Lectures

NPTEL
COURSE ON ENTREPRENEURSHIP
Perspectives of Business Strategy and Economic Development
WEEK 7 – LECTURES 31, 32, 33 and 34

Course Module 8 (Part)
Raising Finances and Developing Financial Strategy
Prof. C Bhaktavatsala Rao, Ph.D.

Ajit Singhvi Chair Professor
Department of Management Studies

Indian Institute of Technology Madras
NPTEL
WEEK 7 – LECTURE 31

Part 1


Entrepreneurial Odds
Odds are many in the entrepreneurial and start-up journey:
• conceptualisation of the product or service,

• arrangement of finances,
• assembling of the team, Passion Constraints
• establishment of the project,
• development and proving of the product or service,
• delivery of the product or service, and finally
• earning of reasonable returns
These activities are both sequential and simultaneous, and often iterative as the
entrepreneur seeks to overcome challenges and leverage opportunities.
These core, critical steps in the journey of an entrepreneurial enterprise also need to
be consistent with the capabilities and potential of the entrepreneur.
While there may be little precision on when and how the challenge for
entrepreneurial journey ends, and the quest for enterprise sustainability begins, the
ability to raise funds that support growth is critical to entrepreneurial success.
3
Expansion and
Financing Staircase Diversification Phase
Growth Phase
Testing and Validation

Phase
Initial Public Offer

Prototyping Phase
Private Equity
Funding
Ideation Phase
Venture Capital
Series Funding
Angel and Seed

Funding
Personal and
Family Savings
Smooth and seamless

financing is essential for
sustainable start-up
development
4
Macro Funding Scene
The funding scene for start-ups has changed significantly for the better over the last five years.
There is a huge spurt in start-up sub-verticals based on disruptive technological and business
trends which have attracted increased funding interest.
Globally, the financing staircase for a start-up follows a typical path:
• At the ideation stage, personal savings and institutional grants

• In the prototyping phase, financial support from angel investors and seed funds
• In the testing phase, bridge funding by angels and venture capital firms
• In the growth phase, more structured venture capital funding in multiple series
• For the major expansion and diversification phase, private equity investments
Start-up investment profile in India is no different from this approach:

USD 231
Million
The size of each investment rounds has been scaling up,
reflective of investor confidence in the Indian start-up potential USD
11,000
Million
The value of deals has scaled up from USD 231 million in 2011 25 percent
CAGR
to USD 11 billion in 2018, representing a compounded 2011-2018
annual growth rate of 25 percent
5
Indian Start-up Funding & Investment Trends
Seed funding tends to be available from amounts as low as USD 50,000 to as high as USD 1 million
while equity funding tends to be available from USD 500,000 to USD 2.5 billion.
Over the last four years, each month the number of deals vary between 50 and 100 typically. There
tend to be ups and downs, and variations across stages, though.
In 2018, deal values and deal numbers reduced, although the trend remains growth oriented
The nature of participation is usually multilateral with several investors participating in various
rounds. Such participation also enables partial or full exits by early stage investors.
An important feature in India is the continued dominance of consumer internet and e-commerce
platforms which cater to regular consumer and consumption needs.
At the same time, healthcare, fintech, big data, logistics,

Cloud SaaS products, and artificial intelligence
are emerging as hot areas.
In terms of locations, Bengaluru continues to lead the

start-up activity while Mumbai, Pune, Chennai, Gurugram,
and Hyderabad constitute the other locations.
6
Some Areas of Start-up Investor Interest
Retail
e-
commerce
Digital
Hospitality Logistics
Digitisation Fintech
Edtech
Big Data,
Medtech
Analytics
AI, ML, DL
Digitisation of products and services rather than fundamental R&D is the main driver of investments into start-
ups in India. Unlike in the West, where fundamental research by start-ups has a valuation and acquisition
appeal to global giants, the emphasis in India is on market-consumption based value creation
7
Funding Experience
Overall fund-raising by start-ups in India has registered a quantum jump over the last few years.
This trend is even more visible in respect of technology-driven start-ups.
The funding in the last 5 years represents over 50 percent of the funding over the last 15 years
Funding is increasingly focussing on growth stage, signifying an intent to capitalise on earlier

investments
At the same time, the decline in early-stage investment in start-ups (seed capital or angel funding)
reflects a slowdown in new ideation on one hand and a concern on the mortality of early stage start-
ups on the other.
Angel investors through their investment forums and the government through its Start-up India
recognise the need to encourage early stage start-up funding.
Post-
Post-
Build
Commercialisation
Stage
Early Growth Late
Stage Stage Stage Stage
Idea and
Build
Stage
8
India as a Start-up Funding Destination
India has, over the last few years, become
a global destination for start-up investments.
These investments are typically in terms of

seed/angel and venture capital/private equity
investments, which are related to the stage of the firm.
The first seed investment phase is usually a round of strategic investments by the promoters, their
friends and families, high net worth individuals and angel investors.
This phase enables the idea to take shape and go through the stage of prototype build to different
degrees. The second and third phases of venture capital and private equity funding must follow,
which typically could occur in multiple sequential series.
Venture capital funding helps start-ups take their prototypes to commercialisation and beyond
while private equity funding helps start-ups scale up as mainstream companies. It is a win-win
providing opportunities for exit when the start-up company accomplishes scale and value.
Table presents the Indian start-up funding profile covering the period January 2015 to September
2017, in terms of total funding (seed plus private equity) received across fifteen notable verticals
and one miscellaneous group of other verticals, with a coverage of 2,441 start-ups in the data
stack.
9
Macro Funding Data
10
Start-up Funding Snapshot - 2018
Since 2014, Indian tech start- ups raised more than USD 44 Bn across nearly 4000 deals
This includes investments in unicorn giants such as Flipkart and capital infusion into Amazon by the parent
In 2018, Indian start-ups could raise USD 11 billion with around 750 deals
2018, in fact, saw a deceleration in funding and the number of deals by 16 to 20%, compared to 2017
Seed stage funding dropped by 40%, while growth stage funding remained the same and late stage funding
increased by 18% in 2018 relative to 2017
As many as 11 companies entered the global unicorn league
Nearly 700 investors participated in the start -up investments in 2018.
11
Funded Start-up Hubs
By AMOUNT By FUNDED
12
Trending Themes in Funding
Given the pervasiveness of digital technologies, it is indeed difficult to classify the verticals without
overlaps. Dedicated e-commerce business marketplace dominates the funding share (33.6 percent).
Sector-based themes such as hospitality, real estate, logistics,

E-
food and beverage, healthcare, fintech, fashion, education, Commerce
Edtech Growing on-line
and cybersecurity are emerging as notable themes

(with shares up to 18 percent).
AI/ML/DL Medtech Foodtech
Typically, for the chosen universe, seed funding
constitutes 13 percent of total funding. In terms of the
number of firms, there seems to be a more secular
distribution of firms, with most of the sectors having Virtually every
Fintech Digitech
sector digitised
100 to 150 start-ups.
The funding ticket size is significantly larger in the e-commerce marketplaces at say, Rs 50 million
average per start-up, compared to other themes which could range between Rs 2 million and Rs 25
million per start-up. This higher ticket size is linked to the desire to drive up scale rapidly in the
consumption space
Interestingly, seed funding moves somewhat secularly into different thematic fields but private equity
seems to be flowing strongly into consumption-led sectors, besides e-commerce.
This level of funding is supported by entry of several angel investors, venture capital investors, and
private equity investors into the Indian start-up scene. 13
2018 Deals by Sectors
Top 5 by DEALS Top 5 by AMOUNT
Fintech Ecommerce
Enterprise Tech Consumer Services
Ecommerce Fintech
Consumer Services Travel Tech
Healthcare Enterprise Tech
14
Funding Distribution by Sectors – By Amount and by Deals
By AMOUNT By FUNDED
15
Funding Canvas
Funding canvas for scale-driven start-ups is vast. Even after start-ups scale up (eg., Flipkart), and
are no longer start-ups in the real sense, scale-related start-ups tend to be richly valued for
additional funding.
A start-up which is a first mover in the domain, has executed its business model well, is growth
oriented, and is willing to consider multiple funds for supporting its growth scores with substantial
funding.
For example, prior to acquisition by Walmart in 2017,

Flipkart received an investment of USD 2.5 billion
by SoftBank, taking the total pre-acquisition funding
to USD 5.7 billion – impressive by any standard.
Secondly, for start-ups which have validated their technical premise and proven their business
model, financing can stabilise between USD 100 to 300 million. This region is crucial for start-ups in
in the scaling up mode. If they are unable to demonstrate continued success, they are likely to be
denied further funding and eventually face disruption of operations.
Thirdly, there are multiple funds that provide funding from USD 100,000 to
USD 1 million for start-ups to take their first growth steps. USD
1,000,000
USD
100,000
USD
10,000 16
Funding Pyramid
Of the several regions reported in the TechinAsia database, India leads the pack with
over 10,000 cases.
That said, there is no doubt that India is experiencing, in an absolute sense, heightened
start-up activity. The start-up evolution is typically like a pyramid in terms of number of
deals but an inverted pyramid by value.
A large majority (as much as 66 percent),

