various mentors, investors, and other budding entrepreneurs that have enrolled for the same program. Entrepreneurs should look for the right fit while choosing the right program for their startup. Some startups may benefit from being in an incubator, while others could be fit for an accelerator. So do your research and choose wisely.
How to Decide Between Pitching to a Venture Capitalist vs. Angel Investor
Both venture capitalists and angel investors are people who invest money in businesses. Angel investors and VCs both take calculated risks when investing in the hopes of earning a healthy return on investment (ROI). (either debt or equity) So, what is the difference between angel investors and venture capitalists? Being able to answer this question can save you time and help you seek funding from the best fit.
How they work
A venture capitalist is a person or firm that invests in small companies, generally using money pooled from investment companies, large corporations, and pension funds. Typically, VCs do not use their own money to invest in companies.
An angel investor is an accredited investor who uses their own money to invest in small businesses. They are required to have a minimum net worth of $1 million and an annual income of at least $200,000 to be considered an accredited investors. Many angel investors are small business owners’ family and friends.
When they invest
Angel investors and venture capitalists invest in businesses at different stages. The investor you appeal to depends on whether you are established or if you are just starting up.
Venture capitalists tend to invest in businesses that are already established to reduce their risk of losing investments.
Angel investors are more likely to invest in businesses that are just starting out. They choose businesses that they are interested in and can see becoming profitable, even if the company has not proven itself yet. Because of this, angel investors take more risks than venture capitalists.
If you are just starting out, an angel investor might provide you with enough money to get off the ground. When you’re established and looking to expand, you might try pitching to a venture capitalist.
Another difference between angel investors and venture capitalists is the amount of business capital both investors are willing to offer.
VCs invest more money into businesses than angel investors. While venture capital tends to be invested in the millions, angel investments are in the thousands.(in dollars)
The return on investment venture capitalists and angel investors want differs. Generally, venture capitalists expect a higher percentage.
Venture capitalists might expect a return on investment anywhere between 25% and 35%.
Angel investors may want a return between 20% and 25%.
An investor’s role in the business
Both venture capitalists and angel investors want business equity and/or some sort of control in how your business runs. Because they invested money into it, they want to make sure they get a high return on investment out of it.
Venture capitalists might require that you establish a Board of Directors and give them a seat on it after investing. Generally, they are not interested in acting as mentors, although this varies from firm to firm. After a set period, the venture capitalist may fully buy the company or, in the event of an initial public offering (IPO), a large number of its shares.
Many angel investors act as mentors. They might offer suggestions about running your business, help you form connections with lawyers, accountants, and banks, and help with decision-making.
Startup India is an initiative of the Government of India. The campaign was first announced by Indian Prime Minister, Narendra Modi during his speech on 15 August 2015.
The action plan of this initiative is focussing on three areas:
- Simplification and Handholding.
- Funding Support and Incentives.
- Industry-Academia Partnership and Incubation.
A startup defined as an entity that is headquartered in India, which was opened less than 10 years ago, and has an annual turnover less than ₹100 crore (US$14 million)
Initial capital of ₹20,000 crore (equivalent to ₹230 billion or US$3.2 billion in 2019) has been allocated for this scheme.
Eligibility for Registration under Startup India
- The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership 2. Turnover should be less than INR 100 Crores in any of the previous financial years
- An entity shall be considered as a startup up to 10 years from the date of its incorporation
- The firm should have approval from the Department of Industrial Policy and Promotion (DIPP)
- The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”
Benefits of Startup India Scheme
A company is required to comply with various labor law compliance. Non-compliance with such laws leads to strict liability. Startups being fairly new to the eco-systems end up neglecting them.
However, to reduce regulatory liabilities, startups are allowed to self-certify compliance with nine labor and environmental laws. In such a case, no inspection will be conducted for a period of three years.
If you are someone who has ever registered a patent, you will know the cumbersome process it is. However, several steps are taken under the scheme to protect valuable intellectual property. This includes a fast-track examination of patent applications.
The efforts are not just restricted to fast-track patent application. A rebate of 80% of the total value of the patent fee is also granted once the patent is filed.(filing a patent application costs around 9-10K in India)
In a wonderful movie, the startups registered under the Startup India scheme are exempted from tax. This exemption is provided for a period of the initial three years. Any investment which is made by incubators of higher value than the market price is exempted.
Further, investments made by angel investors are also exempted under the scheme. A tax holiday for the first three years or reaching a certain threshold limit means, that the startup can completely utilize the revenues for business development purposes only
(in budget 2021, the tax holiday was extended to another year. So the tax exemption is now for four years, instead of three years)
An Incubator Setup
The Startup India scheme includes an incubator module. This module endorses the public-private partnership. The module gives the startup the requisite knowledge and support that are required by the start-ups.
At the moment, there are 118 incubators powering the startup ecosystem across India, helping the startup ecosystem.
.Research and Innovation Benefits
Finally, the most crucial of them all. Startup India also encourages research and innovation among those, who have an aspiration to be an entrepreneur. Proposals are in place to set up seven new research parks. These parks will ensure that facilities are provided to students and startups to research and develop their products/services.
As of the last week of December, there were 41,061 govt-recognized startups in India. Of this, over 39,000 startups accounted for 4,70,000 jobs, according to the Economic Survey 2020-21. With as many as 38 unicorns(companies valued at over 1 billion dollars), with 12 of them coming up last year, India’s startup ecosystem is currently the world’s third-largest.
However, has the startup India scheme been a success? Data suggest it hasn’t.
WHY STARTUP INDIA HAS FAILED SO FAR?
For young Indian entrepreneurs, Startup India was the most exciting policy initiative by the Modi government. It promised a conducive environment for new ventures, including well-thought-out tax benefits that were consistent with global benchmarks, funding and advisory resources, and reduced red tape.
However, the initiative has been a failure due to implementation issues.
To understand why this is so, first let’s examine Startup India’s actual impact on the ground. Since its launch in January 2016, only 88 startups have qualified for tax benefits. (as of March 2020). That’s it – 88 – which is a country of 1.3 billion, is irrelevant.
The reason for this state of affairs is the deeply flawed process that’s been put in place (under section 80-IAC) to assess which startups are ‘worthy’ of tax benefits. Each startup is scrutinized by an Inter-Ministerial Board (IMB) to see if the startup is ‘innovative’ – i.e. if it is unique or a world first.
But if the objective of the Startup India initiative is to give a boost to new ventures, generate employment, and promote the creation of Indian intellectual property, then what’s the point of setting up the IMB to be a major stumbling block, instead of allowing the market to decide winners and losers?
Consider this – per the IMB’s logic, the following trailblazing startups would have been denied benefits if they were being launched in India today – Google was not the first search engine, Facebook was not the first social network, and Apple was not the first company to make computers or mobile phones. So bizarrely, per the IMB’s definition of ‘innovation’, these companies would not be considered ‘innovative’, and hence would not be ‘worthy’ of tax benefits.
And once the IMB makes a decision about the ‘worthiness’ of a startup, said the startup is not allowed to be heard in person, and there is no appeal mechanism.
A suggestion to fix this problem:
Extend tax benefit to ALL registered startup entities incorporated after April 1, 2016, even if the IMB has denied benefits previously. Trust startups and remove the IMB scrutiny process completely, not just for Angel Tax but for 80-IAC deductions also. Let the market decide winners & losers, not bureaucrats.(vvvv imp)