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The different stages of any business, according to experts, have corresponding funding options, which have been described below in details.

1.    The beginning

a. Seed fund

The beginning is always the toughest. As a fresher or maybe a college passout, one does not have many, or let’s say any, funding options available. At this stage, one has to begin with a bright business idea and understanding the market for the service or product one wants to foray into. Groundwork done, an entrepreneur has to begin with his own savings and debts from his own family and friends. Normally, one would need between Rs.5 lakh to Rs.25 lakh to start a venture.

However, with this ‘personal’ amount, a business can go very far. “With the seed money ranging from Rs.5 lakh to Rs.25 lakh, an entrepreneur can go on for just four to five months,” says Ravindra Krishnappa, Founder Partner, Vertexperts. “In India, there is a huge gap between the early stage and angel funding. And, a lot needs to be done to bridge that gap,” he points out.

Explaining the time different growth stages take, Krishnappa says, “A company takes between 18 months to two years at the seed and angel funding stage. In another two to five years, they normally reach a stage that requires venture capital funding. In the next five to seven years, a company would need private equity funds. In another seven to 10 years, a company is generally ready to go public by initial public offering (IPO). There may be earlier mergers and acquisition exits too.”

b. Angel fund

After the initial setup of a venture, an entrepreneur gets into a dire need of not just funds but also expert hand-holding to stand up in the market. Here comes the role of what we know as angel investors. Angel investors not only provide fund for your business but also assist it to survive in the market that is full of cut-throat competition. However, that depends on your capacity to convince an angel investor about the relevance of your business plan. Ideas that look innovative to an entrepreneur might not attract an experienced angel investor’s reasonings.

“In the early stage, you might just have been wasting your own savings. Angels investing, on the other hand, is the formalization of a business idea. These are the people who have the ability to judge the relevance of your business plan. They fund you only if they see a chance for your venture to grow in future,” opines Saurabh Srivastava, Chairman, CA Technologies and Co-founder, Indian Angel Network (IAN).

Angel funding, an equity-based transaction, may vary from Rs.10 lakh to Rs.3 crore-Rs.5 crore. In India, IAN and Bombay Angel Network are the two major players in this type of funding. Apart from them, one can find a millions of individual angel investors.

Before funding you, an angel investor looks at:

. Whether you clearly understand the business you are doing.

. How big is the market for your product?

. What is the kind of competition in the market?

. Last but not the least, how do you plan to execute your business plan? Taking about execution, an investor primarily looks at the team of professionals—people who have to execute an idea into reality.

According to Hemant Kanakia, a member at IAN, big companies/investors put money into a startup venture with a long-term perspective. Depending on the growth of the company over the years, such an investor reaps the benefits in future. “Angel investors also fund a particular business idea to get educated in the area he might be planning to foray into. They also do it because they have an interest in the segment,” he adds.

From an investor’s point of view, this transaction involves a lot of risk. Given that, an investor looks at around 60 percent equity in a business. “Angel investors, who identify potential entrepreneurs and fund their businesses, look at whether the person understands what it takes to make a business a success. At this stage, an entrepreneur has nothing much to offer. So, the equity share is higher in angel funding above or around 60 percent,” says A. Ramesh Kumar, MD & CEO, Asia Pragati Capfin Pvt. Ltd.

Equity-based funding is the only available option at this stage because, says Kanakia, it’s very hard to get a debt during this period.

2.    Growth stage

a. Venture capital fund

A company needs venture capital (VC) fund infusion when it reaches a stage where it’s earning some revenue, but there is a lot of growth that has to follow on. A tool of equity financing, VCs assist private business to grow faster. A venture capitalist acquires an agreed proportion of the equity of a company in return for the funding.

Equity finance offers the significant advantage of having no interest charges. It is “patient” capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing. Given the nature of equity financing, venture capital investors are, therefore, exposed higher risks. As a result, they invest in companies, which have the ability to grow successfully in future and provide higher than average returns to compensate for the risk taken.

At this stage, many government grants are also available. Apart from that, banks also readily fund a business, says Kanakia.

Early stage VC funds may vary from Rs.1 crore to Rs.200 crore. During the later growth stage, this amount may go to as high as Rs.1,200 crore. “During the later stage, a company starts earning revenues and more money has to be infused in the venture for a rapid growth. At this stage an entrepreneur goes for a combination of debt and equity together,” says Kanakia.

According to Kumar, one prefers debt funds to equity-based finance in India: “This is because there is a clear laid-out law when it comes to debt and there is a huge portfolio in bank financing while equity-side fund support is an emerging phenomenon in the country.”