By Value
by number of cases, will be in seed and grant
as well as other undisclosed funding modes.
Series A to J comprise about 23 percent; Series
and within that Series A and B comprise
82 percent of all Series A to I cases.
Pre-Series
Interestingly, 10 percent of all start-ups end up
getting acquired. Less than 0.1 percent emerge
as full-fledged corporates with private equity Seed
participation or public offerings.
Given the billions of dollars that are at the disposal of the fund houses that have
developed an exposure to the Indian start-up scene, the potential to achieve a quantum
17
jump in start-up funding is evident.
Funding – Patient but Expectant
The venture capital economic models are patient for returns but expectant in terms of scale of
returns. The returns expected or received by the angel investors and venture capital or private
equity investors is not in public domain.
The returns depend not only on the entry and exit prices Invest
but also on the dividends and bonus shares received.
An angel investor who is like a micro venture capitalist Wait

would expect a return in low single digits while venture
capital firms and private equity firms could expect
returns in mid and high single digits. Encash
While angel investors may look to exit within 2 or 3 years
for their sub-million (or million, in certain cases) dollar investments to pay off, venture capital and
private equity firms could be patient to wait for a long period of 5 to 10 years for their multi-
million dollar investments to pay off.
The recent IPOs of select high-growth start-up and other companies, which have seen partial or full
exits by private equity investors, have reflected pricing of shares at 25 to 250 times of the par value
of the shares of Rs 10 each.
These thumb rules imply that start-up firms need to target sustainable and profitable growth for
virtuous equity-led growth models. 18
Enterprises in the Making
All the world’s known investment firms specialising in start-up funding are now in India and are
appreciative of the potential of India’s start-up movement.
That said, India’s start-up endeavour needs

Single Product, Many Products, Many
a much larger investment ecosystem that Markets
Many Markets
enables bigger businesses to seed and grow
smaller start-ups, and rich individuals turn Product-Market
angel investors to needy start-up entrepreneurs. Configurations
The opportunities for such investment occur all Single Product, Many Products,
around us but need a specific start-up mind-set to Single Markets Single Market
fructify.
Start-up entities which cater to one product and one small market segment are best termed as
nano enterprises. A nano enterprise is usually operated by only one individual, the owner.
We see and depend on several self-employed persons each day but do not see them as nano
enterprises.
It is amazing how the nano-entrepreneurial effort is surviving in India despite lack of attention to it
by the formal economic system.
Societies must be guided to take an enterprise view of self-employment and support nano
19
enterprises in terms of upskilling and upgrading
Management helps Firms Cross Scale-Barriers; From Nano to Mega
A start-up print house which prints documents for multiple clients with a printing machine and a small
team of assistants, a local restaurant or a tailoring house represent micro enterprises
A print-house with a national network of additional design capability and manufacturing capability for
various types of documents and accessories, a city-centric chain of restaurants or a clothing cum tailoring
house represent small scale firms
A publishing cum printing house, a pan-Indian restaurant chain, and an apparel manufacturing company
all of which in current times require modern technologies, trained work force and capable management
represent medium scale enterprises.
All listed national companies with highly organised research, manufacturing, and marketing capabilities
are the typical large companies; for example, a multimedia corporation with core competencies in print
or television media, a ready-to-eat foods company, and an end-to-end textile and apparel company typify
large companies.
Bluechip companies and giant corporations in diverse industrial

segments corporations, with global scale and scope,
constitute mega corporations.
Theoretically, sky is the limit for even humble entrepreneurial beginnings.

The indigent nano entrepreneur, if equipped with a semi-motorized cart,
can cover more neighbourhoods. Finance and management can make
an aggressive local retailer become a national multi-brand retail chain.
20
NPTEL

Part 2


Six Types of Enterprises
 The very basic enterprises
 Limited to individual effort
 One-person (owner) companies
 Extension of individual craft and local

nativity
 Balanced and sustainable foundation
for start-up
 Mainstream companies that Nano  Hyperlocals that can become chains
are national and global Enterprises
 Technologically and financially
endowed
 Often industry leaders
Mega Micro
Enterprises Enterprises
Enterprises
 Highly successful start-ups or

 Directed start-up enterprises
graduated medium scale
Large Small Scale  Largely dependent on OEMs
enterprises
Enterprises Enterprises and large customers
 No longer start-ups, having
 Typically, B2B in approach
graduated into the mainstream
 Subject to structured
competition
Medium Scale
Enterprises
 Established with purpose, ab
initio
 Often, graduated from small
scale enterprise level
 Requires dedicated and
assured funding 22
The Start-up Canvas – Nano Enterprises
Start-up entities which cater to one product and one small market segment are best termed as
nano enterprises.
Nano enterprises are an integral and dominant part of Indian employment system, and
interestingly the nano-entrepreneurial effort is surviving despite lack of attention to it by the
formal economic system. Some examples:
• vegetable cart vendors serving homes in multiple streets,

• street-side tailors meeting the clothing needs of the location,
• corner shops providing grocery items for neighbourhoods,
• mobile tailor with sewing machine
• local iron person,
• street vendors for snacks, fruits and vegetables, and
Image: Courtesy, Reuters
• A host of such service providers
A nano enterprise is usually operated by only one individual, the founder or the owner.
In the past, they were seen as individual self-employment activities and were left at that
In today’s environment, each such nano enterprise itself can grow into a small scale enterprise with
upskilling and wider business horizon, supported by funding and technology.
Yesterday’s plumber and electrician are today’s UrbanClap, for example! 23

The Start-up Canvas – Micro Enterprises
Micro enterprises are emerging as the new seeds of India’s entrepreneurial movement;
technology has given a new reach and scope for such micro enterprises
Micro enterprises are based on the premise that individual craft and local nativity could be turned
into businesses in their own right. Examples abound:
• graphic and web designing houses which provide publishing support,

• print houses which print multiple products for multiple clients,
• a restaurant which provides multiple cuisines for a multi-ethnic population, and
• a boutique which caters to multiple clothing styles.
Institutionalised craftsmanship, with or without

digital support, drives typical examples of
the next level of micro enterprises.
Micro enterprises have a few good attributes relevant for a sustainable start-up economy. They:
• are typically hyperlocal but have the ability to replicate themselves into chains of hyperlocal
enterprises,
• combine product and service attributes and are thus able to generate customer engagement
and brand equity, and
• represent a balance between investment needs of business and funding capabilities of founders
Micro enterprises emerge as a winning starting approach for a diversified start-up movement 24
The Start-up Canvas – Small Scale Enterprises
Small scale enterprises (SSEs) have been the mainstay of India’s entrepreneurial movement,
focussed essentially on manufacturing output for large scale enterprises
Government policies traditionally provided investment and tax subsidies for SSEs besides land in
State industrial parks, leading to growth of SSEs. Examples abound:
• ancillary component suppliers for original equipment manufacturers (OEMs)

• bus and truck body building units
• units in dedicated thematic zones (eg., apparel, pharmaceuticals, electronics)
However, SSEs became victims of their own initial advantages:
• dependence on OEMs subjected them to market vicissitudes faced by OEMs,

• exclusive relationships constrained SSEs from exploring broader opportunities, including
exports, and
• SSE mindsets and supportive policies acted as disincentives to grow business beyond subsidy-
qualifying levels or to undertake investments for technology upgradation, product-market
diversification and capacity expansion
With ‘market-seeking’ and ‘market-making’ rather than ‘market-assurance’ becoming driver of

India’s start-up movement, SSEs may see a transformation in their strategies in future
25
The Start-up Canvas – Medium Scale Enterprises
Medium scale enterprises (MSEs) are matured small scale enterprises or entrepreneurial firms
established on medium scale from the very initial stage.
Corporate investments in entrepreneurial ventures based on criticality of technology and supply

for OEMs facilitate formation of entrepreneurial MSEs.
Certain domains such as pharmaceutical R&D will also require entrepreneurial firms that are of
medium scale from the very beginning
Recent government policies reducing tax rate to 15 percent for new enterprises could spur scale-
oriented entrepreneurial effort; even so, entrepreneurial MSEs could be second generation
enterprises than first generation enterprises
MSEs tend to be set up with:
• Certainty in product and market opportunity,

• Established funding lines,
• Modern technologies,
• Structured organisation, CEO
• Trained workforce, and

• Capable management COO CCO
MSEs provide sustainable, rather than disruptive, entrepreneurship. VP-

