Start-up funding in India: Key documents
Breakthrough company ideas provide value to society in this Startups Landscape. However, turning a brilliant company concept into a money-making machine takes a great deal of effort, professionalism, and capital. Unfortunately, not all brilliant ideas are supported with the necessary financial cushion. This is where start-up funding comes into play. This article attempts to shed some light on the technicalities of the fundraising process, namely the paperwork portion, which will help you on your fundraising journey. The page includes important material pertaining to startup funding in India.
However, the start-up ecosystem has exalted soliciting money, often more than earning money itself. To the point when raising funds for your business is considered a success. And unwittingly, this has made soliciting funds appear convoluted, difficult, and only for a select few. This alone has frightened and demotivated many prospective entrepreneurs.
Indian Start-up Background
India has an estimated 26,000 businesses, making it the world’s third-largest startup ecosystem, with over $36 billion in consolidated inflows over the last three years and 26 “unicorns” — startups valued at more than $1 billion. The Indian startup ecosystem has grown fast, owing mostly to private investments such as seed, angel, venture capital, and private equity funds, as well as technical assistance from incubators, accelerators, and the government.
Eligibility Criteria for Startup Registration: The start-up should be formed as a private limited company or as a limited liability business. In any preceding financial year, sales should be less than INR 100 Crores. Startup India registration has numerous benefits. It is an easy and quick way to start a company. New startup registration might be a little distressing but one can avail of the outsourcing service for company registration at a minimal cost.
For its part, the government is fostering a conducive environment through its flagship Start-up India programme, which went into effect in 2016. With India attempting to transition to a knowledge-based and digital economy, the government is attempting to deploy ICT infrastructure and provide policy support for enhanced e-governance, investments, and technological innovation through research and higher education in order to support entrepreneurship and spur economic growth.
According to data, the rise of the startup ecosystem has generally been concentrated in big (Tier 1) cities and states with financial depth, particularly in IT-enabled industries like eCommerce, transportation, and banking. Small firms outside of metro areas are not fully aware of or incorporated into, programmes that give different government incentives and tax advantages to entrepreneurs.
Despite progress, Indian businesses face significant challenges, including the unorganised and fragmented nature of the market in most sectors, a lack of clear and transparent policy initiatives that startups can quickly tap into, a lack of infrastructure, a lack of knowledge, and exposure, and complications in doing business. Increasing awareness of government programmes and incentives, loan distribution to key industries, increasing outreach and network advantages to Tier 2 and Tier 3 cities, and simplifying financing and tax exemptions for international and domestic investors might all help startups in India.
How the Startup Funding Process Works
As previously mentioned, you may raise funds for your firm in two ways: debt or equity.
Debt is essentially a loan in which you borrow money from a person or a bank at an agreed-upon interest rate. You repay the borrowed funds, plus interest, within a certain time frame.
However, there is a major flaw with this one.
If you opt to go this way, you assume 100 percent of the risk and are obligated to repay the borrowed funds. Furthermore, the loan application procedure is typically time-consuming and limited to firms that already have a steady cash flow.
To avoid risk, some business owners generate funds by selling a portion of their firm in the form of stock (shares). The investor will receive a stake in your firm in exchange for the money provided, but you are under no obligation to repay the money.
Typically, investors choose to wait it out and pay out their investment through a process known as an “exit,” in which the investor sells his shares of the firm. The investor generally exits when the value of his share is exponentially more than what he paid for it.
Documentation’s Importance in Start-up Fundraising
In general, institutions like Venture Capital, Private Equity, Angel Investors, and Investment Bankers choose projects that have the potential to provide a high return on investment in the future. So convincing these investors and closing the sale would need more than a casual effort on the part of the start-ups.
So, does this indicate that getting a concept accepted is really difficult?
Well, the answer is No; provided you have a proper plan to follow, which includes adequate documentation and other concrete elements as mentioned in the next section.
Documents pertaining to start-up funding in India
We have split the papers pertaining to start-up financing into two categories: pre-funding and post-funding. It is critical to approach this activity with caution in order for the startups to expand steadily, with the rules being followed at regular intervals.
A pitch deck is an official presentation that companies use to persuade prospective investors during the fundraising process. It may be a basic PowerPoint presentation that demonstrates the following company characteristics. In layman’s terms, a pitch deck is a technique to present your concept to a large group of people, primarily investors. One of the most important aspects of a good pitch deck is that it is synced depending on the audience and forum to whom it is to be given. A pitch deck should comprise elaborative overview slides, the issue you’re dealing with, the product, the strategy/market, the personnel, financials/projections, and the tone you want to convey.
