India has approximately 26,000 entrepreneurs, making it the world’s third-largest startup ecosystem, with over 36 billion dollars in consolidated inflows over the last three years and 26 unicorns startups worth more than 1 billion dollars. The Indian startup ecosystem has developed quickly, owing to private investments such as seed, angel, venture, private equity funds, and technical assistance from incubators, accelerators, and the government. For its part, the government fosters an enabling atmosphere through its flagship Startup India initiative, which went into effect in 2016. (1) The government is trying to deploy Infrastructure facilities and provide policy support for strengthened e-governance, investments, and technology innovation via research and higher education to support entrepreneurship and spur economic growth as India moves toward a knowledge-based and digital economy.
Small companies outside of metro areas aren’t entirely aware of or incorporated into government initiatives that provide entrepreneurs with various tax cuts and incentives. Despite the progress made thus far, Indian companies face significant challenges, including the unorganized and fragmented nature of the market in most industries, a lack of consistent and straightforward policy initiatives that startups can quickly tap into, a lack of infrastructure, a lack of awareness and visibility, and difficulties in doing business promoting outreach and network benefits to Tier 2 and Tier 3 cities and increasing public understanding of government programs and rewards (2).
The telecom industry shake-up, mainly fueled by a new entrant, Reliance Jio’s price war over data in 2016, sparked one of the significant shifts in making digital services more available to the masses. This near-commoditization of the internet provided Indians with the cheapest data plans in the world and a whole new user base. The valuation of private investments and the number of venture capital funds have also increased in recent years, both in India and globally. A fascinating trend has emerged from the East, with Japan’s SoftBank Group investing over 8 billion dollars by the end of 2018, followed by the People’s Republic of China’s Tencent investment holding firm.
Exits and M&As were few and far between as the startup ecosystem expanded. In 2018, Walmart paid 16 billion dollars for a 77 percent stake in Indian e-commerce giant Flipkart, making it the world’s largest e-commerce M&A transaction. The transaction represented the size and speed at which Indian startups had expanded. Despite its rapid growth and vibrancy, India’s startup ecosystem is still in its infancy. For a long time, Indian entrepreneurs did not prioritize resolving local concerns or using cutting-edge technology. This can be described in part as a scarcity of bold venture capital financing due to a shortage of investors with deep pockets, determination, and patience (3).
The Startup environment
Between 2011 and 2015, investment prices grew at a compound annual growth rate (CAGR) of more than 75 percent, while the number of deals grew at a CAGR of more than 80 percent. According to various estimates, VC investments have risen steadily since then, peaking in 2019. India is quickly becoming a breeding ground for innovation and entrepreneurship by leveraging its strengths in human resources and ICT services and moving to a digital and knowledge-based economy. To develop, disseminate, and apply knowledge for development, knowledge economies rely on ICT, innovation, science, higher education, and specialized skills.
The agreed characteristics of a “startup” include its age, size of operations, and mode of financing, but there is no specific description. It is generally described as a new company that is only a few years old and has yet to create a consistent revenue stream. These businesses operate on a small scale, typically with a working prototype or paying pilot, but they can expand and scale quickly. They are initially financed by the founders’ network of friends and family, and they aggressively pursue additional funding to survive and grow into a viable company. In India, startup funding has adopted the Anglo-Saxon model, which promotes entrepreneurial enterprise through private and ventures capital financing because banks consider them too risky.
Unlike in Europe, venture capital and private equity are not limited. Friends and family provide funding in the early stages, followed by seed and angel investors and VC and PE capital. When the company has built itself, it will borrow money from banks, closed-end funds, and investment banks to absorb late-stage investments and move closer to an IPO. Similarly, many Asian countries have money lenders that lend to small businesses and startups. These lenders could be essentially loan sharks, which are unregulated and have a reputation for charging exorbitant interest rates. Though loan sharks play a role in India’s MSME market, Seed and Angel investors, HNIs, some VC firms, and a rising list of FinTech and non – banking finance firms rule early-stage startup funding.
In addition to seed, VC, and PE capital, (4) Accelerators have aided the startup ecosystem’s growth. Various accelerator programs a form of accelerator funded by a successful corporation in the hopes of discovering and evaluating innovative ideas and solutions by offering grants, paid pilots, or joint go-to-market options, while charging a flat fee or acquiring a 6 percent 8 percent equity stake in the startups they fund have been a significant trend in the last 3 to 5 years.
What is Seed Capital?
Seed capital is required to support the early stages of the production of a new product or service. These early funds could be used for product creation, proof-of-concept, market analysis, or to cover the startup costs. An actual seed-stage corporation has not yet developed commercial operations. During this point, a startup develops proof-of-concept by demonstrating a prototype (product or service) to potential customers and convincing them to become capital sources. At this point, the company’s goal is to test the market, assess the business concept’s feasibility, and gauge investor interest and appeal (5).