VP-Mfg VP- Sales
Quality 26
The Start-up Way to Grow
Each enterprise develops based on two parameters:
Growth with
Sustainability
Efficiency: the ability to cover more in a day (for example,
the number of households the vegetable vendor
can cater to in a day), and Revenue-
Profit
Scalability: the ability to convert efficiency into profits Optimisation
that can be reinvested (for example,

the growth trajectory from being a local cart vendor Scalability Sustainability
to multi-city grocery deliverer)
The above is a function of entrepreneurial energy that is fuelled by finance and management.
With an already large economy which is set to grow further driven by demographics and technologies,
India offers several domains, each with potential for hundreds of start-ups and millions of dollars of
investment each year.
This presents a great opportunity for different types of firms, from nano to mega to co-exist and also to
evolve higher in scale and scope.
India’s healthcare sector is one prime example with co-existence of nano, micro, small, medium, large,
and mega start-ups.
Also, today’s medium, large, and mega healthcare start-up firms were nano, micro and small firms in their
earlier years, validating the theory of start-up evolution.
A typical start-up hierarchy in the Indian healthcare sector is illustrated in the following slide 27
A Typical Start-up Hierarchy - Indian Healthcare Sector
Healthcare has been a hot area for start-up establishment and investments. With a large and growing population (1.3 billion), high
disease incidence, growing healthcare awareness, slow and steady insurance growth and better incomes, healthcare offers a perfect
fit for a wide range of start-up firms - from nano to mega. The healthcare sector saw annual investments in excess of USD 1.5 billion
(on average) over 130 deals (on average) in the last few years.
Mega
Large THYROCARE
 National
Medium PRACTO
diagnostic
 Doctor-patient laboratory
Small PORTEA platform with network
Micro ATTUNE  Home healthcare complete medical  Market cap of USD
 Total funding of services 570 million
 Cloud healthcare  Total funding of
Nano DOXPER USD 47 Million
tech solutions USD 170 Million
MEDINFI  Health tech IoT  Total funding of
 High seed funding USD 16 Million
 Doctor discovery of USD 750,000
platform
 Base seed funding
of USD 125,000
28
Top funded Start-ups in 2018
Industry Type Company
Fintech
Edtech
E Commerce
Consumer
Services
Enterprisetech
Traveltech
Media &
Entertainment
Healthtech
Deeptech
29
Idea to Enterprise Mentoring
From the yesteryears’ movie magazine idea to Start-up

yesterday’s direct-to-home television,
true entrepreneurial effort is: Success
Financing
• not one of a product or service whose time has come
• but one of an idea which has been thought of ahead of its time
With the explosion in knowledge levels and the implosion in customer needs there exist
today far more product and service ideas than at any point of history.
Mentorship and financing are two critical inputs which can help the nano, micro, and
small enterprises get established first, and later become medium, large, and mega
enterprises progressively.
While large firms have the necessary track record and competencies to raise resources
for new entrepreneurial ventures in their quest for growth, nano, micro and small firms
need explicit, dedicated and empathetic support.
30
Passion to Performance
Performance
Indian investors, financial institutions, banks, and
companies have resources but are in need of Passion
structures and policies that channel their funds
to support start-up firms.
Idea
The financing options for start-ups in India
are still procedurally modelled after
funding established businesses
The financing and investment eco-system will need to be specifically geared to spot entrepreneurs
and help them translate their ideas into enterprises or organised activities.
In India, nano, micro and small firms can emerge and survive only based on conservative bank
priority funding.
India, therefore, needs a wholly new genre of entrepreneurial financing, whether it is a uniquely
Indian type or an established Western type.
Fintech start-ups and a new breed of financial entrepreneurs are required to lead a whole new
entrepreneurial revolution in India.
Several alternative models, each of which will be relevant to a different type of entrepreneurial
initiatives, are discussed below. 31
Financing Options Available for Start-ups in India
Own/Family Identify Engage

Funding Pitch
Late Crowd
Bootstrapping
Growth Funding
Early High Net

Government
Worth
Start-up
Individual
Support
Angel
Investments
Funding
Private/Public
Private Equity
Sector
(PE)
Incubator
Investments
Support
Multiple
Funding
Options for
Start-ups Not-for-profit
Alternative Investment
Investment (especially for
Funds Social
Entrepreneurship)
Established
Micro-finance
Entrepreneur
Corporation
Finance Investment VC/PE
(MFC)
Investment
Investments
Vehicles
Non-Banking
Financial
Operation Innovation Corporate
Corporation
Investments Banking and
Financial (NBFC)
Promise Execute Deliver
Institution Investments
Promotion Scale-up Investments
32
Own/Family Financing
Personal Savings Family Savings Friends’ Savings
Passionate entrepreneurs/ start-up founders typically plough back their job savings or family silver to set up start-
up enterprises
The family ecosystem is an important plank of entrepreneurial development, given the strong family and social
moorings in India
It is important for working executives to set apart a small percentage of their earnings to create their own start-up
fund to be able to have their own start-ups or fund other start-ups
This approach is particularly relevant for university

Savings for
professors, and corporate researchers and technologists who
Start-up
possess a natural potential and proclivity to consider the start-up route
This approach can be taken by working executives to fund nano

enterprises which in India require no more than Rs 100,000 (USD 1500)
Even retired personnel can reinvest a small part of their Total

Earnings
retirement proceedings to set up their own nano enterprises,
be it a corner shop or a core service for the community.
Family Retirement
Needs Needs
High Networth Individuals (HNIs), more particularly, should keep a
target of creating a few nano-entrepreneurial ventures each year
and leave their stamp on the history of India’s entrepreneurial development.
33
Community Financing
Extending the concept further, gated communities and apartment associations can have an even
more impactful role
Gated communities and apartment associations typically have a greater access to collective
resources and provide a ready demand base of captive user needs
These entities can help establish nano-entrepreneurial

ventures that meet the local community needs effectively.
From a security service to a mechanized laundry, and from

a library service to a documentation service, opportunities
for creation of nano ventures by gated residential
communities are indeed plenty.
As these gated communities develop into new suburbs

and mini-cities, the nano and micro foundations of business Image: Amar Prakash
can indeed grow over time.

Community Start-ups
The lesson here is that individuals and communities have far helps Start- serve
ups with community
greater power in their hands to create nano entrepreneurs hyper-local with prompt
requirement attention,
than they realize. for services creating a
and financial core anchor
support for future
34
Individual Start-up Funds as a Concept
To enable a broad-based and more structured public participation in start-up movement, the policy
framework should enable formation of Individual Start-up Investment Funds (ISIFs)
Under this scheme, an individual or any group of individuals should be allowed to set up an
Individual Start-up Investment Fund (ISIF) with a lower base fund limit of Rs 50 lakhs to Rs 1 crore
with a singular focus on nano and micro start-up funding.
ISIFs should be allowed to invest in the seed rounds of nano and micro enterprises and exit through
Series A funding, with their capital gains fully exempt from tax.
This will enable common middle class citizens as well as high income individuals get together to
stimulate localised nano and micro start-up activities.
ISIF, which is a take on Alternative Investment Funds, is just an example of how individuals can be
entrepreneurially encouraged and enabled to prime entrepreneurial
movement in India, with a hyperlocal focus
HNIs investing Nano & Micro Creates huge

in… Enterprises social wealth
35
NPTEL

Part 3


HNIs
Angel Funding
Leaders Angel
Network
Angels are High Networth Individuals (HNIs) Mentors
who are committed to invest in early stage
start-ups either individually or through Angel Networks.
Angel Networks adopt a structured process of inviting applications for start-ups,

evaluating the start-up proposals through independent agencies and investing in them
Typically Angel Networks seek to cash out as part of subsequent Series Funding steps so
that they can provide returns to the HNIs and also enlarge the corpus for subsequent
investments.
Start-ups also engage with individual members of the Networks not only to receive their
individual investments but also to get presented to the Angel Network.
Angel Networks in India are, by and large, organised regionally although they accept
applications from start-ups anywhere
Typically, angel investments do not come with restrictions of board membership and
other governance parameters demanded by venture capital and private equity firms,
and hence are first choice for start-ups for early stage funding. 37
Select Top Angel Investors in India - 2018
SL NO INVESTORS PREVIOUS POSITION
1 Binny Bansal Co-founder, Flipkart
2 Sachin Bansal Co-founder, Flipkart
3 Kris Gopala Krishnan Co-founder, Infosys
4 Ratan N Tata Chairman Emeritus, Tata Motors
5 Nandan Nilekani Co-founder, Infosys
Lead Profiles Marquee investors Founders of high-value Founders of mainstream

start-ups corporations
Other Profiles Academicians High networth Industry executives
individuals
Phases Post-retirement Post-cashout In service - supported by employers
Scope Personal investments Tactical investments Strategic investments
Purpose Social purpose Business purpose Profit motive
38
Some Angel Networks in India
Perhaps the largest angel network Probably the second largest angel
in India; offers up to Rs 6 crore per network in India; InMobi has been a
business flagship investment
The Indian
Angel Mumbai
Network Angels
High
Perfection
Low
Keiretsu Low High Let’s Venture

Innovation
A platform, located in India, US and Singapore, A platform, located in India and Singapore,
which connects investors and start-ups, and which connects investors and start-ups,
enables the investor-members take their and enables the investor-members take
individual investment decisions their individual investment decisions 39
Incubator Support
Incubators are infrastructure platforms
that make available plug and play facilities,
co-working spaces, legal and patenting
support as well as mentoring to start-ups
Incubators enable start-ups overcome their resource constraints to an extent and get
organized well.
Incubators provide relief to start-ups in ideation and prototyping phases as well as in PoC of
MVP.
Government of India has set up Atal Incubation Centres (under Atal Innovation Mission) in
public and private sectors in addition to scaling up Established Incubation Centres.
Several State Governments have also set up State level incubation centres.
Armed with grants, the incubators are well positioned to support start-ups pursue their
programmes
Details are available at:

https://www.startupindia.gov.in/content/sih/en/compendium_of_good_practices/incubations
upport.html
40
Incubator Support for Not-for-Profit Start-ups
Some Incubators and Accelerators provide specific
investment support for start-ups that are set up
with not-for-profit motive
Such platforms are especially helpful to encourage

and sustain social entrepreneurship that aims at
improving the Quality of Life in the country
N/Core is one such incubator which is set up

with participation from Cisco, Ford Foundation,
and IRB Infrastructure
N/Core recently unveiled Series/N to provide funding

for 30 start-ups over 5 years, ranging up to Rs 2 crore
for each start-up
N/Core has senior executives from various IT

and other companies to mentor and nurture start-ups
Incubators typically provide their funds in any of the

four forms of grants, debt, quasi-equity and equity 41
Other Investors
Angel Networks - Venture Catalyst, Indian Angel Network, Mumbai Angel

