NOTES ON UNIT 5: FINANCING START-UP VENTURES IN
INDIA
COMMUNICATION OF IDEAS TO POTENTIAL INVESTORS
In order to find investors for their Start-ups, entrepreneurs must first effectively communicate their
business ideas and plan to potential investors. Every entrepreneur must have a clear understanding of
their idea, growth strategy, and overall business plan. Displaying approachable and confident body
language during your pitch greatly impacts whether investors think your idea is worthwhile.
INVESTOR PITCH
An Investor Pitch Deck is a presentation that assists potential investors to know more about your
business. The Investor pitch deck is also termed as a pitch deck or start-up pitch deck. It illustrates the
business and its potential success in an easy manner through the slides so that the investor can
understand the business potential.
ADVANTAGES OF INVESTOR PITCH DECK
WHAT IS A PITCH DECK PRESENTATION?
A pitch deck presentation usually consists of several slides that helps an entrepreneur to tell a
compelling story about their business. It is usually made by using a generic software like PowerPoint
or a modern tool like Visme to create an out-of-the-box presentation.
WHAT IS INCLUDED IN A PITCH DECK PRESENTATION?
HOW TO PITCH YOUR BUSINESS IDEA TO POTENTIAL INVESTORS
1. KNOW WHO YOU ARE PITCHING
Every investor is not reliable; hence one should be very careful and do some research about
their potential investors before making a pitch. Information should be obtained about the
concerned investor’s track record before entering into a partnership.
2. CONSIDER HOW YOU’RE PRESENTING YOURSELF, NOT SIMPLY YOUR IDEA
Although your ideas and skills matter, your personality is equally as important. Investors also
want to know they are entering into a partnership with the right people.
3. TELL A STORY
When describing your business idea, focus on the problem you are addressing and how you are
solving it. Framing your business idea as a story also helps you explain your passion for your
business. Telling a story can be a great way to connect with your audience and to capture and
keep their attention.
4. COVER THE DETAILS
The following details should be covered in the presentation:
5. SHOW THE ROADMAP
It is always wise to inform the investors about the possible exit strategies that one will employ,
if for any reason the business operations cease to end.
FUNDING FOR START-UPS
There are two types of funding that you can opt for when you do not have the cash to start your own
business: equity financing and debt financing.
EQUITY FUNDING
DEF: Equity financing is obtained through investment made by investors in exchange for ownership.
Unlike debt financing, it does not have to be paid back with interest. Instead, investors receive dividends
based on the company’s performance. Equity capital is also referred to as risk capital because the
investors bear the risk of losing their investment if the business fails.
[Dividends: a sum of money paid regularly (typically annually) by a company to its shareholders out of
its profits]
TYPES OF EQUITY FINANCING:
• PERSONAL SAVINGS:
Personal savings is a common form of equity financing and is usually the first-place
entrepreneurs look for funding. In fact, most investors and lenders would expect to see
entrepreneurs devote some of their own money to the business before investing theirs.
• PRIVATE INVESTORS
1) Angel investors:
➢ These are wealthy individuals or groups interested in providing funding to businesses
that they believe will provide attractive returns.
➢ These angel investors are normally those who know the entrepreneur, or are a friend
or family member of the person opening the business.
➢ They invest with new entrepreneurs or small businesses.
➢ The amount that the angel gives is normally just a one-time deal, that helps the
business to grow. Angels also invest to help some companies move through the tough
and difficult early stages.
➢ Angels provide needed insight, connections, and advice due to their industry
experience.
➢ Normally, angels invest in the early stage of a business's development.
➢ During the initial stages of the company, when the owners do not have an established
customer base or a functional product, they reach out to angels for funding.
➢ An angel investor will not get involved in the day-to-day management of the business.
➢ Angels normally take up the most risk as compared to those investors who fund the
company in its later stages.
➢ It is difficult to find an Angel investor.
2) Venture Capitalists:
➢ A venture capitalist, also known as a VC, is an investor who offers capital to startup
companies or offers support to the small companies that want to expand but do not have
the access to equities markets.
➢ VCs agree to invest in companies that have strong management teams, a unique service
or product, and a huge potential market with a strong competitive advantage.
➢ They usually demand a noteworthy share of ownership in a business for their financial
investment, resources, and connections.
➢ In fact, they may insist on significant involvement in the management of a company's
planning, operations, and daily activities to protect their investment.
➢ Venture capitalists typically get involved at an early stage and exit at the IPO stage,
where they can reap enormous profits.
➢ Venture Capitals, or VCs for short, usually enter the funding cycle of a company after
the angels, but before the other types of funding sources like banks.
➢ The goal of a VC is to fund a company during the initial stages and grow the company’s
value, after which they then sell their stake for a large amount in the market.