Financing for startups in this stage includes funding for product creation, early promotion, and operating costs. This type of funding is ordinarily available to newly founded businesses or those conducting for a period but have not yet sold their product. At this point, most startups have assembled key management, written a solid business plan, and done their due diligence on the market viability of their product or service. Startups that need “early” stage funding have generally been in operation for two to three years and have launched their business. The management team has been placed in place, commercial activities have started, and financing is often needed at this point to cover cash flow requirements. Manufacturing, distribution, and marketing capabilities are also improved by funding at this level.
Expansion capital enables businesses that are already selling goods or services to grow. Second-stage capital funding helps enterprises that are already selling goods or services to increase. A business raises more equity capital at this point to develop its engineering, technology systems, sales, and manufacturing strengths. Many companies during the stage are not yet profitable. They often use the funding obtained at this stage to meet working capital needs and administrative and inventory costs. If required, third-stage funding will help with significant expansion projects, including plant expansion, integrated marketing campaigns, establishing a large-scale sales organization, and new product growth. The business is typically at or near break-even or profitable at this stage.
Stages of financing
Entrepreneurs have had to adjust to the harshest funding conditions in modern history. The world struggles to recover from the financial crash of 2008 and the most severe global economic crisis since the Great Depression. Traditional bank funding for existing companies is no longer open to any but the most creditworthy investors, and conventional sources of capital for startups are scarce. As a result, startup founders must recognize that the typical types of funding paradigms that served startups in the second half of the twentieth century until 2008 are experiencing dynamic changes. Much of this is due to factors outside their influence, such as global financial forces (6).
In the field of startup finance, we are now entering a New Era, with clear-cut funding methodologies being increasingly scarce. Financing for startups has entered an era of disruption. A startup can find itself relying on a hybrid combination of funding sources in a scramble for low capital, and these sources may appear in any order. We conclude that familiarity with conventional capital sources and strategies for finding money is still required before recognizing the News Age of startup financing. Seed funding for a startup is also the most complicated because it entails the most significant risk for investors. (7) This is the startup’s funding stage, where the entrepreneurs are usually bootstrapping their business with personal savings and credit cards. When you get to this point, you realize you need more money. Mates, family, and well-known acquaintances are always the source of the next round of funding.
Startups may use Private Placement Memorandums (8) to raise finance from an initial group of outside investors at this stage. Private Placement Memorandums or Private Stock Offerings mark the start of a startup’s stock ownership exchange for cash. Private placement investors have analyzed these opportunities to get ten times to 30 times return on their investment, but they might have no say in the company’s management. Furthermore, due to the current volatile economic situation, standards on investment return benchmarks for high-risk capital can no longer be assumed.
Angel investors frequently provide a necessary round of funding to startups in the early stages of their development. In several cases, startups have failed to consider angel investors as a source of financing. Angel investors are classified as seed-stage capital by some scholars, while others see angel investors bridging the gap between seed-stage and venture capital. Angel investing is a cross between the two (9).
Angel investors are typically wealthy individuals, such as successful entrepreneurs, who want to remain active in their business by helping the next generation of entrepreneurs. Angel investors are motivated by more than just money; providing needed and valuable feedback to the startup’s management is also rewarding. Before entering tailored agreements with angel investors, startup founders should take a close look at their own needs and conditions, as they may find themselves giving up more power over their companies than they want. Angel investors expect a 20x to 30x return on investment on their initial investment. Slow growth is not appealing to these buyers. These estimates are sometimes regarded as too speculative by angels. When discussing return expectations with angel investors, expect the playing field to change (10).
Venture capital (11) is a form of financing that typically comes after seed-stage and angel investor funding, used in the early stages of a startup’s life. This type of growth financing is given to high-potential, growth-oriented businesses that need a large amount of money. The amounts are generally in the hundreds of thousands of dollars and can reach tens of millions of dollars or more. It should be remembered. However, venture capital funding can occur at any point during the startup’s early stages, up until the IPO. Money invested in startups carries a high level of risk for venture capital firms, including the potential of losing all of their profits.
Crowdfunding is creating a new form source of revenue for startups in the seed stage that is just starting to develop. We believe that this type of capital financing will be a massive opportunity for startup companies in the future. We assume that crowdfunding has the potential to drastically alter the global venture finance landscape. Although crowdfunding, also known as crowdsourcing, has long served the financial needs of charitable causes, musicians, writers, and non-profit organizations, the 2008 financial crisis prompted the need for a new model of small-scale financing for commercial projects (12).