Network
Incubators and Accelerators – Y Combinator, Axilor
Angel Networks – 19 : 81 Deals
Incubators and Accelerators – 250+ : 46 Deals
42
Bootstrapping as a Source of Finance
Bootstrapping is a method of financing a start-up through creative use of resources, trade channels and
other stakeholder relationships, without raising equity from equity investors or loans from banks.
Bootstrapping is highly advantageous to founders because equity is not diluted and loans are not
contracted; they retain full value of the company
Leasing of real estate and equipment can be a cost-efficient way of setting up the initial base for the
start-up
Facility Product Capital
Bootstrapping can work in product development when
potential customers have a stake or interest in the product Plug and R&D that is Working
and are willing to pre-fund the product Play aligned to a capital to
facilities to value chain produce
minimise or a theme and sell
It can also work in prototype build when the fixed costs
contract manufacturing organisation (CMO) has capacity
that can be offered in anticipation of future payments
Founders need to be adept at tight working capital management

to be able to be successful at bootstrapping
Bootstrapping should not be seen as a permanent or complete financial solution as bootstrapping can
limit the start-up to a resource-strapped stalemate too
Bootstrapping should be used to develop internal skills and build value in the start-up without equity
dilution or interest burden
43
Early Bootstrapping by the Current and Famed Rich
Reference: https://richtopia.com/effective-leadership/10-successful-companies-started-
bootstrapping-case-studies
Reportedly, founders of major tech giants today went through a bootstrapping phase in the early
stage of their entrepreneurial journeys in each case –
Demonstrating the value of creating the product concept and building prototype on shoestring
budgets
Robert J. Lahm and Harold T. Little succinctly write in their seminal research article Bootstrapping Business Start-
ups:
“Bootstrapping is entrepreneurship in its purest form. It is the transformation of human capital into financial
capital.”
44
Alternate Investment Funds
In India, Alternative Investment Funds (AIFs) are defined in Regulation 2(1) (b) of Securities and
Exchange Board of India (Alternative Investment Funds) Regulations, 2012.
AIF refers to any privately pooled investment fund, Alternate

Investment Funds
(whether from Indian or foreign sources), in the form As Per Regulations
of a trust or a company or a body corporate or

Innovative
a Limited Liability Partnership (LLP). Funds
Policy Creativity Needed
Hence, in India, AIFs are private funds which are

Category I Category II Category III
otherwise not coming under the jurisdiction of
Start-up Funds PE/VC Funds Hedge Funds
any regulatory agency in India.
As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012
Alternative Investment Funds shall seek registration in one of the three categories:
• Category I: Mainly invests in start- ups, SME's or any other sector which Govt. considers
economically and socially viable.
• Category II: These include Alternative Investment Funds such as private equity funds or debt
funds for which no specific incentives or concessions are given by the government or any other
Regulator
• Category III: Alternative Investment Funds such as hedge funds or funds which trade with a view
to make short term returns or such other funds which are open ended and for which no specific45
incentives or concessions are given by the government or any other Regulator.
Western Venture Capital Model - 1
Venture capital (VC) firms entered the Indian industrial scene in the 1990s in a big way along with
the economic policy liberalisation.
VC firms’ entry was pursuant to a decision of the Government of India to allow foreign finance
companies take stakes in the Indian companies.
Taking stakes of 10 to 25 percent in the capital structure of new as well as fast growing companies,
venture capital firms enabled a number of first generation enterprises strengthen their equity base
and also list themselves on the bourses.
Venture capital funds enable companies achieve the crucial leap from a modest beginning to a
growth-oriented stage, accessing technologies or markets through their equity financing.
As companies are not typically listed at that stage,

venture capital firms take stake based on stock pricing Pre- •Post-
prototype
Series A
negotiated with the promoters.
Seed funding and Series A, B, and C funding Series A •First

commercialisation
constitute the primary support to start-ups.
•Growth
In most cases, additional Series funding rounds D, E etc., Series B capital
are commonplace
46
Western Venture Capital Model - 2
While venture capital firms serve a valuable purpose, their emphasis on growth and exit at
attractive valuations, through listing or further sale to other strategic investors, tends to distort
orderly growth of companies through additional investments direct into the companies.
Typically, venture capital firms help establish medium scale enterprises with their investments
ranging between USD 10 to 50 million. Venture capital firms tend to be sector-savvy, betting on
sunrise and entrepreneurially driven sectors.
India’s IT and pharmaceutical sectors in the 2000s benefitted from venture capital investments.
Potentially, venture capital can support India’s drive into sunrise sectors such as biotechnology,
nanotechnology, healthcare, education, artificial intelligence, alternative fuels, and clean
technologies, providing confidence to entrepreneurs move into such sectors.
That said, if the global venture capital funds

tie up with Indian groups the ability to take risks
relevant to the Indian scenario could be reinforced
and in greater focus with India’s needs.
Adaptive
Local
Global VCs VC
Corporates
Ecosystem
47
Top Venture Capital Firms in India - 2018
SN NAME
1 Accel Partners India
2 Sequoia Capital India

3 Blume Ventures
4 Nexus Venture Partners

5 Kalaari Capital
6 Matrix Partners India
7 Omidyar Network
8 Saif Partners
9 IDG Ventures
10 Beenext Ventures
48
Global Private Equity Model - 1
While venture capital funding and private equity funding are seen to be synonymous, private equity
funds tend to favour listed companies for their investments.
Most private equity firms enter established firms through preferential allotment of new shares to
themselves at prices that reflect market valuations or reflect specific premiums based on their
insights into business plans.
While venture capital firms provide growth capital, private equity players provide funding for a
variety of purposes including growth capital, capital for retiring debt, mezzanine funding and
acquisition war chest.
With investment ranges from USD 50 to USD 200 million, private equity firms can truly shape
medium scale enterprises become large corporations.
Globally Networked
PE Funds
Though the global economic downturn of 2008 and 2009
saw the weak foundations of organised venture capital
and private equity industries, entry of big funds
like SoftBank and Alibaba has led to deal sizes Japan and China
skyrocketing to a big range Based Funds
of USD 500 million to USD 2.5 billion.
US and Europe
Based Funds
49
Some Top Global Private Equity Players
Global private equity players have huge fund levels, reaching up to USD 60 billion in the case of top ranking PE
player, and play major role in funding established start-ups moving into mainstream arena
50
Global Private Equity model - 2
The established private equity industry has global investors. Their investments are
subject to returns to their investors, some of them extremely large and powerful ones
such as global pension funds.
Some of the leading global equity firms have been driving Indian start-up and
established firms’ industrial growth aggressively
In good times, these private equity players are nation and sector agnostic, seek a
diversified investment portfolio and display a penchant for globalisation of their
portfolio firms.
In difficult times or when other nations secure better investment rakings, they tend to
be cautious and selective as well
Indian PE Firms
Indian financial institutions,
gratuity and pension funds,
Banks and Financial Pension
provident funds Institutions Funds
and mutual funds as well as large
public and private sector groups have Private Public Sector
the potential to create India’s own Mutual Funds
Corporations Undertakings
private equity behemoths. 51
State as Super Equity Player - 1
As large firms grow larger, many grow beyond the reach of even large private equity players. Large
firms and private equity players manage the situation by creating subsidiaries for newer activities
and channelling equity flows.
In countries such as India where government owned public sector undertakings (PSUs) occupy
commanding heights of the economy, the State has to assume the role of a super public equity
player or venture capital player, with respect to the PSUs.
Several corporations in infrastructure sector have emerged due to such public investments by the
Government of India. These PSUs are also given special status as Maharatnas, Navratnas, and
Miniratnas based on their financial scale and performance.
Such PSUs, in turn, have led to creation of new strengths in the economy, which the private sector
or the overseas players would consider to be either beyond their means or their risk profile.
PSU-driven
start-ups
Disinvestment
Proceeds
PSUs
Maharatna,
Navratna and
Miniratna
Enterprises
Image courtesy thehansindia.com

52
Government Policy Framework
As of date, there are as many as 58 schemes that are available under the aegis of different central
ministries and departments that support start-up activity.
These are comprehensively listed in the Government of India ‘startupindia’ website