➢ For lending an amount for the growth of the company, VCs normally get at least one
seat in the company’s board of directors.
3) Crowdfunding: Crowdfunding involves individual investors investing small amounts
via an online platform (such as Kickstarted, Indigo go, and Crowdfunder) to help a
company reach particular financial goals. Such investors often share a common belief in
the mission and goals of the company.
4) Initial Public Offering (IPO): The more well-established business can raise funds through IPOs,
whereby it sells shares of company stock to the public. Due to the expense, time, and effort that IPOs
require, this type of equity financing occurs in a later stage of development, after the company has
grown.
ADVANTAGES OF EQUITY FUNDING
DISADVANTAGES OF EQUITY FUNDING
DIFFERENCE BETWEEN ANGEL INVESTOR AND VENTURE CAPITALIST
ANGEL INVESTOR VENTURE CAPITALIST
• They are wealthy individuals who can • They are institutional firms or
also be relatives or friends of the companies.
Entrepreneur.
• They invest at the beginning of a Start- • They invest after the Angel investor has
up. left.
• They do not always aim to make a profit • They always aim to make a profit out of
out of their investment. their investment.
• They take risks. • They do not take any risks.
• They usually do not get involved in the • They get involved in the daily operations
daily operations of the business. of the business.
• They are difficult to find. • They are easy to find.
• They invest less money. • They invest a huge amount of money.
DEBT FINANCING
DEF: Debt financing refers to one of the types of financing in which entities like companies obtain
finance by issuing debt instruments or borrowing money from sources like a bank. The funds are used
to finance working capital, buy resources, and business expansions. The entity issuing the debt
instruments is the debtor, and the holders of the debt instruments are the creditors. The issuer must repay
the creditor in line with the predefined terms and conditions.
TYPES OF DEBT FINANCING
1) BANK LOANS
A loan occurs when entities like banks and other financial institutions lend money to business entities.
The recipient incurs a debt and is liable to pay interest on that debt until it is repaid and to repay the
principal amount borrowed. There are many types of loan classifications. For example, it can be a
secured loan tied with collateral like mortgages or unsecured like a credit card.
2) BONDS AND DEBENTURES
Bonds and debentures are common debt financing instruments issued by the government and corporate
entities to raise capital. Bonds can be secured or unsecured, whereas debentures are unsecured; hence
debentures are riskier than bonds. However, both offer interest income to the instrument holders.
3) FACTORING
Factoring is an example of a debt instrument used to create short-term solutions. Factoring involves
entities selling the accounts receivables in their books to a third party to obtain short-term liquidity
ADVANTAGES OF DEBT FINANCING
• There is no dilution of ownership, or the creditor has no say in the debtor’s business decision-
making.
• Repayment of the loan and completing the payment of interest and principal ends the obligation
towards the creditor.
• The interest expense can reduce the tax liability.
• It’s easy to access and less costly compared to other forms of financing like equity financing.
DISADVANTAGES OF DEBT FINANCING
• It involves borrowing and repayment of the borrowed amount, usually with interest.
• Increased reliance on this type of financing can affect the optimum capital structure.
• Payments on debt must be made regardless of business revenue.
• Debt financing can be risky for businesses with inconsistent cash flow.
EXAMPLES OF DEBT FINANCING
Debt financing includes bank loans; loans from family and friends; government-backed loans, such as
SBA loans; lines of credit; credit cards; mortgages; and equipment loans.
DIFFERENCE BETWEEN DEBT FINANCING AND EQUITY FINANCING
VENTURE CAPITAL FUNDS
DEF: Venture capital funds (VCFs) are investment instruments through which individuals can park
their money in newly-formed start-ups as well as small and medium-sized companies. These are types
of investment funds that primarily target firms that have the potential to deliver high returns.
Nonetheless, investing in these companies also involves considerable risk.
TYPES OF VENTURE CAPITAL FUNDS
BANK LOANS TO START-UPS
GOVT. SCHEMES AND INITIATIVE TO BOOST START-UPS IN INDIA
1) STARTUP INDIA INITIATIVE
The Startup India Initiative is, by far, the largest government scheme for startups in India. Started by
Prime Minister Narendra Modi in 2016, over 50,000 businesses come under this scheme.
It has an extensive collection of ebooks, courses, and mentorship programs to promote leadership and
skills. Critical benefits of this scheme include:
Tax exemption
Cost reduction
Easy business wind-up option in 90 days.
Access to funds
Self-certification under labor and environmental laws
Fast-track patent registration with an 80% fee rebate.
2) PRADHAN MANTRI MUDHRA YOJNA
PMMY is a scheme for startups and MSMEs that aims to provide access to capital and loans to help
ventures sustain and grow their business. Launched in 2015, eligible applicants can claim loans of up
to 10 lakhs for working capital requirements. The repayment period for loans availed under this scheme
is five to seven years.
