These are high net worth Individuals who are ready to invest in start up companies. The typical investment cap is at Rs.1 crore starting from as low as Rs.10 lakhs to Rs.25 L. They expect equity from the promoters and exit typically by selling their equity in the next rounds of funding.
Once we have a prototype or a proven business model is in hand time is ripe for launching the company to the world (target customers). Here we will need additional equity support apart from big loans. Here is a time when the innovator has to decide whether to own 100% of a small company or a lesser percentage in a much larger company. It is also the time for the innovator to think whether he/she has the managerial talent and the market connections to make it big on their own. If the innovator decides that it is required for additional talent and additional money in the form of equity, then the rest of the article will be useful for him/her.
Early Stage Support
There are equity participant who would participate at an early stage. These are high risk takers who are ready to bet on us when even we are not ready with the business model / product / service design in full. These investors can be in three forms – Angel Investors, Early Stage Venture Capital Firms, and Development Institutions With Special Schemes.
These are High Net Worth Individuals who are ready to invest in startup companies. The typical investment cap is at Rs.1 crore starting from as low as Rs.10 lakhs to Rs.25 lakhs. They expect equity from the promoters and exit typically by selling their equity in the next rounds of funding.
They will also be giving mentoring support and generally will be giving access to their business networks. They are in all practical sense a working and investing partner for the company. They will be taking active involvement in the running of the company as their personal money is at stake. There may be a few Angels who also manage their investment (our company) at arms length asking only for periodic reports. It is very important that there is a clear understanding between the Angel Investor and the innovator.
Indian Angel Network is an organization which connects a large group of Angel Investors to innovators. They have regular (almost monthly) review sessions for connecting prospective innovators and interested Angels at Bangalore, Mumbai and at Delhi.
Early Stage Venture Capital Firms
Venture capital firms are professionally managed firms which manage the money for other investors as per their mandate. Some of the Venture capital firms invest in early stage companies too. The investment again can be from Rs.25 lakhs going upto Rs.1 crore.
These firms after the due diligence may not be involved in the company as much as the Angel investor. Each venture capital firm may specialize in a few domains and will not entertain businesses in other domains.
Development Institutions With Special Schemes
Some Developmental Institutions like SIDBI have schemes where they provide seed fund through their Venture Capital subsidiary. There is a scheme called National Equity Fund under which 25 % of the project cost is funded as an interest free loan. 10% is to be brought in by the promoter and the banks fund balance 65 %.
Venture Capital Firms
As mentioned earlier, venture capital (VC) firms are professional institutions with a mandate to invest in certain domains and with certain returns expectations. Having an Angel investor at an early stage is a somewhat easy route to access VCs. VCs are also on the look out for business ideas which have good scalability and a good management team. As they say, “An A class management team with a B class idea is better than a B class management team with an A class idea”. Of course as an investor the VCs are looking for nothing less than an A + A.
The VCs are in the business for the money, so do not expect any cushy support as can be expected from an incubator. There are people who call VCs, Vulture Capitalists for their sharpness in getting the best out of the business for themselves. But when one considers that they are paid to derive the best for their investors, we understand that their sharpness and excellent negotiation skills cannot be lesser.
The general quantum of investment from a VC starts from US$ 1 million. The upper limit for investment varies from fund to fund. VCs today are very mature in expecting the innovators to be stringent with spending cash. So do not expect to get a huge pay packet for yourself. The funds are meant for the business and only for that.
The general exit strategy for a VC is through an IPO or through another round of high volume funding. So it is wise to include a plan for IPO when pitching to a VC firm. This also means a growth strategy that makes the company want for Rs 100 crores of additional equity in about 5 years. So please do not waste time (yours and also the VC’s) if your aspirations are lesser.
Fast track growth is the buzz word for anybody looking to invest equity in a new business idea. This has to be supported by an excellent business model and management team. There are again multiple options for funding suitable for various stages of the growth of the company.
The Indian market for equity funding is still at a nascent stage. But opportunities are abundant for people who are ready to burn their bridges for following their dreams.