(https://www.startupindiahub.org.in).
From grants which help training of unemployed individuals to funding of high risk-high reward
research there are several options available for a wide range of start-up needs.
There are several schemes available under the aegis of the State Governments too. It would be a
good idea to have a start-up firm that connects start-ups with the government schemes, and also
with incubators and accelerators as well as with mentors, investors, and other enablers.
53
Non-Profit Organisation (NPO) Support for Start-ups
Bharatiya Yuva Shakti Trust (BYST), an NPO set up in 1992 in India by Lakshmi Venkatesan is a trend
setter in providing end-to-end support for disadvantaged micro-entrepreneurs in the form of loans,
mentoring, networking, and marketing.
BYST nurtures the young micro-entrepreneurs until they reach a level at which they are not only
self-sufficient, but they in turn make a valuable contribution to the society through creation of
wealth and employment.
Over 4000 experts and professionals, including some actors and public figures, associated
themselves with BYST as mentors for entrepreneurs since its inception.
Nationally, BYST has supported 4200 micro-entrepreneurial ventures, employing over 175,000
people and providing training to several thousands of people since its inception.
BYST has both rural and urban training programmes

covering six major regions of India. Confederation of India (CII)
provides the infrastructure and administrative support to BYST.
BYST is also networked with international organisations

that are aligned to similar objectives. NPO model is
particularly appropriate when financial needs are low
and mentorship needs are high
54
Indian Start-up and Financing Ecosystem
The boom of the Indian start-up ecosystem started towards the late 1990s / early 2000s.
In a short span of less than 2 decades, India has witnessed a huge transformation across the
innovation & entrepreneurship landscape, with over:
• 20,000+ start-ups,
• 270+ incubation & business acceleration centres/programs,
• 200+ global & domestic VC firms supporting home-grown start-ups, and
• a fast-growing community of 230+ angel investors.
India also boasts of being home to the 3rd largest unicorn community, with over 18 high achieving
startups (started in the last 11 years) having gone on to raise over USD18 Bn funding, valued at over
USD 60 Bn.
These unicorns have made a huge difference by changing the outlook of global investors, VC & PE
Firms, and global corporates towards the massive opportunity posed by the growing Indian
consumer market.
The growing rise of internet users and falling internet prices

has played a catalytic role in expanding the ecosystem,
with over 600 Mn Indians now using internet services
across the county.
55
Corporations as Investors
The advantage of mainstream corporations taking to start-up investments is that there would be a well-
needed focus on, and dovetailing with, mainstream activities.
An overwhelming number of start-ups focus on digital applications, including e-commerce and digital
technologies while established corporations with a strong brick and mortar business have only peripheral
digital applications
Established corporations could gain a lot by investing in start-ups that are strategically aligned and
technologically reinforcing to their businesses
Reliance Industries, for example, has taken up a start-up

initiative covering modern technologies; for example,
physical products such as wind turbines, solar and
hydro-electric plants, logistics, artificial intelligence,
robotics and data analytics.
Take Solutions is an example of how a corporate investment of

Rs 2 crore by Shriram Group enabled the company become
a mainstream software solutions company.
Mahindra Group’s Rise project has been focusing on grants

for start-ups in energy and transportation sector while
Godrej Group’s venture capital fund has been focussing
on agricultural and consumer products.
If every successful corporation begins investing in and starts mentoring start-ups in related technologies
56
and products, India would see a significant level of product innovation and delivery
Reliance Start-up Portfolio
Reliance Industries has invested in 11 start-ups to reinforce its digital ecosystem
Source: https://inc42.com/features/indian-tech-startup-acquisitions-and-investments-by-reliance/
57
Focus Areas of Reliance Portfolio of Start-ups
Start-up Focus Area
C-Square Enterprisetech for digital commerce
SaaS enterprise for citizens to search for and access government

EasyGov
schemes/services
Embibe AI based digital learning solutions
Fynd Time-optimized sourcing of products for customers
Grab On-demand reverse logistics, first-mile and last-mile deliveries

Haptik Digital assistants
Netradyne Digital logistics solutions for fleet flow
Reverie Real-time delivery of online content in multiple Indian languages
Saavn Indian music streaming
Sankhaya Sustra High-performance computing
Tesseract Mixed Reality, Augmented Reality and Virtual Reality
Interestingly, Reliance has invested in start-ups that have already seen some traction
through investments by seed investors, VC and PE funds
58
Corporate Catalyst Model - 1
Major corporations, given their organisational infrastructure and market reach as well as their
financial capability can contribute impressively to the entrepreneurial movement directly and
indirectly.
The logical way is to convert or let go fragments of their value chain or operational spectrum as
nano or micro entrepreneurial ventures. This is a natural and economical way of creating
entrepreneurial value while enhancing the cost-competitiveness of the company.
Each function or domain of a firm, for example research, manufacturing, marketing, supply chain,
human resources, accounting, information technology and clinical trials, offers scope for creating
entrepreneurial outfits for outsourcing of fragments of such domains.
Chinese phone and appliances maker Xiaomi Corp

stated that it would invest as much as
USD 1 billion in 100 start-ups in India over the
next 5 years to develop an ecosystem of apps
around its mobile phone range is an example of this approach.
Courtesy Xiaomi Today
Elaborating, its chief executive Lei Jun stated that it pioneered such a start-up investment strategy
in China (investing in as many as 300 companies over the last four years for USD 4 billion) which was
instrumental in catapulting Xiaomi into the global big league in smartphones.
The chief executive also stated that the firm would like to do only a few core things by itself and let
its partners do the rest, which strategy contributed to its rapid growth. This model of big firms
growing through partner/affiliation relationships would offer a major opportunity for start-ups. 59
Corporate Catalyst Model - 2
Quite apart from such value chain participation, another way is to leverage a corporation’s
resources to reach out to wider population, create awareness and harness passion, in association
with Non-Governmental Organisations (NGOs) and Not for Profit Organisations (NPOs).
The success of the Teach India initiative organised by the Times of India media group in association
with select NGOs in bringing together educated experts to teach underprivileged children is proof
enough of the relevance of this approach.
Corporations can undertake with equal aplomb

entrepreneurial initiatives utilising their resources.
In addition to individual corporations industry

associations such as FICCI, CII and ASSOCHAM
can each play a catalyst role by creating divisions for entrepreneurial projects.
Government policies should facilitate corporations establishing Corporate Start-up Investment

Funds (CSIFs) with higher base fund limit of Rs 5 crore or Rs 10 crore which any group of
corporations can establish.
Such corporate funds should be allowed to invest in larger seed rounds and corporate grants, and
exit through PE funding or IPOs, with their capital gains partially exempt from tax.
Successful corporations have enormous funds at their disposal which they can effectively leverage
for both industrial and social start-up development. 60
Corporate Ventures
Several global corporations have set up venture capital arms that evaluate, fund and even
acquire promising start-ups
The practice is well established in pharmaceuticals and technology domains, given the
need for disruptive technologies and models
The images below are self-explanatory, in terms of the extent of the corporate venture
practice and the firms actively involved in the space
Indian corporations must take the cue and move into the corporate venture space to
develop value in the Indian start-up capital space
61
Infosys Founders’ VC Model
Apart from corporations directly supporting start-up and entrepreneurial development, promoters
of successful firms can themselves set up venture capital funds to support this endeavour
Infosys Founder, N R Narayana Murthy, set up Catamaran Ventures as an investment fund that helps
early stage start-ups; so have other Infosys co-founders, Kris Gopalkrishnan and Nandan Nilekani in
their own ways
Companies listed in the National Stock Exchange of India have

a combined market capitalisation of over USD 1 trillion.
Even a very nominal sale of the capital would provide
billions of dollars of funds for setting up promoter-inspired
venture capital funds.
If entrepreneur-heads of all listed companies dedicate a small share (say, from 0.1 to 0.5 percent) of
the respective companies’ shareholding/market capitalisation, USD 1 to 5 billion would become
available to support entrepreneurial ventures.
When this scale of finance is coupled with their personal commitment to mentor budding
entrepreneurs a sea-change would occur in the entrepreneurial scene.
Vedanta, India’s metals and energy conglomerate led by Anil Agarwal, has pledged 75 percent of its
wealth for investment in programmes with socio-economic objectives.
Several other successful entrepreneurs as well as corporate group heads have the potential to 62
replicate or improve upon the Catamaran model.
NPTEL

Part 4


Start-up IPOs - 1
While some companies, even established ones, choose to remain private, for an overwhelming
number of companies listing in the stock exchanges and accessing capital from the markets is the
ultimate test of their maturity and strength.
The Initial Public Offering (IPO) is a major milestone in any corporate journey, followed by listing in
other overseas exchanges like NYSE, Nasdaq, and LSE.
IPOs are not very common in the Indian start-up scene given that funding comes rather easily for
good and proven ideas.
However, over the past five years, more start-ups have been exploring the listing option as they
began turning profitable, an essential requirement for listing in the Indian stock exchanges. Some
successful entrepreneurial firms with heady IPO debut are:
• Justdial (May 2013),

• Infibeam (March 2016),
• Quick Heal (February 2016),
• Yatra (December 2016),
• Tejas Networks (June 2017), and
• Matrimony.com (September 2017) More potential can be unlocked with dedicated
platforms for public issues by start-ups
Many start-ups entered the market with rich valuations, and continued to build value amidst the
inescapable stock market rollercoaster.
64
Start-up IPOs - 2
Public listing on stock exchanges provides many advantages to start-ups:
• building brand image with all stakeholders, including investors, customers, employees, public
and governments,
• providing measurable value to company’s performance and potential,
• adding transparency and value to employee stock option schemes, and
• reducing the dependence on debt by bringing in more risk capital.
Successful start-up listing requires:
• high degree of corporate governance and regulatory compliance,