There are three categories under which loan gets provided in PMMY:
Shishu – Up to 50,000
Kishor -Up to 5 Lakhs
Tarun – Between 5-10 Lakhs
Startups must be involved in trading, manufacturing, services, or any other non-farm business to be
eligible for this scheme.
3) ATAL INNOVATION MISSION
This scheme belongs to a category of government schemes for startups with a mandate to promote
entrepreneurship and innovation countrywide. The core focus of this scheme is on tier-2 and tier-3 cities.
Also known as AIM, this scheme provides a platform for promoting world-class innovation hubs,
sectoral focus, grand challenges, and talent initiatives. Some key programs under this scheme are
innovation centers, Atal tinkering labs, community incubation centers, and innovation centers.
4) DIGITAL INDIA GENESIS
Digital India GENESIS is a deep-tech startup platform initiative launched by the Ministry of Electronic
and Information Technology (MeitY). It was introduced in the year 2015 and aims to help tech startups
from mostly Tier II and Tier III cities scale up their operations. The selected ten thousand startups will
get their help for five years, and will be provided with the right tools to scale up.
5) THE STANDUP INDIA SCHEME
This scheme is one of the few government schemes for startups that encourage entrepreneurship among
scheduled tribes (STs), scheduled castes (SCs), and women by offering financial help as loans.
The SIC, launched by the Prime Minister in 2016, aims to promote employment generation for
backward castes and women and entrepreneurial spirit in this section.
Banks will provide loans of up to INR 1 crore to at least one SC or ST borrower and a woman borrower.
There’s a flexible loan repayment time of seven years under this scheme. However, only first-time
entrepreneurs can apply for this scheme.
6) ASPIRE
This is a scheme that is designed to improve the social and economic aspects of life in the rural areas
and is one of the most important schemes sanctioned by the Indian government. Launched in 2015, its
main purpose was to offer proper knowledge to entrepreneurs to start their business and emerge as
employers. Through empowering people, the ASPIRE scheme aims mainly at increasing employment,
reducing poverty and encouraging innovation in rural parts of the country. The main idea is to promote
the agribusiness industry.
MICRO SMALL AND MEDIUM ENTERPRISES (MSME)
DEF: The Government of India has introduced MSME or Micro, Small, and Medium Enterprises in
agreement with Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. These
enterprises primarily engaged in the production, manufacturing, processing, or preservation of goods
and commodities.
MSMEs are an important sector for the Indian economy and have contributed immensely to the
country’s socio-economic development. It not only generates employment opportunities but also works
hand-in-hand towards the development of the nation’s backward and rural areas. According to the
annual report by the Government (2018-19), there are around 6,08,41,245 MSMEs in India.
FEATURES OF MSME
IMPORTANCE OF MSME
Across the globe, MSMEs are accepted as a means of economic growth and for promoting equitable
development. They are known to generate the highest rate of growth in the economy. MSMEs have
driven India to new heights through requirements of low investment, flexible operations, and the
capacity to develop appropriate native technology.
MSME REGISTRATION FOR START-UPS
ELIGIBILITY CRITERIA FOR REGISTRATION
BENEFITS OF MSME REGISTRATION
NAMES OF A FEW ANGEL INVESTORS IN INDIA
EXAMPLES OF VENTURE CAPITALIST FIRMS
QUESTION BANK:
1) Why should Entrepreneurs communicate their business ideas to potential investors?
2) What is a Business Pitch?
3) What is an Investor Pitch Deck?
4) State the advantages of Investor Pitch Deck.
5) What is a Pitch Deck presentation? What are its components?
6) Elaborate on the steps that one should follow while pitching their ideas to potential investors.
7) What are the 2 types of funding available for Start-ups?
8) Define Equity funding.
9) What are the types of Equity funding?
10) Who is an Angel investor?
11) What the features of an investment by an Angel investor?
12) Name a few Angel investors.
13) What do you mean by Venture Capitalist? Discuss their features.
14) Give a few examples of Venture Capitalists.
15) What is Crowd Funding
16) What are the advantages/disadvantages of Equity funding?
17) Point out the differences between an Angel investor and a Venture capitalist.
18) What is Debt financing? Discuss its types.
19) Write down the advantages/disadvantages of Debt funding.
20) Give examples of Debt Financing.
21) Differentiate between Equity financing and Debt financing.
22) What are Venture Funds?
23) Discuss the types of Venture Capital Funds.
24) Name a few schemes and initiatives to boost Start-ups by the Government of India.
25) What the benefits of availing such schemes?
26) What are MSMEs?
27) State the features of MSME.
28) Importance of MSME in India.
29) What benefits can a Start-up get after registering as an MSME?
30) State the eligibility criteria separately for Micro, Small and Medium industry.
