Do you have a fantastic idea, pathbreaking product, or service proposition to offer to society at large? And then search for how to get funding for startup India? Have you ever imagined a situation where your service initiative through your startup venture is uplifting the backward socio-economic strata of society? Breaking free from the monotonicity and exploring a new possibility to serve humanity through your Startup is the way ahead. If you want to bring a change, be the catalyst of change.
Indian ecosystem is now much more flexible, open to new innovative ideas, and has an open entrepreneurship culture. The Indian government recognized the potential of Indian startup companies, thereby accelerating the spreading of the startup movement. In India, startups grew from 504 in FY2016 to 14,470 in FY2020, and in FY2020, the total jobs posted by these startups stood at 1.7 lac.
Recently to promote and grow the startup culture in India, the government of India propagated an industry-academia partnership and incubation, thereby harnessing private sector experience for incubation setup, organizing startup fest, and supporting funding and incentives structure. In terms of funding support and incentivizing the startups in India, a corpus of Rs. 10,000 crores has been launched by the Government of India. Moreover, the funding support regime provides a credit guarantee fund, tax exemption on capital gains, and startups are exempted from tax for three years.
On this note, let us understand how to get funding for Startup India.
What are the types of funding?
If you are looking how to get funding for startup India? First, you need to understand the types of funding available that you can seek. You will need funds to scale your business venture, launch a new product or service and even enter a new possible territory or region. The types of investment vehicles and funding available are equity, debt financing, and grants.
Equity Financing: In simple terms, equity financing means investing money into your business, thereby taking equity stakes in your company. Many venture capital or private equity fund invests in emerging businesses and startups by taking part in the equity portion. When the company goes public, these private equity and venture capital firms sell their equity portion at a much higher price earning an exponential return on their invested capital.
In the case of equity financing, there is no concept of repayment of interest or principal. However, since raising equity is risky and costly, you will have to assign equity stakes to investors. Angel investors, family, friends, venture capitalists, incubators, and accelerators are some relevant groups from whom you raise equity capital for your Startup. Equity investors also participate in the decision-making process of the company.
Debt Financing: In the case of financing, your Startup through debt involves borrowing money and repayment of interest and principal within the stipulated time. You can avail of debt funding from banks and NBFCs and even apply through some government loan schemes. To secure debt funding, you might need to provide collateral which can be any of your business assets. You must also need to keep an eye on the repayment structure and timeline and ensure that you have available funds or cash balance to repay the interest and principal regularly.
Grants: To promote specific essential sectors like healthcare, education, sustainable welfare initiatives etc, the government disburses grants to incentivize new and emerging startups in these niche areas. Grants are usually financial awards given to an entity or organization to incentivize performance. However, there are many prerequisite and eligibility criteria to avail grants which differ from industry to industry and sector to sector.
It is also important for you to know that grants are disbursed in tranches based on fulfilling certain norms and criteria. Primarily State Government, Central Government, and other important agencies disburse grants. Moreover, the institutions and agencies disbursing grants do not participate in the day-to-day affairs of your company. Secrecy is thus maintained.
To get funding for a startup, you must be aware of the steps and stages in fundraising. The funding stages are a time-consuming process. It involves due diligence and other legal aspects before actual funds are raised. The following are the funding steps and stages.
- Idea generation or Pre–Seed Stage: It is the stage where you germinate your startup idea and tries to give it a definite shape and structure. This being the first stage, a very basic amount of funds is required depending upon the industry or sector you intend to serve. In this stage, you can channel your idea and raise funds through your friends and family. Moreover, you can also participate in startup competitions, business plans, and pitching events. You can pitch your idea to a jury and raise funds if your startup idea is approved.
- Validation or Seed Stage: By now, after raising your pre-seed funding, your startup prototype should be ideally ready. At this stage, you need to test the demands for your products and services before the actual launch. Once your venture is concept and product ready, you can approach angel investors, raise seed funds through crowdfunding or apply through government loan schemes.
- Initial Traction or Series A funding stage: The initial traction is when your Startup gains momentum and makes a mark in the industry you cater to. The funds raised in the pre-seed stage are insufficient to scale and expand your operation and develop and market new products and services. You surely need to raise additional funds by now. You raise Series A funds to scale up, develop and explore new markets. You can reach out to Venture Capital Funds, banks, NBFCs, and venture debt funds to raise Series A Funds.