“A pitch deck is a collection of slides that acts as the background for your presentation. It serves as a visual guide and reference to the important points you want to communicate to potential investors, and it may be the difference between a poor presentation and one that secures money”
In general, here is what the Pitch deck should have:
- Product and service characteristics
- Supply chain survey (demand and supply)
- Model for generating revenue
- Costing report for the project
- Cashflow forecasts
- Unique Selling Points Data pertaining to the Proposition Industry
A non-disclosure agreement (NDA)
A non-disclosure agreement is a contract that prohibits the revealing of any information (NDA). NDAs serve as a safeguard for start-ups throughout a funding campaign since they are the only thing that protects their trade secrets, aspirational ideas, and intellectual property (IP) alive and well. As a result, it is critical in the fundraising process for startups.
Startups in India frequently believe that customer data, formulae, procedures, and methodologies are not critical to the success or failure of the company. However, most successful firms have a different opinion, believing that these elements are important for start-up growth.
As a result, it is critical that workers, investors, and consultants with whom important data will be shared sign a detailed Non-Disclosure Agreement.
Before discussing information with investors, make sure you include your signature in the NDA.
Due diligence refers to the process of conducting study and analysis before the start of any enterprise, investment, purchase, and so on. Due diligence is typically used by a firm to determine the pain points and value of the topic of the due diligence. These results are then succinctly described in a report, which is usually referred to as a due diligence report.
Due diligence is carried out in order to:
- Analyze various elements in order to have a better understanding of an entity’s commercial potential
- Determine the financial feasibility of the planned enterprise on a broad scale.
- Examine the existing legal standards and regulatory framework in relation to the planned initiatives or commercial transactions.
Focus Areas in a Due Diligence Report
- Viability: The viability of the target company may be determined by a thorough examination of the business and financial plans.
- Monetary aspect: To understand the entire picture, critical fiscal facts and ratio analysis are required.
- Personnel: The potential and credibility of the individual working in the firm is an important factor to consider.
- Environment: No business operates in a vacuum. As a result, it is critical to investigate the macro-environment and its overall influence on the target entity.
- Technology evaluation: A critical element to examine is the entity’s technology assessment. Such an evaluation is critical since it helps to determine future activities.
- Key Liabilities & Prevailing Liabilities: Any current litigation or regulatory issues should be taken into account.
- Synergy’s effect: The creation of cooperation between the target firm and the dominant corporation acts as a decision-making medium.
A term sheet is a non-binding agreement that outlines the basic terms and standards of an investment. The term sheet serves as an easy-to-use template and the foundation for more detailed, legally enforceable contracts. Once the parties have agreed on the facts listed in the term sheet, achieve a binding agreement that adheres to the sheet detail set out. A term sheet should ideally have the following elements.
- Equity and preference are the two types of securities. Shares, debentures, and so on
- responsibilities of promoters
- Investors’ obligations and duties, such as drag along with provisions and the ability to reject the offer, are outlined in the Exit Clause.
- Co-founder vesting norms
- Stock valuations and the number of shares intended to be issued or converted into liquidation
- Lock-in or Promoter & Investor
Agreement Between Shareholders
A shareholders’ agreement, sometimes known as a stockholders’ agreement, is a legal document that specifies how a corporation should execute its activities and specifies shareholders’ obligations and rights. The agreement also includes information on the firm and shareholder protection. Such agreements are intended to ensure that shareholders are treated fairly and that their rights are honoured. Furthermore, it allows shareholders to make judgments about the selection of future shareholders and provides minority position safeguards.
Take note of the following: Make certain that the documentations stated centres around the following characteristics:
Positioning oneself as a real candidate for funding necessitates a high level of professionalism and a well-thought-out strategy. The documents listed above are nothing more than necessary preparations for you to begin your fundraising adventure. It goes without saying that these documents should be carefully crafted, preferably with the assistance of subject matter specialists. Keep in mind that the delicate drafting of papers is the key to success in the Fundraising for Startups path.
“Capital is still necessary, but what is more crucial is knowing when and how to use it most efficiently in order to get the most out of it. Capital offers you a huge edge over other competitors since it allows you to grow and grab a large market for yourself in a very short period of time”