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Module: 3 Start-ups & Its Financial Issues

Introduction- Meaning – Features – Types of Start-ups – Ideation – Design Thinking, Entrepreneurship Lessons
for Start-ups, 3 Pillars to Initiate start-ups (Handholding, Funding & Incubation).
Start-ups Financial issues: feasibility Analysis- The cost & Process of Raising capital–Unique Funding issues
of a High-tech Ventures – funding with equity – Financing with debt – funding strategies with bootstrapping
– Crowdfunding – Venture Capital.

➢ Start-ups:
Meaning of Start-ups:
Start-ups are companies or ventures that are focused on a single product or service that the founders want to
bring to the market. Start-ups are founded by one or more entrepreneurship who want to develop a product or
service for which they believe there is demand.

Features of Start-ups:
1. Tremendous Growth: Start-ups are businesses designed to scale incredibly quickly, and this focus on
growth and rapid scale differentiates them from small businesses. Consequently, start-upss usually have
high burn rates and typically hire employees to facilitate this growth. There is a distinct lack of stability.
Interestingly, companies that begin to generate profit may no longer be classified as a start-ups.
2. Innovation: start-ups are then involved with innovation, new ideas and using technology to create
something that addresses a problem. They are typically disrupting existing markets – hotels (Airbnb),
taxis (Uber), search engines (Google)
3. Age: Start-ups are generally young and after three years in business, most cease operating as start-ups.
This coincides with other events including:

✓ The company is acquired by a larger company

✓ The company sets up multiple offices
✓ The company reaches revenues of over $20 million
✓ The company has over 80 employees
✓ The company has over five directors
✓ The founders personally sell some of their shares.
4. Tech – oriented: A start-ups does not, by definition, have to be tech-oriented although in reality they
often are. Start-ups often use technology to solve problems and the ever-growing public access to that
technology enables a start-ups’s tremendous growth.
5. Culture: We’ve already mentioned culture and many founders insist that start-upss are a culture,
undeliberated by metrics. As such, they argue that a company can be a start-ups at all ages and sizes.

Benefits of Start-ups:
1. Self – Certification under Labor and Environmental Laws: A company is required to comply with
various labour law compliance. Non-compliance with such laws leads to strict liability. Startups being
fairly new to the eco-systems end up neglecting them. No inspection will be conducted for a period of
three years.
2. Tax exemption for three Years: the startups registered under the Startup India scheme are exempted
from tax. This exemption is provided for a period of the initial three years. Any investment which is
made by incubators of higher value than the market price is exempted.
3. Tax exemption on investment above fair value: People investing their capital gains in the venture
funds setup by the government will get exemption from capital gains. This will help startups to attract
more investors.
4. Easy winding up: In case of exit – A startup can close its business within 90 days from the date of
application of winding up. Start-up patent application and IPR protection: If you are someone who has
ever registered a patent, you will know the cumbersome process it is. However, several steps are taken under the
scheme to protect valuable intellectual property. This includes a fast-track examination of patent applications.
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5. Relaxation in public procurement norms: Start-up India has paved the way for equal opportunities for
both start-ups and experienced entrepreneurs. Now, public procurement norms have been relaxed for
start-ups. Thereby making it easy for them to go for public procurement.
6. SIDBI funds of funds: Government projects are usually large and have higher monetary incentives by
SIDBI is given (Small Industrial Development Bank of India). However, it is fairly difficult to obtain
one. The primary reason being the competitiveness involved in them.

➢ Types of Start-ups:
1. Small business start-ups – self starter, Indian companies with small teams
2. Buyable start-ups – business built to be bought out
3. Scalable start-ups – companies that branch off from bigger companies
4. Offshoot start-ups – Companies that branch off from bigger corporations.
5. Social start-ups – Non-profits and charitable companies

1. Small business start-ups – self starter, Indian companies with small teams:
✓ This kind of start-up are average and has common with mother rather than Google or App
✓ Interest in growing their own pace
✓ No such benefit from tech
✓ Such business are self –funded
✓ 24 hours Tees are examples

2. Buyable start-ups – business built to be bought out

✓ Small team built business and sell it bigger
✓ These kinds are especially software and tech companies
✓ Plenty of independent app makers
✓ Giants like Amazon and Uber purchasing other smaller start-ups

3. Scalable start-ups – companies that branch off from bigger companies

✓ This kind of business raise capital from outsiders
✓ Some companies scale others
4. Offshoot start-ups – Companies that branch off from bigger corporations.
✓ This are start-ups that branch off from large companies to start their own entities
✓ Effort for a bigger company to new market
✓ Have freedom to do business and experiment
✓ Eg: sidewalk lab, an offset of Google’s partner

5. Social start-ups – Non-profits and charitable companies

✓ Some start-ups do good for people
✓ Charities, non-profit organizations
✓ They start with the help of public grants and donor
✓ Eg: [Link], an organization that’s managed to raise $50 million from the likes of google and
face book to help students to field in computer science.