However, according to many, there is no getting away venture capital infusion. Now, the task is to convince the VCs to invest in your business. VCs are high-risk investors and expects good returns from an entrepreneur. That makes it harder for an entrepreneur to convince VCs to fund his business. “It’s not like a loan-taking procedure where you go to a bank with a set of papers and it’s all done. VCs have a different criterion altogether and it happens to be very tough. There is a lot of touch and feel involved,” says Rishi Sahay, Founder, Cogence Advisors.

This has to be taken into consideration that approaching venture capitalists may not be the right thing for all sorts of businesses as they invest in companies that fit their investment criterion. Also, they invest funds on a professional basis, often focusing on a limited sector of specialization.

The basic questions on the basis of which an entrepreneur is normally evaluated are:

. How is your product superior? Is it growing fast?

. Do you have the ability to go and win customers?

. Do you have leadership skills?

. Can the business go online?

. Is there a clear exit opportunity for their investment such as public listing or a third party acquisition of the investee company?

Apart from the money, VCs can assist you on many other fronts. With their network of contacts, they can add value your business. This may be in the form of providing contacts in international markets, introducing to strategic partners, and, if needed, co-investing with other venture capital firms when additional rounds of financing is required. VCs are also able to provide practical advice and assistance to the company based on their past experiences. According to a Bain PE database, around 1,300 Indian companies received VC/PE funding till 2009 and have shown remarkable growth.

The drivers of the phenomenal VC growth in India are largely the knowledge-based industries that are expanding fast and are globally competitive. The strong return of Silicon Valley VC firms to India as well as the rising number of new India-dedicated VC firms give confidence that the resurgence in VC investment is likely to be sustained. However, VC is yet to be established as a sustainable asset class among institutional investors. Also, limited amount of true ‘risk capital’ is likely to hit entrepreneurial activity. India still suffers from shallow capital markets and dull M&A environment for small companies. With a strong capital market and supportive legal system, however, VC funding in India could see a major growth in future.

There are more than 150 foreign VCs listed with Securities and Exchange Board of India (Sebi) in India at present, apart from some local players. IDG India Ventures, Intel Capital, Norwest Venture Partners, Nexus India Capital and Sequoia Capital India are some of the major players in VC segment.

b. Private equity fund

Private equity (PE) enters the scene when a business is making profits and looking at expansion. According to Indian Venture Capital Association, private equity is a broad term that refers to non-public ownership equity securities that are not listed on public exchanges. Private equity encompasses both early-stage (venture capital) and later-stage (buyout, expansion) investing.

In PE, the funds can range between Rs.25 crore and Rs.1,200 crore. Normally, 20 percent of these investments lose money, 70 percent get average returns, while 30 percent make good money, says a report by Cogence Advisors.

Before going for PE funding, an entrepreneur has to have a clear idea on these questions:

. Is he willing to sell some of his company shares to a private equity investor?

. Does his company have high growth prospects and are he and his team ready to grow the company rapidly?

.Does the company have a product or service with a competitive edge? Is it globally competitive?

. Do he and his management team have relevant sector experience?

Before considering private equity, an entrepreneur has to look at many aspects. PE funds generally target 20-40 percent ownership, besides board representation and liquidation preference. With the infusion of PE funds, a lot of competition would creep in. This, in turn, would call for rapid growth from entrepreneurs’ side. On the other hand, private equity funds align their interests with those of entrepreneurs. Hence, it can be a profitable solution for both the parties.

According to the Cogence report, India will remain an attractive destination for PE funding. Some prominent PE funds operating in India are Warburg Pincus, GW Capital, New Vernon, Standard Chartered, Chrys Capital and Goldman Sachs and ICICI Ventures.

3. The exit route

IPO/sale

When the promoters of a private company raise money by selling stock to the public for the first time, they have to come up with an Initial Public Offer (IPO). IPOs are normally issued by younger companies seeking capital expansion. Large privately-owned firms looking to become publicly-traded companies also go for IPOs.

IPOs can be a risky proposition for entrepreneurs. It is difficult to predict how a company’s stock would perform in the initial days because there is little historical data to analyze its fundamentals. Also, most IPOs are those of companies going through transitory growth phase. This makes the future value of the stocks even more uncertain.

However, going public helps a business have greater access to markets for future capital inflows too. In general terms, most companies’ IPO valuation and debt-to-equity ratio improve after going public, making it possible for enterprises to receive better terms from lenders after they complete an IPO calendar.

Even after offering securities to the public, a company’s management and directors are able to retain a large degree of control, unlike many other capital infusion options. For example, if a private company brings in venture capitalists to raise capital, the VC would insist on being part of the decision-making process.

And, that’s not all. Being a public company has a definite appeal. Historically, such companies have achieved higher recognition than their private peers. Funding resources available to public companies are, again, much higher than those available to private concerns.

This apart, at the profit-making stage, a venture can get into exit mode by selling the company and start a fresh venture with new and innovative ideas. The show must, indeed, go on!

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bootstrapping, cash, Indian Angel Network, private equity, venture capital