• high level of transparency, and
• strong leadership team with a qualified board of directors.
Typically, it takes several months for an internally focussed private start-up to prepare for public
listing.
Ideally, start-ups must start integrating some of these features from the early days so that the
transition from a private to public enterprise is smooth and seamless.
In the overall, the advantages of public listing would outweigh the disadvantages, if any.
Even the best technology companies of US namely, Microsoft, Apple, Google and Facebook have
prospered with public listing 65
Start-up IPOs – 3: About Emerge ITP Platform
EMERGE’s Institutional Trading Platform (ITP) is for Start-Ups and Small and Medium
Enterprises which do not have their securities listed on any recognised stock exchange
and which seek listing of their specified securities exclusively on the institutional
trading platform for informed investors.
ITP is a credible platform for start-ups and growing companies to list and showcase
their performance to their lenders and potential investors, with or without an IPO
(Initial Public Offer).
India has witnessed a growing start-up ecosystem fuelled by a large entrepreneurial

community. Many entrepreneurs are building excellent businesses but do not have
access to the funding they need.
Simultaneously there is a growing Angel and Venture Capital Industry providing much
needed equity capital to these businesses, but they do not have access to diverse early
stage opportunities.
Further, as these investments mature, it becomes essential for the initial investors to
exit and look for new opportunities, and new investors to step in and fuel the next
phase of growth. emerge_itp will facilitate churn in the investment portfolios and
create a more active market for channelizing funds to start-ups and small companies. 66
Crowdfunding of Start-ups
Crowdfunding is the process of raising funds online through small donations from a large number of
people on the internet.
Crowdfunding uses the power of the masses to fund the smallest to the largest initiatives having good
intentions. The concept has become useful for launching start-ups too.
While crowdfunding of start-ups is structured and legal in the US, it is yet to become so in India. However,
there are angel investor networks with participating individual investors who can connect the start-ups to
potential investors (for example, Keiretsu Forum).
On a global level there are many Reward Investment platforms such as Indiegogo, RocketHub, Peerbackers,
and Kickstarter which are popular in this space. Crowdfunding route can be used to raise debt too;
SoMoLend and Endurance Lending are two such platforms.
More structured equity crowdfunding platforms like MicroVentures conduct their own due diligence, and
help raise capital from angel investors via its SEC-approved online platform, giving angel investors the
ability to invest small amounts of capital to crowdfund a start-up.
Angel List, CircleUp and Grow Venture Community are other equity crowdsourcing platforms. The last two
offer additional services like mentor networking and partner access.
Crowdfunding platforms can also be useful to market and commercialise the products developed and
launched by start-ups. They help create communities of users who follow the start-up and benefit from
customisation of the products, in return for the assured sales and word of mouth publicity in the
community.
67
Need for Formal Crowdfunding Platforms
In India, as elsewhere, start-ups could succeed with investments ranging from a few thousands of
rupees to a few lakhs of rupees, based on the product and scale
When angel investors and next stage investors add to the start-ups’ financial mite in the second and
third stages, start-ups blossom as full-fledged corporations.
The most difficult stage, however, are the initial stages of ideation and prototyping. There are more
Theme-Thread-Passion platforms waiting to become start-ups than have actually become.
Several developed countries, including the United States, saw the establishment of formal laws and
securities mechanisms in the 2000s to allow crowdfunding of equity investments for start-ups.
At the other end of the spectrum, a developing country

such as Kenya has a vibrant crowdfunding ecosystem
(Babandu and M-Changa are two popular
crowdfunding platforms).
Under the JOBS Act in the US, crowdfunding up to USD 1 million can be raised by start-ups.
Crowdfunding enables more differentiated start-ups to come into being as organised financing
typically tends to focus on successful domains.
Crowdfunding facilitates and encourages democratisation of entrepreneurship, something which

India needs badly. 68
Idea Banking Ideas
Ideas
For a thriving start-up ecosystem, a proliferation of ideas is critical. Ideas
Incubators and accelerators have served to support ideas of entrepreneurship.

Feasible & Viable Ideas
Even before reaching the incubator/accelerator stage, many ideas falter or wither away for want of
mentoring or financing support. Two trends are encouraging, however:
• Graduates of premier institutes are developing creative ideas during their college educational
stage itself and are prepared to forsake lucrative careers to pursue their ideas.
• Professors of such institutes are increasingly coming forward to share their ideas and co-nurture
the ideas with students into start-ups.
Likewise, corporations should also be willing to give sabbatical to their executives to pursue their
start-up ideas:
• Leaders should mentor start-up projects even when they are in active service and when they are
able to provide positive influence.
• Given their knowledge, leaders can pick up niches from the value chains of their businesses
which can be reinforced with start-up ideas.
When universities and professors, and corporations and leaders evaluate and choose ideas, and
mentor start-ups with creative ideas, the ideas would become bankable. 69
Financial Instruments - 1
Equity, convertible debt, and venture debt are three principal forms of raising finance for start-ups
The instruments are chosen based on the stage of the company, the business model, and the
valuation levels.
Equity is typically obtained from angel investors or private equity funds, with issuance by the
company to them. The options are:
• If the founders believe that the project has already proved itself they may issue direct equity,
with the founders holding 100 percent of the equity pre-issue.
• If the founders believe that the project is proven but higher valuation is feasible in a few
months, they can issue partially or fully convertible preference shares (which may be offered
with some interest) that will convert into equity based on pre-determined valuations.
In cases where the start-ups do not wish to set a pre-determined valuation, the founders can issue
convertible debt which can be converted into equity at a future point of time based on certain
benchmarks.
Equity
The debt earns a coupon rate which is combined
with the principal for conversion. Otherwise,
the principal and interest are repaid in cash.
Debt
70
Start-ups have a few standard financial instruments to consider for inducting funding support from
any of the above agencies and entities. These are: Equity, convertible debt, and venture debt
The instruments used are based on the stage of the company, the business model, and the
valuation levels.
Equity is typically obtained from angel investors or

Convertible
private equity funds, with issuance by the company to them. Equity
Debt
If the founders believe that the project has already

proved itself they may issue direct equity, with the
founders holding 100 percent of the equity pre-issue. Preference Venture
Shares Debt
If they believe that the project is proven but higher

valuation is feasible in a few months, they can issue
partially or fully convertible preference shares (which will earn some interest) that will convert into
equity based on pre-determined valuations.
In cases where the start-ups do not wish to set a pre-determined valuation, the founders can issue
convertible debt which can be converted into equity at a future point of time based on certain
benchmarks.
The debt earns a coupon rate which is combined with the principal for conversion. Otherwise, the
principal and interest are repaid in cash. 71
Venture debt is a senior secured loan that sits on top of the funding pile, in terms of liquidation
preference (repaid before all other debt or equity holders).
Venture debt is typically issued by more aggressive banks or venture debt investors. Such debt is
usually secured by asset pledge.
All these instruments, typically, have a timeframe of 6 to 18 months for conversion or redemption.
The three instruments differ in terms of dilution to founder equity structure and influence or get
influenced by valuations that are either pre-determined or determined at the time of conversion.
A revenue model is necessary to support the valuations Business Plan

in all the types of financing but is essential for the 10
third route of debt.
0
Variations exist to each in terms of investor protection

conditions, including first rights where equity issuance is involved. Series 1 Series 2 Series 3
An excellent summary of the financial instruments is available in a Forbes article “Comparing Equity,
Debt and Convertibles for Startup Financings” (George Deep, March 19, 2014).
https://www.forbes.com/sites/georgedeeb/2014/03/19/comparing-equity-vs-debt-vs-convertibles-
for-startup-financings/#3cc6c08969ff
72
Financial sufficiency for start-ups - 1
Entrepreneurial energy can take shape in terms of entities with highly variable scale and scope.
From nano to mega, enterprises can be positioned and grown depending on the applicable product-
market scope in each case.
As discussed in this chapter, India has as many as nine financing options with awesome financial
power in the aggregate which can be made available to finance varied types of entrepreneurial
ventures under different modes.
Profitable firms and successful investors can raise money by selling a small portion of their holdings
periodically to set up and expand venture capital entities which will offer not only finance but also
mentorship by the successful entrepreneurs and corporate leaders.
The Governments, Central and State, can also play catalytic roles in promoting such financial
options for entrepreneurial ventures in different capacities.
Government e Marketplace (GeM) is an online procurement

platform for government ministries and departments, and the most
widely used channel for public procurement in India. MSMEs,
DPIIT recognised startups and other private companies can
register on GeM as sellers and sell their products and services
directly to government entities.
GeM Startup Runway is a new initiative launched by GeM to allow