➢ Ideation:
Meaning:
Ideation refers to the process of developing and conveying perspective ideas to others, typically in business
setting.

Components of Ideation:
1. Brainstorm: This occurs when everything comes to the mind, regardless of the various ideas.
2. Evaluate: Analysis the collected ideas and assess the strength before moving to next one. This may
involve few questions like?
• Passionate about the ideas
• Is idea simple and easy
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• Is ideas unique and better than the other

• Finally ýes’or ‘no’for idea framed
3. Research: In this, the startup has survived the previous steps. Research the market for each ideas and
constantly keep an eye on the interested area of market.
4. Discuss: At this stage, the process you should have a smaller but stronger group of ideas left to explore.
Share the ideas with the friends, peer groups who are interest in giving you the feedback.

Models for Start-ups Ideation:

I. Solving problem ad Unmet Needs
II. Juxtaposition
III. Disrupting Institutions
IV. Fast followers and Clones
V. Unbundling
VI. Bundling

1. Solving problem & Unmet Needs

• Solve an existing problem, that an individual or business would pay to have solved
• There are 3 types of problem – cost, convenience and moral
• Inputs insights to look for problem
2. Juxtaposition: Is a business model that is working in one market and apply it to a different category
or market with similar dynamics
• Juxtaposition takes the position of x and y
• ‘x’ can be replaced by specific business model
• ‘y’ can be replaced by different category
• This model can be used for Mobiles, DTC Brands
• Inputs insights to look for business models doing well in the market.
3. Disrupting Institutions
• Institutional disruption is intentionally utilized to explore the taken-for-granted foundations of
social institutions.
• Develops an institution that directly goes up against existing products
• Porter’s generic strategies give good basis for the techniques.
• The share donors giving up market share or profits
4. Fast followers and Clones
• Develop a business that is similar in value prop and business
• This models works well in non-winner take all markets
• Mainly works in service-intensive business
• Eg: Publicity shares by Gilt (by VentePrivee in France) and Alando (inspired by Ebay and City
deal)
5. Unbundling
Unbundling is a process by which a company with several different lines of businesses retains core
businesses while selling off, spinning off, or carving out assets, product lines, divisions, or subsidiaries.
• Launch a business that picks apart an existing company’s offering
• Unbundling can be of:
▪ Unbundling craigslist by category
▪ Unbundling zoom to create business offers
▪ Unbundling banks by launching better products
▪ Unbundling insurance by launching business
• Eg: Unbundling Reddit, OLX, Banks
6. Bundling
• Combine products, features and other into a single company that previously required going to
multiple vendors.
• A common usage of bundling in startup is on internet platforms, software products.

➢ Design Thinking:
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Meaning: Design Thinking is a term used to represent a set of Cognitive, strategic and practical
process by which design concepts are developed.
➢ 5 Stages of Design Thinking Process:
1. Empathize: The first stage of the Design Thinking process is to gain an empathic understanding of
the problem you are trying to solve. Empathy is crucial to a human-centered design process such as
Design Thinking, and empathy allows design thinkers to set aside their own assumptions about the
world in order to gain insight into users and their needs.
2. Define the Problem: During the Define stage, you put together the information you have created and
gathered during the Empathise stage. This is where you will analyse your observations and synthesise
them in order to define the core problems that you and your team have identified up to this point.
3. Ideate: During the third stage of the Design Thinking process, designers are ready to start generating
ideas. You’ve grown to understand your users and their needs in the Empathise stage, and you’ve
analysed and synthesised your observations in the Define stage, and ended up with a human-centered
problem statement.
4. Prototype: Prototypes may be shared and tested within the team itself, in other departments, or on a
small group of people outside the design team. This is an experimental phase, and the aim is to identify
the best possible solution for each of the problems identified during the first three stages.
5. Test: Designers or evaluators rigorously test the complete product using the best solutions identified
during the prototyping phase.
This is the final stage of the 5 stage-model, but in an iterative process, the results generated
during the testing phase are often used to redefine one or more problems and inform
the understanding of the users, the conditions of use, how people think, behave, and feel, and to
empathise. Even during this phase, alterations and refinements are made in order to rule out problem
solutions and derive as deep an understanding of the product and its users as possible.

