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Startups India - An OverviewContents 1. Introduction 05 2. Evolving definition a. What is a startup? b. Stages of the startup lifecycle 06 c. Startup ecosystem d. Startup financing lifecycle 3. Scope for Growth a. Policy initiatives b. Role of large businesses 15 c. Possible impact of startup incubators d. Startup investment round up e. Approvals and other regulatory processes 4. Challenges a. Startup business challenges 21 b. IPR management 5. Procedure for starting a business 25 6. Deal analysis and trends in Startup 28 7. Overview - Startup India - the next big theme for economic 35 growth 8. Industry speak 36 9. Appendix 40 4 Startups India - An Overview1. Introduction Prashant Mehra Partner Grant Thornton India LLP Startups have been the flavour of the season over the last The larger problems plaguing the businesses, such as the few years for the Indian markets. This has resulted into the unorganised and fragmented Indian market, lack of clear and emergence of a number of home grown unicorns across transparent policy initiatives, lack of infrastructure, lack of the country. One of the major contributors leading to this knowledge and exposure, complications in doing business, development has been the mega funding that has been etc. are at least now being identified as issues that need to ploughed into most of these unicorns between the period be addressed. The framework and course of regulations 2007 and 2015. This has been in line with the global trend need to be updated and adopted as per the times. The right dominating the space. Even the aspiring unicorns have had policy matter announcements by lawmakers can be a push. a decent run during this period, where managing to find In times like these, pro-reforms announcements are required investors is usually considered a tough task. The trends of to provide the much needed impetus to the general business investments suggest that investors want to enter as an early environment in the country in the startup space. investor, even before the start of the firm. To create awareness and building an entrepreneurial From an overall viewing, India comes across as a thriving environment, a lot of emphasis should now be given to under-penetrated consumer driven market with a scope creating infrastructure for mentoring startups. Various for exponential growth. Internet penetration and its stakeholders such as the government, corporates, increasing importance will drive most of the businesses. On educational institutions and others are and should join account of the consumer demographics, with China being hands to build a better ecosystem for young people. We out of bounds, India offers the largest pie of investment understand that the Commerce Ministry is planning to build opportunity that the world is eyeing. This is despite the an online portal for information sharing among various multitude of operational, regulatory and taxation issues stakeholders including incubators/accelerators, angel that surround the business running environment in India. investors, VC funds and government departments. We also However, 2015 has turned out to be a year offering a bit of understand that other such initiatives are in the pipeline and a reality check to one and all and redefined the dynamics to are expected to be rolled out in due course. a great extent. The year also set the tone for the next stage This report has been compiled in the form of a handbook in the evolution of the startup ecosystem. The maturity in with the intention of providing the reader key insights into decision making that should ideally come in at this stage this space, covering various aspects mentioned above. I am would be a step in the right direction taking the startup hopeful that the report will serve the purpose of addressing space in India towards greater heights, as it deserves. the concerns. I look forward to this exciting space in 2016. Startups India - An Overview 52. Evolving definition a. What is a startup? Currently a clear definition of a ‘Startup’ does not exist in the Indian context due to the subjectivity and complexity involved. Considering various parameters pertaining to any business such as the stage of their lifecycle, the amount and level of funding achieved, the amount of revenue generated, the area of operations, etc, some conceptual definitions are available in the public domain. These have been sourced and enumerated below to provide an indicative understanding on the space to the reader. The Department of Industrial Policy and Promotion (DIPP) is also working around a clear definition for startups and is expected to make it public in due course. Definitions of startups What is a startup A startup business is defined as an organisation: • Incorporated for three years or less A startup is a young company that is beginning to develop • At a funding stage of Series B or less and grow, is in the first stages of operation, and is usually financed by an individual or small group of individuals • An entrepreneurial venture/a partnership or a temporary business organisation A startup is a young company which could be an entrepreneurial venture or a new business, a partnership A startup is defined as a business that: or temporary business organisation designed to search • Engages in development, production or distribution of new for a repeatable and scalable business model products, processes or services • New and existence for not more than five years A startup is a young company that searches for a an unknown business model in order to disrupt existing • Revenue of up to INR 25 cr. markets or create new ones • Not formed through splitting or restructuring • Formed through splitting or restructuring A startup is a young, dynamic company built on technology and innovation wherein the founders attempt to capitalize on developing a product or service for which According to an Infosys Co-founder, a startup is defined they believe there is a demand as a business: • Within the first three years of its existence • Employing 50 people or less • Revenue of INR 5 cr. or less Source: NASSCOM Startup India report 2015, Secondary sources, New articles 6 Startups India - An Overviewb. Stages of the startup lifecycle Discovery Maintenance Identify a potential scalable Maximising benefits and facing product/service idea for a problems derived from the global big enough target market dimension that the business has achieved Validation Sale or Renewal The service or product discovered hits the market, The decision to sell the startup to looking for the first clients a giant or acquire huge resources ready to pay for it that the brand will need to continue growing PRE-STARTUP STARTUP GROWTH Efficiency The entrepreneur begins to define his/her business model and looks for ways to increase customer base Scale Pushing the growth of the business aggressively while increasing its capacity to grow in a sustainable manner Startups India - An Overview 7c. Startup ecosystem Support Big Universities organisations companies Research Service Funding organisations providers organisations • Ideas, inventions and research • Startups at various stages • Entrepreneurs Startup • Startup team members Ecosystem • Investors • Mentors • Advisors • Other entrepreneurial people • People from related organisations 8 Startups India - An OverviewRisk Introduction d. Startup financing lifecycle Funding by Venture Public Angel investors/ capital markets Seed funds • Early stage startups rely on • Used to scale the • Late stage startups can feel angel investors and seed company’s business model the need to expand more funding aggressively or actively • Comes from larger innovate the product • Invest solely into the institutional funds entrepreneur with an idea • Private equity funds together • Focus is on building the with public markets provide • Does not encumber the sales force and establishing large amounts of liquidity to entrepreneur with any a global presence late stage startups corporate governance formalities Startup funding process Public markets Venture capital Seed funds Angels Grants Concept Startup Growth Expansion Startups India - An Overview 9 Investment SalesEffective operational management for startups • Planning and Budgeting Managing • Customer Retention and Business Brand Loyalty Performance • Product Profitability Process and System Development Strategy and Organisation • Working Capital Management • Business partnering • Operational process • Shared services and outsourcing • Financial management • Financial design • Database management 10 Startups India - An OverviewIntroduction India is amongst the top five countries in the world in terms of startups. US ranks number one on the list with 83,000+ startups. Canada UK 6,100+ India 7,900+ 10,000+ US 83,000+ China 10,000+ Source: Microsoft Ventures, Zinnov, NASSCOM Startup India report 2015 Startups India - An Overview 11Indian startup industry composition Total startups 10,000 (approx.) Startups % Share New startups annually 4,300 5,700 43% 57% 800 N.A Sector concentration E-commerce - 33% Engineering - 17% B2B - 24% Construction- 13% Consumer internet - 12% Agri products- 11% Mobile apps - 10% Textile - 8% SaaS - 8% Printing & packaging – 8% Other – 13% Transport & logistics - 6% Outsourcing & support – 5% Other – 32% Technology based startups Non-Technology based startups Note: Non-tech based startups sector concentration is an outcome of a survey conducted by CRISIL on 20% sample of micro, small, and medium enterprises 2013-14 Source: NASSCOM Startup India report 2015, Microsoft Ventures, Secondary sources, News article 12 Startups India - An OverviewIntroduction Current state of Indian startups 3rd Largest India is 3rd largest startup hub 9% 9% of total startup founders are women 28 Yrs. Average age of startup founders is 28 Yrs. 800 to 2,000 Average no. of new tech startups have moved from 480 in 2010 to 800 in 2015. Expected to increase to 2,000 in 2020 4,300 to 11,500 Total Tech startups are expected to increase to 11,500 in 2020 from 4,300 in 2015 40% The number of incubators has grown by 40% to 110 during 2014-15 Metro cities 50% (approx.) Majority of startups and/or Approx 50% growth in share investors are from Metro cities of female entrepreneurs in the last 12 months 43% (approx.) approx 43% of total startups are Tech-based Stringent Complex tax regulatory/policy environment atmosphere 60% (approx.) approx 60% of new jobs were created by SMEs during 1993-2013 Double The number of PE/VC firms have doubled in the last 12 months Source: NASSCOM Startup India report 2015, Startup India-Momentous Rise of the Indian Startup Ecosystem, CII report on a snapshot of India’s Startup Ecosystem, Secondary sources, News article Startups India - An Overview 13India comparison India China Israel Singapore Japan US Total no. of 10,000 10,000 4,750 N.A. N.A. 83,000 startups () Tech-based 4,300 3,400 4,000 N.A. N.A. 48,500 startups Non-tech based 5,700 6,600 750 N.A. N.A. 34,500 startups Set up a new 30 – 60 30 13 2 10 4 business (Days) Corporate tax 34% 25% 26% 17% (100% tax 34% 39% rate exemption for startups) No. of Tax 33 9 TBD TBD TBD 11 payments by businesses (p.a.) Bank lending rate 10.3% 5.6% 3.9% 5.4% 1.2% 3.3% R&D spending 0.85% 1.90% 4.20% n/a 3.40 2.80% % of GDP (Est. 2014) Source: World Bank, News articles, Gov. sites 14 Startups India - An Overview3. Scope for Growth a. Policy initiatives Indian government aims to build an ecosystem that promotes entrepreneurship at the startup level and has taken a number of initiatives to ensure that the startup businesses get appropriate support Make in India In September 2014, Prime Minister Narendra Modi introduced a big initiative “Make in India” to promote the manufacturing sector by promoting companies to invest in the sector. The intent of the campaign is to attract foreign investments and encourage domestic companies to participate in the manufacturing thereby contributing to the growth story. The government also took various steps to build a favourable environment to do business in the country. For example, an online system for environment clearances, filling income tax returns and extension of validity of industrial licenses to three years have been put in place. 1. The government increase the foreign Direct Investment limits for most of the sectors 2. Protection of the intellectual property rights of innovators and creators by upgrading infrastructure, and using state-of-the-art technology Standup India The Prime Minister also aims to build systems for enabling startups and wants to make the country as a number one destination for startups. In August 2015, he announced a new campaign “Standup India” to help startups with bank funding and encourage entrepreneurship among the young Indians. He also requested all 1.25 lakh bank branches to fund at least one startup founded by tribals and dalits. Standup India: On 6th January 2016, the Union Cabinet has given approval to Standup India campaign which aimed at promoting entrepreneurship among women and scheduled castes and tribes. Some of the salient features include: • Loans under the scheme would be given for greenfield projects in the non-farm sector, • Intention of the scheme is to facilitate at least two such projects per bank branch, • The scheme is expected to benefit at least 250,000 borrowers in 36 months from the launch of the Scheme. It also plans to ease out the existing regulatory regime for startups and is considering extending tax incentives to them. The Department of Industrial Policy and Promotion (DIPP) is currently working around a clear definition for startups to ensure that the regime is available to businesses Digital India This is an initiative led by the Indian government to ensure that government services are made available to every citizen through online platform. In July 2015, the PM announced the Digital India initiative that aims to connect rural areas by developing their digital infrastructure. This translates into a huge business opportunity for startups. E-Commerce companies in India are planning to break into India’s rural market as a part of the government’s Digital India initiative. In September 2015, PM Modi visited Silicon Valley, US and had meetings with a number of founders of technology firms and industry leaders such as Satya Nadella and Sundar Pichai to talk about his ambitions of developing a better startup ecosystem According to NASSCOM startup report 2015, every year more than 800 tech startups are being set up in India. By 2020, a projected 11,500 tech-startups are going to emerge and will employ around 250,000 people. Source: NASSCOM Startup India report 2015 Secondary sources, New articles Startups India - An Overview 15Financial assistance In his Union Budget speech for 2015-16, Finance Minister Arun Jaitley announced government’s plan to set up Micro Units Development Refinance Agency (MUDRA) Bank and a Credit Guarantee Fund with a refinance capital of INR 20,000 cr and INR 3,000 cr. • In April 2015, the government launched Mudra Bank to boost the growth of small businesses and manufacturing units - The newly Bank would provide a credit facility of up to INR 50,000 to small businesses, loan of up to INR 5 lakh to little bigger businesses and loan of up to INR 10 lakh to the MSME sector MUDRA Scheme: On 6th January 2016, the Union Cabinet has given approval to the following proposals: • The cabinet has approved the creation of a Credit Guarantee Fund for MUDRA loans - It is expected that the fund will guarantee loans of over INR 1,00,000 cr to micro and small businesses in the first instance - According to the finance minister, the MUNDRA scheme is expected to provide benefits to 1.73 cr. people - The fund will guaranteeing loans sanctioned under Pradhan Mantri Mudra Yojana w.e.f. 08th April’15 • The cabinet also given its go ahead to convert MUDRA Ltd. into MUDRA Small Industries Development Bank of India (SIDBI) Bank as a wholly owned subsidiary of SIDBI Additionally, the government has set a target to provide a total loan of INR 1.22 Lakh cr. to promote new entrepreneurs and fund the unfunded businesses with the help of banks India Aspiration Fund: The finance minister also announced the India Aspiration Fund to encourage the startup ecosystem and allocated INR 400 cr. to various venture funds. He also launched another program called SMILE (SIDBI Make in India Loan for Small Enterprises) with an allocation of INR 10,000 cr. The objective of the scheme is to offer soft loans in the form of quasi-equity and term loans on soft terms to MSMEs. Startup Exchange The SEBI announced a new set of listing norms for startups, including e-Commerce ventures, planning to raise funding from listing on stock exchanges. These new norms will