- Scaling up and Exit Stages: You can further scale up and develop newer products and services by raising Series B, C, D & E. The funds you raise will also help to increase your revenue and employ and hire the finest human resources. Venture capital funds and private equity firms are best known for investing in your startup venture. This private equity and VC funds earn a substantial investment return when you decide to go public through IPO, M&A, and other routes.
How to raise funds for business in India?
(Steps to Raise funds for Startup)
Raising capital for your business is a tedious task, and successful fundraising requires effort and patience. It would help if you needed to understand how to raise funds for business in India.
Determining the need for funding: Firstly, you need to determine why you need funds and how much you need to raise for your venture. You need to have a clear vision and timeline in terms of projected revenue, product and service prototype, production cost, research and development costs, etc.
Accessing for funding: You need to assess whether your startup venture is ready and requires funding for its growth and scaling up. Before raising funds, you should understand your venture’s profitability and break-even position. You need to have a reliable, talented, and passionate team aligned with your company’s long-term vision. Moreover, your Startup needs to have a competitive advantage and uniqueness.
Pitchbook preparation: Investors and venture capital firms prepare a pitchbook which is a detailed presentation outlining all the financial aspects and other projections. It weaves a story circumventing around your Startup, connecting every element of your venture.
Due Diligence: Before any fundraising or equity-raising deal is finalized, venture capital firms and angel investors start their due diligence process. A thorough background check, like past financial records and credentials, is verified. It is done to ensure that the deal is a success and materializes.
Why do investors invest, and what do they look for in startups?
Before even reaching out to potential investors, you should know what investors look for and why they invest in startups. Many investors seek to understand the objectives and service offerings of your Startup, what you are trying to address, and how it will serve society at large.
In the initial round of negotiations, many venture capital firms want to understand the experience, driving force, and passion behind starting your venture. Your passion and enthusiasm give you a competitive edge over others.
Recent history has shown that many startups fail in the first three years of their operation and existence. It is important to showcase to your potential investors the scalability and sustainability factors of your venture—other factors like barriers to entry, growth rate, expansion plans, etc.
Investors also try to understand your steady and regular group of suppliers and customers that, in a way, ensure a stable and steady stream of revenue. Your customer and suppliers are evaluated based on your relationship with them. A good and strong relationship with your stakeholders ensures a long-term and sustainable working relationship.
Funding Support for Startup companies in India
The Indian startup community and ecosystem grew leaps and bounds. Many startup founders and enthusiasts like you have made it possible for the next generation of entrepreneurs to view it as a career option instead of being restricted to multinationals and conglomerates.
The number of Indian Startups has quadrupled in a decade, and many of these successful Startup companies are now unicorn companies, making their mark and presence in the international arena. Owing to the success of many of these Indian Startups companies, the Department of Promotion of Industry and Internal Trade and the Ministry of Commerce and Industry, in association with the Government of India, have launched Startup Portal.
The Startup Portal is India’s largest online platform that allows entrepreneurship to blossom and startups to network, connect and explore a wide range of accelerators, mentors, and incubators on the platform. Moreover, the Startup India initiative also provides funding support for emerging ventures in the following ways.
- SIDBI Funds of Fund Scheme: The way this fund of fund scheme works is that SIDBI Fund invests primarily in venture capital firms and Alternate Investment Fund (AIFs), which in turn invests in promising and high-potential startups. The Government of India created this fund with a capital injection of Rs. 10,000 crores to accelerate the Indian Startup community. This fund supports and finances Indian startups in different business cycles. Till date, SIDBI Funds of Fund have injected capital of Rs. 5811.29 crores, approximately to nearly 443 startups.
- Startup India Seed Fund Scheme: This fund was created by the Department for Promotion of Industry and Internal Trade (DPITT) to help and inject funds into startups showcasing product trails, proof of concept, and prototypes. The Startup India Fund Scheme was formed with an initial capital of Rs. 945 crores. This fund works similarly to pre-seed funding, wherein you work on your startup idea and raise funds to design the basic structure and conceptualize your Startup.
Many startup aggregators and platforms like Tykeinvest are making it easy for you, bridging the gap between investors and startup founders. They furnish you with an exclusive community of investors and fellow startup owners, enriching and fulfilling your investment experience.