startups to reach out to the universe of government buyers by
offering innovative products that are unique in design, process and
functionality.
73
The financing models of not-for-profit and microfinance corporations have demonstrated how focus
and reach can create a viable start-up network.
At the other points of spectrum, established venture capital funds and private equity players have
to rework their models and become more entrepreneurial by themselves.
Indian mutual funds, pension funds and provident fund organisations as well as corporate groups
have to set up India’s own venture capital and private sector funds.
At the apex level the Government has to rediscover its role as a super venture capital investor,
gaining additional financial capability from the envisaged PSU disinvestment programme.
Financial entrepreneurship has to be seen as the trigger for emergence of a full spectrum of nano,
micro, small, medium, large and mega entrepreneurial entities in India.
A 10,000 crore rupees fund is set-up by the Government of India to provide funds to the startups
as venture capital. The government is also giving guarantee to the lenders to encourage banks and
other financial institutions for providing venture capital.
74
Entrepreneurial firms have a highly variable scale and scope. From nano to mega, enterprises can
be positioned and grown depending on the applicable product-market scope in each case.
India has several financing options with awesome financial power in the aggregate which can be
made available to finance varied types of entrepreneurial ventures under different modes.
Profitable firms and successful investors can raise money by selling a small portion of their holdings
periodically to set up and expand venture capital entities which will offer due finance for start-ups.
The Governments, Central and State, can also play catalytic roles in promoting financial options for
entrepreneurial ventures in different capacities. The Governments can be a super venture capital
investor, gaining additional financial capability from the PSU disinvestment programme.
Even not-for-profit and microfinance corporations can create a viable start-up network.
At the other points of spectrum, established venture capital funds and private equity players have
to rework their models and become more entrepreneurial by themselves.
Indian mutual funds, pension funds and provident fund organisations as well as corporate groups
have to set up India’s own venture capital and private sector funds.
Financial entrepreneurship can trigger emergence of a full spectrum of nano, micro, small, medium,
large and mega entrepreneurial entities in India.
75
Indian Commercial Banks and Start-ups
Indian commercial banks and development institutions have been major drivers of India’s industrial
growth with their term lending and working capital funding
Limits Collaterals
MSMEs owe their growth in the post-independence
era, to a large extent, to the concessional lending Banks and Start-ups
support from the banks Margins High Interest
Banks traditionally had funding lines for entrepreneurs but they were subject to traditional
requirements of overall limits, collateral guarantees and margin stipulations, besides interest rates
being high and initial moratorium periods being short
Under the Stand-up India Scheme, certain banks, notably public sector banks, began to open special
funding windows for SMEs and self-employed professionals. Even these are limited to Rs 2 crore per
start-up, and linked to collaterals but with an interest rate of 10 percent and moratorium period of
18 months. Unsecured loans entail a higher interest rate of 16 to 17 percent, which start-ups can ill-
afford.
Technology-driven Start-ups which operate under uncertainty, however, have not received a special
dispensation until recently; in other words, there are no tailored programmes of lending that
recognise the uniqueness of each start-up situation
While leading banks have started deploying specific platforms for start-up needs (slides that follow)
they are more in terms of counselling and support services rather than customised investment
services 76
Indian Commercial Banks and Start-ups Under Stand-up India
Stand-up India: Towards Social Empowerment of the Underprivileged through Entrepreneurship
Stand-up India Scheme facilitates bank loans between Rs 10 lakhs and Rs 1 crore to at least one
Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one woman borrower per bank
branch for setting up a greenfield enterprise. This enterprise may be in manufacturing, services or
the trading sector. In case of non-individual enterprises, at least 51% of the shareholding and
controlling stake should be held by either an SC/ST or woman entrepreneur.
77
Financial sufficiency for start-ups: Banking System
HDFC Bank, India’s second largest private lender, launched its maiden start-up focussed, sector-
agnostic fund that will initially have a corpus of USD 25 to 30 million. The Bank also proposes to
provide legal and financial advice to its portfolio companies.
If other banks follow the example, the established banking system can create a large fund of at least
USD 250 million, enough to provide additional reinforcement to the start-up ecosystem.
Interestingly, there has been an increasing trend of start-up firms specialising in financing of small
and medium enterprises (SMEs). Given that most SMEs are entrepreneurial in nature, a start-up
finance enterprise movement to support SMEs is indeed a welcome trend.
New age lending platforms like Capital Float,

NeoGrowth, LendingKart,
Kinara Capital and Indifi Technologies
as well as a few others have themselves
received funding to an extent of USD 200 million.
Lending to SMEs has its challenges due to low spreads and recovery risks tied to economic
headwinds. That said, there is also potential for SME start-up finance sector to become a
transformational force in the same manner as Non-banking Finance Companies (NBFCs) have been
for transforming indigent rural and urban financing landscape.
Interestingly, NBFCs themselves have been adding medium, small, and micro enterprises to their
portfolio. Apart from traditional industrial and consumer sectors, food processing and agro
78
industries could benefit structurally from start-up finance in this sector.
Microfinance Corporation Support for Start-ups
The Grameen Bank was founded by Muhammad Yunus in 1983 in Bangladesh to provide tiny loans
for the poor to enable self-employment.
The success of the Grameen Bank and the global recognition it secured is reflective of the potential
of directed micro credit. Over a period of 26 years, the Bank created over 7.8 million active
borrowers (cumulative) disbursing over USD 3.5 billion in tiny loans.
The pioneering work in employment generation touching the lives of the poorest of the poor
fetched for Yunus and the Grameen Bank the Nobel Peace Prize in 2006.
Today the Grameen Bank has become more diversified in its product offerings, leading to greater
generation of wealth for its customers.
In India, microfinance corporations (MFC) sector Large Banking Micro Finance

took root very quickly over the last two decades, Corporations
Corporations
and some of them even received small bank licenses
under the new regulations of the Reserve Bank of India. Start-ups
While MFCs played a stellar role in supporting social
entrepreneurship and women self-help groups, Urban Rural
upon conversion into small banks they shifted
focus to high-cost business loans.
NBFC liquidity pressures need to be alleviated to ensure diversified start-up ecosystem, ground up.
79
MUDRA
Under the Pradhan Mantri MUDRA Yojana (PMMY), MUDRA has created several products and
services as below
2018-19 Statistics: No. of PMMY Loans Sanctioned: 59,870,318;

Amount Sanctioned: Rs 321,722 crore; Amount Disbursed: Rs 311,811.38 crore
80
Indian Banking Platforms for Start-ups - 1
Bank Initiative / Platform Focus

AXIS Bank "Thought Factory" • Working from ideation stage with start-ups
• Looking for two-way benefit
• Focus on AI, blockchain, mobility and cloud
• Dedicated team to coordinate with start-ups.
Federal Bank "Launchpad" • Exclusive outlet for start-ups in Bangalore and Kochi
• Focus on digital financial services, biotechnology, hi-tech
farming, healthcare, logistics, e-commerce etc.
• Counselling and customised banking solutions
• An exclusive corpus for investing in start-ups.
HDFC Bank "Smart Up" • In association with Zone Start-ups India (ZSI), a start-up initiative
• Offers a Smart-up current account and PayZapp for business
payments
• Opportunity to showcase products on Smart Buy to 32 million
HDFC bank customers.
ICICI Bank "iStartup Garage" • Advisory services for start-ups in digital, financial services,
biotechnology, hi-tech farming, healthcare, logistics, e-
commerce etc
• Business networking and meets with leading VC's and PE
players
• Connections with other service agencies.
Banks
National
Value
Start- 81
ups
Indian Banking Platforms for Start-ups - 2
Bank Initiative / Platform Focus

Kotak Mahindra Bank "Kotak Business Boosters" • A seven-member core team working with start-ups
• Focus on Artificial Intelligence, analytics, biometric of crisis
scanning and machine learning
• Launch of dedicated funds, starting innovation centres,
organising hackathons and ideation contests.
Ratnakar Bank (RBL) "Start-up Club" • Select branches to cater exclusively to start-ups in Bangalore
• Wide range of exclusive financial services
• Registration, legal and tax formalities.
State Bank of India "IT-ISEP" • IT Innovation Start-up Engagement Programme (IT-ISEP) with
an outcome of Rs 50 crore
• Investment and debt engagements of up to Rs 3 crore to a
start-up banking and related technology
• Purchase of product or service for the start-up.
Banks
Start-ups
National
Value
82
Type of Company Formation and Registration for Start-ups
 Simple one person firm
 A family and self-
 Broad-based companies listed on stock employment business
exchanges, constituted with public  All liabilities personal
shareholding  No scope to add investors
 Requires registration with Registrar of
 Requires two people to start, otherwise
Companies and issue of shares as per SEBI
similar to sole proprietorship
guidelines and approvals
 Requires registration with Registrar of
 Ability to take strategic investors at
Companies
negotiated valuations that also meet SEBI Sole  Like sole proprietorship, not amenable
and Company Law requirements Proprietorship to investors
 Subject to stringent corporate governance
standards
 Ideal for partial or full exits by investors
Public Limited Partnership

Company
Enterprise
Legal
 A form of private limited company Constitution
requiring only one person
 Limited liability but limited also by
turnover levels  Ideal for professional service
 Requires registration with Registrar of One Person Limited Liability organisations
Companies Company Partnership  Limited liability of partners
 Inability to take investors or go public  Requires registration with
 Relevant for businesses that will remain Registrar of Companies
small  Not amenable to investments
by others
Private Limited
 Preferred form for start-ups
Company
 Limited liability but ability to take investors
 Requires registration with Registrar of Companies
 Flexibility to seek investments with a variety of
instruments
 Ability to issue ESOPs for employees
 Potential to retain value until ready for dilution 83
Valuation as a Lever of Financing - A Race to the Bottom?
An enigmatic feature of tech-based start-up system is if a start-up is able to achieve large user base and high
market share even without any clear path to profit, such a start-up is able to achieve billion-dollar valuations
This has been supported by abundant availability of VC funding in the West; in 2005, VC funding was USD 20
million in the US and in 2018 it touched a peak of USD 99 billion. There is no evidence that the rise of unicorns or
the spurt in valuations has led to start-up profitability
New technologies are enabling tech based

start-ups, fuelled by generous VC funding Valuation
High Share
to disrupt age-old ways of doing businesses,
gain users and revenues at breakneck speed
and create new behemoths;
Uber, Spotify, WeWork, Flipkart, Ola, Oyo are Low Prices Revenue Profit
A few representative examples.
Some exceptions do exist (eg.,TransferWise)
When such growth is achieved by low prices, discounts, incentives and offers, growth tends to be critically
dependent on such margin-destroying measures; if the market has low tech barriers in addition, growth becomes
virtually a race to the bottom
Techspace in its well-written paper in Medium (https://blog.techspace.co/profit-vs-growth-part-1-unicorns-arent-

real-23f0420e310d) argues that most such unicorns are overvalued on paper for a variety of reasons including
protection for VCs, which makes them vulnerable to tech bubbles that could burst in periods of recession
The advice is that start-ups should pursue business models that represent a prudent balance of revenues and
profits, of pursuit of scale and focus on sustainability
84
Pros and Cons of Pursuit of Growth Versus Pursuit of Profit
Upsides of Maximising
Growth
• More attractive to most
investors
• Helps raise capital when
investment climate is good
• Scale does have benefits of
monopoly
Downsides of Maximising Profit Upsides of Maximising