provide relaxations in disclosure related requirements, takeover and Alternative Investment Fund regulations for IT, data analytics, intellectual property, bio-technology or nano-technology companies. Self-utilisation and Talent Utilisation (SETU) The government is planning to set up a mechanism called SETU, under the newly formed NITI Aayog, to provide technical assistance and incubation to startups. In 2015 Union Budget, Finance Minister, Arun Jaitley, has set aside INR 1,000 crore for support startups. Source: NASSCOM Startup India report 2015 Secondary sources, New articles 16 Startups India - An OverviewGrowth b. Role of large businesses Big corporates generally focuses on innovation, performance excellence and risk management in order to compete in the dynamic global business environment. Issues related to tightening of research and development budgets, increasing digital disruption and organisational bureaucracy make it difficult for large companies to innovate on their own. Rising number of corporates are looking in search of diverse information, creative people and processes at the smaller companies or star-ups: • Many corporates are now shifting their focus from investments into their own research and development to investments in multiple source of innovation, focusing in particular on technology based startups - Nandan Nilekani is investing US 1-2 mn in startups in many sectors including telecom, aerospace, publishing, logistics etc. - Ratan Tata recently invested an undisclosed sum in Tracxn, a Bengaluru-based startup intelligence firm • Corporates collaborate with other small firms including startups by investing fully or partially to access to their pool of talent, assets and capabilities. • Big firms often look at smaller companies as they are more agile, with less bureaucracy and fewer approvals required to develop innovative products. Startups in India have managed to get funding from various informal channels including corporate, angel/seed or VC funding. There are a few startups with innovative business ideas which have managed to raise funds through “Crowdfunding”, where a large number of investors contribute capital through various channels including internet, mail-orders, events etc. For example, startups such as Ketto, BitGiving and Wishberry have raised money through this concept. Over the recent years, “Crowdfunding” as a concept has gained popularity globally, however, in India, it is still at a nascent stage and is expected to pick up as a regular funding channel with the increase in awareness. Source: NASSCOM Startup India report 2015, Secondary sources, News articles Startups India - An Overview 17c. Possible impact of startup incubators Startup incubators are companies that assist new startups in their initial phase of development by providing various services. Incubators share both tangible and intangible resources such as equipment, office space, services such as accounting, computing and legal services. They also assist startups in raising startup capital and perform various networking activities to reduce the financial burdens and resource issue. Incubators help entrepreneurs in building sustainable business environment while benefitting the broader corporate communities. • According to NASSOCM report, there is a 40 percent growth in the number of incubators to reach to approximately 110 in 2015 as against around 80 in 2014. • Approximately 50 percent of total incubators are set up in non-metro cities i.e. outside NCR, Bengaluru and Mumbai to offer. • Growing number of educational institutes have started setting up incubator programmes independently or jointly. Shri Ram College of Commerce, New Delhi for example has set an incubator to help their student in their own starups, VESIT college of engineering has set up an incubation centre with the same objective. • Big corporates are also setting up incubator programmes to help startups. Tata Group launched T-Hub, Google, Microsoft Ventures etc. • Tata has come up with country’s largest technology incubator centre ‘T-Hub’ in Hyderabad • Google has come up with a Launchpad accelerator programme for specific to mobile startups in India, Brazil and Indonesia with training and developmental support and upto US 50,000 in equity-free funding • Y-Combinator, a popular incubator in the San Francisco Bay Area has designs to make investments in India in the near future. Startup funding in India Funding based on age of company Average Age of a firm (in years) Venture capital invests in both stages of company based on the following criteria: 1 Yrs. 3 Yrs. Early stage: 5 Yrs. Includes first or second round of institutional 8 Yrs. investments into companies: • Average of less than five years old • Not a part of big corporates • Investment amount US 20 mn Family and Angel/Seed VC/PE/ Public Growth Stage: friends funds/VC/PE Banks market/PE • Usually third or fourth round of funding • First or second round of investments for firms with 5-10 years age Early stage • Spinouts/carve outs from big corporates Growth stage • Investment amount US 20 mn 18 Startups India - An OverviewGrowth d. Startup investment round up 2,500 700 2,213 600 2,000 500 1,500 400 903 300 1,000 200 345 500 304 231 100 - 0 2011 2012 2013 2014 2015 4 3 3 5 4 Average Investment Value (US Million) Volume Sizes (US mn) During 2011-13 (CAGR growth) During 2013-15 (CAGR growth) • Yearly growth of 22 percent • Yearly growth of 153 percent in in number of investment number of investment • Yearly growth of 47 percent • Yearly growth of 127 percent in in total value of investment total value of investment 