Local Funding for Startups
Awareness about the various funding alternatives is the key. The role of the policymakers is equally important. The objective should be to promote local funding for local startup. — Alok Singh
Capital funding is one of the important constraints for launching a business. But it is not the primary constraint. The primary constraint for the startup is a new idea, new product, and the operations of the business. Many of the domestic startups that have become unicorns are relying on foreign funding. This needs to be changed. The reasons and the solutions need to be explored.
Awareness about the various funding alternatives is the key. The role of the policymakers is equally important. The objective should be to promote local funding for local startup.
The traditional funding mechanism is bank loans, loans from non-banking financial services, loans from microfinance companies, bootstrapping, crowd funding, angel investment, venture capital, funding from business incubators and business accelerators, peer to peer lending, participation in fundraising contests, grants from the government or capital from government-sponsored programmers for a startup business, pre-sales, self-financing like investing savings or selling assets, and many more.
Bootstrapping is the basic confidence-building measure in the startup business. If an individual trusts their business model then they must take the first step as an investor. Selling an asset to raise the fund for the startup is a tough choice. The risking of the past savings in the startup is equally hard. An entrepreneur who believes in his ideas and the business model should invest initially from his own personal resources, this will help build confidence in the business model and subsequently, banks or other loans and many other support channels can join them in the entrepreneurship journey. Today it’s easier said than done and yesterday also it was like that and tomorrow also it will be the same. The startup that invests their own savings or sells their own assets to invest in their business helps in building trust in the business model.
The model of pre-sales is like that the order of the product is received first before the work is started. The computer hardware manufacturer Dell is an example of the success of such a startup model. The real estate developers in India used to follow the same model before the implementation of the Real Estate Regulation and Development Act. The pre-sales model for a startup can be practiced by targeting the prospective customers of the entrepreneur. The government can be one of the customers in such cases, wherever products manufactured or service delivered is of government consumption. For example, the new private medical colleges have the assurance of the government is one of the clients under the Ayushman Bharat scheme. The team of medical practitioners can come together and start a new medical college and hospital. The awareness needs to be spread.
The union government has already done enough for the startups but the big question is why the foreign funding is chasing our startups. The startup India scheme is a detailed scheme. The PLI or production linked scheme has huge allocation by the government and the PLI scheme should include separate terms and conditions to offer the benefits of PLI to startups. The policymakers have to do everything to encourage local capital. The government should not create barriers that encourage startups for foreign listing or chase cheap foreign money at the cost of illusive valuation as has been reported in many e-commerce based startups. E-commerce itself is a dicey area for the government, the regulators, and the tax collectors. The government should demolish any barriers in the way of the startups.
The fundraising contest for startups is something that many entrepreneurs can explore. It risks the idea getting copied. But the fact is that if a person can execute an idea better then anyway the business idea will have competition unless it has some protection by means of patents or copyrights or any other statutory barriers. The entrepreneur who owns the original idea is the best entity to execute it. The organizers of such a contest should provide enough motivation in terms of providing funds to encourage the entrepreneurs to explore this route.
The peer to peer lending is a route where startups can get their peers involved in contributing a small amount to their business. The peers can be the stakeholders in the supply chain of the business or the future customers. In the era of the internet, it’s convenient to reach many peers to contribute to the business. Trust in the business model is the key to such funding. The banks and other funding channels are regulated and the startups on many occasions are unable to meet the benchmark for getting funds from such organizations. The peer to peer lending has relatively lesser regulations and is a good alternative channel to get funds for the startups.
The business incubators and the business accelerators are exclusively for startups. The incubators are usually stationed in the university or any academic institutions that provide a lending platform to their alumni or to their students who come up with a plan and commitment to a startup. Such incubators apart from funding also guide in terms of business development and business management. The business accelerators are equity-based advisory and financing concepts and it suits startups who are in the phase of launching the product. The incubators spent lengthier time nurturing the startups while the accelerators push the launch of the product of the startup in the least time.
The venture capital is the investors and the consultants who in lieu of equity provide services to the startups. The venture capital acts as a one-stop-shop for financing to the startups. The growth potential and the profitability forecast of the startup is the driver to get funding from venture capital firms.
Angel investment is a kind of loan to the startup where the money is pooled from many individuals. . The participants of the angle funding are the high net-worth individuals. This form of funding can’t be done by small investors.
The startups in our company need to be educated about the funding sources for their business. There are many ways of debt-based or equity-based funding platforms. There are exclusive channels for small investors and for big investors in the startup.
The regulators and the government can keep working to provide the convenient benchmark and policy flexibility to make the funding by small investors more practical. This will help in reducing the dependency on foreign funding. The SEBI can come up with a policy change to allow small net worth individuals in the Angle funding scheme. For example, An individual owning assets worth two crores can invest five lakhs in Angle funding. This can be relaxed by providing an opportunity to an individual having assets of one crore to be eligible to invest two and a half lakh rupees and individuals having assets of fifty lakhs can invest one lakh and twenty-five thousand in angle funding and so on.
The success of Jan Dhan Yojana has surprised everyone. The surprise is in terms of the emergence of a new purpose and not the scale of the originally planned purpose. The original purpose of this yojana was not to get deposits from the poor rather was the necessity to serve the poor through direct cash transfer. The volume of money deposited in banks by the new bank account holders has created history and the same expectations can be replicated by the small contributors in the angle funding. The dependency on foreign money and foreign ownership can be diminished using this tool of funding startups. We have enough funds to fund our startups. The relaxation under the category of Angle funding by the regulator SEBI is the need of the hour to give serious thought.
(Alok Singh is a Fellow of the Indian Institute of Management Indore and currently is faculty of general management at NICMAR, Delhi-NCR Campus.)