Profit
• Focusing only on profit, the start-
up may be confined to be a niche Growth Vs. Profit • The start-up becomes
player Conundrum attractive for acquisition
• In a growth-obsessed VC system, • Profitable firms have better
the start-up may secure only IPOs
lower valuations and lower VC • Founders can retain more
funding equity with themselves and
• Cost-cutting may stunt innovation stay in control
Downsides of Maximising
Growth
• Blind dependence on equity
means use of long-term capital
for short-term operations
• Growth fuelled by discounted
prices becomes unsustainable
A balanced business strategy and business model that optimises growth-profit equation needs to be
structured based on start-up context
85
A Model of Scalability with Sustainability
Pursue Growth with Profit
Pursue Profit
When:
Product is IP protected
Pursue Scale Entry barriers muted
When:
Desirous of long-term play
Scale is price-driven
VC system is cautious
Cost-efficiencies possible
When:
Need independence
A first-entrant
VC system is objective
Entry barriers low
Need to pre-empt competition
VC system is growth-driven
Scalability and Sustainability are two sides of virtuous growth paradigm. Ideally, innovation needs to be funded
by business growth valuations and equity risk capital while operational growth needs to be funded by short-
term non-equity capital with clear metrics of performance.
86
Pitch Deck
A pitch deck is a vital vehicle for start-up founders to engage with all stakeholders, more specifically the investor community
Problem
Statement
Execution Solution
Model Proposed
A Pitch
Prototype
Team Deck Must
Build
Have..
Intellectual User
Property Feedback
Business
Model
A Pitch Deck must interest, engage, and inspire the stakeholders into positive commitment with the founders
When a pitch deck is narrated by the founders with passion, the value proposition becomes inspirational to all
87
Three Types of Pitch Decks
Three Types of Pitch Decks

Post-meeting
In-meeting • A closure deck that addresses all

discussed concerns
• Reaffirms the business strategy and
model
• Specific on desired investment
needs
Pre-meeting
• A detailed deck that blossoms with
in-person narration
• Contains all critical information
• A teaser deck to generate interest • Leads to serious investment dialogue
• Self-explanatory with non-
proprietary information
• Concise but emphatic
88
Finance Not a Constraint to Become Entrepreneurial - 1
Age First Year of Current Employees

SN Founder Start-up Name Business Background
(Years) Capital Founding Turnover (Nos.)
Humble family
Asha Mother's background; no
Deepak
1 44 Confectionery, meagre 1984 Chocolates Rs 400 cr 1,200 business
Daryani
Indore savings connections; no
formal education
Humble family
Agarwal Packers
Ramesh Moving household background; former
2 57 and Movers, Rs 4,000 1987 Rs 650 cr
Agarwal goods for relocation Airman; co-founded
Delhi
with his brother
Humble family
background; school
dropout, who could
complete his BE
Ready-to-cook food
3 PC Mustafa 46 iD Fresh food Rs 25,000 2005 Rs 200 cr 1,600 and MBA, and work
ingredients
in IT MNCs
thereafter; co-
founded with 4
cousins
Wow!Momo,
4 Sagar Daryani 32 Rs 30,000 2000 Ready-to-eat food Business family
Kolkata
Source : https://economictimes.indiatimes.com/small-biz/startups/features/meet-eight-entrepreneurs-who-defied-all-odds-and-rose-to-the-top/articleshow/71779574.cms
89
Finance Not a Constraint to Become Entrepreneurial - 2
Age Year of Current Employees

SN Founder Start-up First Capital Business Background
(Years) Funding Turnover (Nos.)
Son of poor farmer in

Machilipatnam, AP;
Bollant
Disposable items congenital visually
5 Srikanth Bolla 28 Industries, Rs 65 lakh 2012 Rs 82 cr
from palm leaves challenge – yet
Hyderabad
graduated from MIT,
USA
Humble family
M & A deal maker, background; quit job
6 Mahesh Singhi 53 Singhi Advisors Rs 11,111 1988
Consutant from LML Vespa to
found the venture
Humble farmer family

Satish Kumar Milky Mist,
7 46 Dairy products Rs 500 cr background; school
T Erode
dropout
Diploma in hotel
JumboKing
8 Dheeraj Gupta 45 Rs 2 Lakh 2001 Vada-pavs Rs 100c management and
Foods, Mumbai
MBA
Source : https://economictimes.indiatimes.com/small-biz/startups/features/meet-eight-entrepreneurs-who-defied-all-odds-and-rose-to-the-top/articleshow/71779574.cms
90
Self-Financing Business Models with Innovation + Execution
Asha confectionery:
• Move From small business to Automated Production
Agarwal Packers and Movers :

Jumbo King foods:
• Anchor order from Airforce officers
• Traditional Native
• Logistics efficiency
food product made
• USP of “100% safety guaranteed”
mechanised way
• Scalable business
ID Fresh Food:
• Technology to make preservative-
free food ingredients
• Niche discovery
• Distribution efficiency
Low First Capital
Business Models
Milky Mist:
• Shift from milk to value
added milk products
• Customer
development
Wow! Momo:
• Category creation in unique snacks
Singhi Advisors :
• Move from project report
writing to M&A consultancy
• Personalised investment
banking
Bollant Industries:
• Fearlessness in turning around sick
paper units
91
Principles of Self-financing through Successful Business Model
Market niche
Product and
production
Product
innovation
quality
Personal Generating
Finance
leadership through Good Distribution
Business efficiency
Management
Dedicated
and well- Client
trained identification
employee
team Working
capital
efficiency
92
Thank you!
93

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NPTEL

WEEK 7 – LECTURES 31, 32, 33 and 34

Raising Finances and Developing Financial Strategy

Prof. C Bhaktavatsala Rao, Ph.D.

Department of Management Studies

Raising Finances and Developing Financial Strategy

Prof. C Bhaktavatsala Rao, Ph.D.

Department of Management Studies

• conceptualisation of the product or service,

Testing and Validation

Initial Public Offer

Angel and Seed

Smooth and seamless

Globally, the financing staircase for a start-up follows a typical path:

• At the ideation stage, personal savings and institutional grants

Start-up investment profile in India is no different from this approach:

At the same time, healthcare, fintech, big data, logistics,

In terms of locations, Bengaluru continues to lead the

This trend is even more visible in respect of technology-driven start-ups.

Funding is increasingly focussing on growth stage, signifying an intent to capitalise on earlier

These investments are typically in terms of

As many as 11 companies entered the global unicorn league

Nearly 700 investors participated in the start -up investments in 2018.

Sector-based themes such as hospitality, real estate, logistics,

and cybersecurity are emerging as notable themes

Top 5 by DEALS Top 5 by AMOUNT

Enterprise Tech Consumer Services

Consumer Services Travel Tech

Healthcare Enterprise Tech

For example, prior to acquisition by Walmart in 2017,

A large majority (as much as 66 percent),

An angel investor who is like a micro venture capitalist Wait

That said, India’s start-up endeavour needs

Bluechip companies and giant corporations in diverse industrial

Theoretically, sky is the limit for even humble entrepreneurial beginnings.

Raising Finances and Developing Financial Strategy

Prof. C Bhaktavatsala Rao, Ph.D.

Department of Management Studies

 Extension of individual craft and local

 Highly successful start-ups or

• vegetable cart vendors serving homes in multiple streets,

Yesterday’s plumber and electrician are today’s UrbanClap, for example! 23

• graphic and web designing houses which provide publishing support,

Institutionalised craftsmanship, with or without

• ancillary component suppliers for original equipment manufacturers (OEMs)

However, SSEs became victims of their own initial advantages:

• dependence on OEMs subjected them to market vicissitudes faced by OEMs,

With ‘market-seeking’ and ‘market-making’ rather than ‘market-assurance’ becoming driver of

Corporate investments in entrepreneurial ventures based on criticality of technology and supply

MSEs tend to be set up with:

• Certainty in product and market opportunity,

• Trained workforce, and

MSEs provide sustainable, rather than disruptive, entrepreneurship. VP-

that can be reinvested (for example,

Industry Type Company

From the yesteryears’ movie magazine idea to Start-up

Own/Family Identify Engage

Early High Net

This approach is particularly relevant for university