800 250 679 654 700 200 568 600 500 150 400 322 312 268 100 300 174 139 200 118 93 50 70 64 100 - - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 Value Volume Note: The criteria used to define startups include: a) The Company should have been incorporated for three or less than three years as at the end of that particular year. b) The Company is a player in a non-traditional service industry c) The Company has received funding only upto Series B Source: Grant Thornton Analysis Startups India - An Overview 19 Value (US mn) Value US mn Volume Volumee. Approvals and other regulatory processes Single online clearance system Prime Minister Narendra Modi plans to bring an online approval window which will provide over 200 permits required by different industries from various government divisions • This new system for clearance approval for new entrepreneurs would allow them to apply for and track the status of their applications/license permits online • Currently, 81 state-level clearances, including land acquisition, setting up a factory are being digitised • 133 clearances that are being granted by other central government divisions, including the home, defence and railway ministry, will come online PM is working on taking the online governance systems on the fingers of public through the introduction of mobile phones channel Simplification of regulatory regime The Prime Minister aims to bring India ranking on the ease of doing business to 50 from the current ranking of 142 on the World Bank’s index, and is working on to simplifying business processes and regulations According to a DIPP official, a government panel is working on a policy that proposes exempting startups from a 22 federal rules and regulations such as: • Proposal includes exemption from company and labour laws until a startups revenue touches to certain level, • Certain tax exemptions for a specified period and • Easing norms for raising capital globally. Source: News articles, Secondary sources 20 Startups India - An Overview4. Challenges World Bank’s Report: Doing Business 2016 • India is ranked 130th out of 189 economies on the ease of doing business, 133rd on the ease of trading across borders and 157th on the ease of paying taxes. • India is ranked 155th in case of starting a business • On an average, Indian businesses need to make 33 tax payments annually with around 243 hours spent to prepare and pay taxes in a year • In contrast, China requires just nine tax payments annually, while the US doesn’t trouble its taxpayers more than 11 times annually for tax payments • Among South Asian economies, India made the biggest improvement in business regulation, increasing its distance to frontier score Sustainability a. Startup business challenges Technology Financial Regulatory Culture and Social Awareness Startups India - An Overview 21Culture and Awareness • The Indian culture has conditioned people to look down upon failure. For failures, opinions do come by but encouragement rarely so. Entrepreneurship is often about failing and learning from those failures and starting all over again. People need to start accepting failures and allow second chances. • Most common questions for anyone to become an entrepreneur - What to do: problem related to creating a business idea, finding business opportunity or having a vision - Why to do: issues related to reward/incentive analysis, risk evaluation or any other benefits - How to do: issues related to legalities and requirements such as clearances, licenses, approvals required. Issues related to resource availability including finances, technology and manpower supply • Most people think that having a domain name, setting up a website, moving to social media are complex, costly and time consuming • People are conscious about risk and rewards, and India is referred to as a price sensitive market • People at large are unaware about how can they contribute to economic growth, generate employment, contribute to social development. Social Issues • Mentorship/Guidance: Most founders of failed startups feel that the lack of proper guidance and mentorship is a major reason behind their failure. An important factor behind failures and slow growth of some organisations is the lack of quality mentorship, especially in terms of industry knowledge/support. • Market structure: Indian markets are largely unorganised and fragmented that create a roadblock for a startup to succeed • Consumer behaviour: Behaviour of Indian consumer changes in every 30-50km that makes it really difficult for a startup to create business or market strategy for their products or services. Most startups generally get stuck in stagnancy and gradually shut down. • Location: An important problem faced by startups is related to location of their business. India is a place of varied culture and taste and thus every product might not be welcomed equally in every region. Technology • Technology infrastructure - Appropriate IT-infrastructure has become a need for Indian businesses given the growing number of consumers online - It is absolutely vital for new startups to train their employees for handling critical customer information such as that of credit card numbers and related data • Cyber security - Most startups have a B2B business model. This is where cyber risk may rise as they are not aware of potential risks that might exist for their startup business - No back-up plan to keep the startup company running when an accident destroys some key equipment in their data centre. 22 Startups India - An Overview

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