funding for startups july 2014 by prof. sabarinathan g

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Dr. G. Sabarinathan Funding for Startups Presentation at Forstartups August 2, 2014

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Funding For Startups It is rarely possible for start-ups to raise sufficient capital to kick-start their operations, launch products and break even. Although a ‘one-time investment’ strategy is theoretically possible, it is hard to cite examples of any successful start-up that has gone this route. Equity financing is one of the best ways to raise funds for a Start-up. Equity financing is money lent in exchange for ownership in a company. New businesses can use equity financing to finance operations for their start-ups, or when they need to offset existing debt. Equity funding allows the entrepreneur to obtain funds without incurring debt, improving cash flow. This will allow business owners to focus their attention on making their product(s) profitable rather than paying back their debtors. The amount of equity an investor (angel/VC) holds is a factor of the company's stage of development when the investment occurs, the perceived risk, the amount invested, and the relationship between the entrepreneur and the investor. How do investors categorize start-ups? What are different stages of equity funding? What are key points of a Term Sheet? What are Angels and VCs and how are they different from each other?

TRANSCRIPT

Page 1: Funding for startups July 2014 By Prof. Sabarinathan G

Dr. G. Sabarinathan

Funding for Startups

Presentation at Forstartups

August 2, 2014

Page 2: Funding for startups July 2014 By Prof. Sabarinathan G

Agenda

1. Disclaimers

2. Funding alternatives

3. Funding Hierarchy

4. How much funding do companies need to plan for?

5. Interiorisers – An Illustration

6. Attributes of funding sources

7. Planning for mobilising funds

8. Approaching funding choices

9. Equity as a funding instrument

10. Trouble with aphorisms

11. Closing thoughts

Funding 4 Startups - Dr. G. Sabarinathan

Page 3: Funding for startups July 2014 By Prof. Sabarinathan G

Disclaimers

• No canned solutions

• Pointers to think

• Questions to ask

3 Funding 4 Startups - Dr. G. Sabarinathan

Page 4: Funding for startups July 2014 By Prof. Sabarinathan G

Funding Alternatives • Often equated with equity – somewhat inaccurately?

• Many other forms that are not uncommon

– Formal debt

– Informal debt – credit cards, overdrafts

– “Spontaneous” liabilities

– Grants: Governments, developmental agencies

• General purpose as well as specific

– Funding in kind – development platforms, kits

– Services fees / contracts

– Contract development work + licensing fees as in pharma industry

– Promotional offers from infrastructure providers

– Monetising “unproductive” assets

Funding 4 Startups - Dr. G. Sabarinathan 4

Page 5: Funding for startups July 2014 By Prof. Sabarinathan G

Funding hierarchy

• Own Funds

• OPM

– “Free” Money – eg., grants

– Tied resources – development kits

– Spontaneous Liabilities

– Debt

– Preferred Shares

– Equity

• Elements of Cost

– Financial Cost

– Control over enterprise

– Disclosure

• Tradeoff: Cost vs Added Value

5 Funding 4 Startups - Dr. G. Sabarinathan

Incre

asing C

ost

Page 6: Funding for startups July 2014 By Prof. Sabarinathan G

How much funding? • Too little funding

– Starves business of “energy”

– Delays establishing / consolidating market beachhead

– Affects early stage hiring

• Too much funding

– Distracts from focus: Penury Parsimony (often, at least)

– Reduces sense of urgency on revenue generation – and hence

customer validation of product / service

– Dilutes equity and so kills financial incentive for founders

• Extent and type of funding a function of

– Nature of business

– Founders’ priorities

– Availability

– Beware of “Vedic” pronouncements!

6 Funding 4 Startups - Dr. G. Sabarinathan

Page 7: Funding for startups July 2014 By Prof. Sabarinathan G

Attributes of Funding Sources

• Not all funding sources are the same

• Attributes to look for

– Flexibility

– Appropriateness for industry

– Reliability of release of funds

– Effort required to secure funding / ease of mobilisation

– Post funding obligations

– Respectability and certification value

– Other Added Value

– Motives :

• Financial return vs Others

• Quick vs patient return

• Attributes depend on source to a large extent 7

Funding 4 Startups - Dr. G. Sabarinathan

Page 8: Funding for startups July 2014 By Prof. Sabarinathan G

Planning for funding • It is only as good as your business forecast

• Focus on refining your business outlook as meticulously as you can.

– Meticulousness ≠Risk aversion

– Systematic Thought ≠ Rigidity

• Develop a range of possibilities from “Must Have” to “Absolute Luxury”

• Fill up the need using a funding hierarchy

• Revisit funding planning at least once a month

– Early stage fund raising can occupy several hours every month

• Specialist intermediaries can be helpful in raising professional money

– Identifying investors

– Providing “market intelligence”

– Modulating the investment pitch

– Fronting for the promoter in interaction, follow-up, negotiations

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Page 9: Funding for startups July 2014 By Prof. Sabarinathan G

Approaching funding decisions

• Systematic thinking ≠ Rigid Thinking

• Think deeply about what the enterprise will do in terms of

– Product /service features

– Target markets / customers

– Development effort

– Marketing effort

– Infrastructure required – human and physical

• Alternative approaches to all of the above

• Learn from role models

• Translate these into alternate funding plans

• You can plan for / control expenses, NOT revenue

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Page 10: Funding for startups July 2014 By Prof. Sabarinathan G

Equity as a Funding Instrument • Sources

– Founders, Friends and Family

– Incubators, Accelerators

– Angels – Networks, “Lone Wolves”

– Seed stage institutional investors

– Early stage VC investors

– Emerging / Late stage VC investors

– Depends lot on location – you are lucky to be in Bangalore!

• Considerations

– How much to raise? How often to raise – it is effort intensive

– Terms of funding – equity comes with strong investor rights

– Dilution

– Availability and timing

10 Funding 4 Startups - Dr. G. Sabarinathan

Page 11: Funding for startups July 2014 By Prof. Sabarinathan G

The trouble with aphorisms

• Pair # 1

– Money is the least of all worries – there is plenty of it

– Grab as much capital as you can when you get it

• Pair # 2

– Don’t worry so much about valuation

– Conserve your equity – it is the most valuable thing you have

• Pair # 3

– Finance follows strategy – Get your strategy right first

– Funding determines strategy – cut the coat according to the cloth

• My aphorisms for you:

– There is no universal truth

– Every step of an entrepreneurial journey is highly unique

– Others’ experiences can at best inform you, CANNOT decide for you

Funding 4 Startups - Dr. G. Sabarinathan

Page 12: Funding for startups July 2014 By Prof. Sabarinathan G

Closing Thoughts… • Funding decisions often have irreversible consequences

• Awareness of startup funding is very low in India

– Funding choices can significantly affect sleep levels

• Capital is scarce in India – we are still a poor and highly regulated

economy!

• Talk, talk, talk – it can help you avoid costly mistakes

– Conversation ≠ Dropping guard

• Beauty – and therefore choice – can sometimes be a curse

• “Neither a borrower nor a lender be,

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry.” Hamlet Act 1, scene 3

– May the Lord bless you all that you may sleep well…

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Page 13: Funding for startups July 2014 By Prof. Sabarinathan G

THANK YOU

Funding 4 Startups - Dr. G. Sabarinathan