➢ Entrepreneurship Lesson for Start-ups:

1. Come with a Great Name for your Business

i. Avoid hard names, select simple and creative one
ii. Don’t pick a limited name
iii. Get a .com domain
iv. Conduct a trademark search – to avoid repetitions of names
v. Make sure customers and employees happy with the name
2. Understand the Raising Finance is difficult – Don’t waste the time with angel investors, capitalize
option of funds would be better option.
3. Focus for building a great product, without delay in launch – Don’t delay in launching the product.
4. Become a strong sales person
i. Become a great salesperson
ii. Sell the products in the market by your own
iii. Come up with creative ideas to reach customers
iv. Take regular feedback
5. Build a great website for your company
6. Protect your Elevator Pitch:
i. Have strong start-up
ii. Be positive and entuastic in in delivery of work
iii. Convey that the business is unique
7. Nail your executive summary and pitch desk – This should be of 4-5 high level summary
8. Understand Financial Statement and Budget
i. Keep an eye on the income and expenditure details
ii. Key assumptions regarding the underlying projects
iii. Request help from prospective investors, partners etc.
9. Information to Investors
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10. Assignment agreement with your employees and consultants – Get all your employees and
consultants to sign a confidentially and invention assignment agreement
11. Market the business
i. Use social media to promote
ii. Issue press release for significant events
iii. Network continuity
12. Deal with Co-founders – Have a proper understanding and deal with the co-founders and partners
13. Assign a right business lawyer
i. Require an effective legal advisor
ii. Issue of contract law, IPR
iii. Employment law, Franchise Law
14. Take into account the tax issues

➢ 3 Pillars to initiate Start-ups

Start-ups India is an Initiation of the Government of India. The campaign was first announced by the
Indian PM in August 15th 2015.
Meaning:
Start-ups India Scheme is an initiative by the Government of India for generation of employment and
wealth creation. The goal of Start-ups India is the development and innovation of products and services
and increasing the employment rate in India

The 19-point Action Plan, organized by the Department of Industrial Policy & Promotion
(DIPP), focuses both on restricting hindrances and promoting faster growth by way of:
➢ The Action Plan of this focusing on three ways:
1. Simplification and Handholding
2. Funding support and Incentives
3. Industry academia Partnership and Incubation

1. Simplification and Handholding

Simplification and Handholding: In order to make compliance for start-upss, friendly and flexible,
simplifications are announced. Start-ups India Hub. The objective is to create a single point of contact for
the entire start-ups ecosystem and enable knowledge exchange and access to funding.
This Includes:
• Compliance Regime based on Self-Certification
• Start-ups India Hub
• Rolling-out of Mobile App and Portal
• Legal Support and Fast-tracking Patent Examination at Lower Costs
• Relaxed Norms of Public Procurement for Start-upss
• Faster Exit for Start-upss

2. Funding support and Incentives

This includes:
• Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore
• Credit Guarantee Fund for Start-upss
• Tax Exemption on Capital Gains
• Tax Exemption to Start-upss for 3 years
• Tax Exemption on Investments above Fair Market Value

3. Industry academia Partnership and Incubation

The Industry-Academia Partnership (IAP) is an association that fosters R&D and technical publications
and presentations at major academic conferences.
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This includes:
• Organizing Start-ups Fests for Showcasing Innovation and Providing a Collaboration
Platform -
• Launch of Atal Innovation Mission (AIM) with Self-Employment and Talent Utilization
(SETU) Program
• Harnessing Private Sector Expertise for Incubator Setup
• Building Innovation Centres at National Institutes
• Setting up of 7 New Research Parks Modeled on the Research Park Setup at IIT Madras
• Promoting Start-upss in the Biotechnology Sector
• Launching of Innovation Focused Programs for Students
• Annual Incubator Grand Challenge

➢ Launch of Start-ups India Action Plan

The Start-ups India Action Plan was unveiled by Prime Minister Narendra Modi on 16th January,
2016 to highlight several initiatives and schemes proposed by the Government of India to build a
strong eco-system to nurture innovation and empower Start-upss across India.
The 19-point Action Plan envisages several incubation centres, easier patent filing, tax exemptions,
ease of setting-up of business, a INR 10,000 crore corpus fund, a faster exit mechanism, among
others.
Over 1500 CEOs, Start-ups founders and investors who attended the Start-ups India launch included:
• Mr. Masayoshi Son, CEO of SoftBank
• Mr. Travis Kalanick, founder of Uber
• Mr. Adam Nuemann, CEO of WeWork
• Mr. Sachin Bansal, founder of Flipkart
• Mr. Kunal Bahl, founder of Snapdeal
• Mr. Bhavish Aggarwal, founder of Ola
• Mr. Vijay Shekhar Sharma, founder of Paytm

➢ Problems or Challenges of Start-ups in India:

1. Insufficiency of Talent:
Although skilled personnel is not quite bad in India, startups just cannot afford them all the time.
Often, however, the multi-skill required to make start-up success stories are very rare to find.
2. Lack of Risk-Taking:
Experiments can provide answers to many questions, which are badly required by any start-ups.
However, either due to turn around time or due to financial situations they are often omitted or
stymied.
3. Financing:
Accumulation of funding relies upon a few elements. Individual financial dependability just as that
of accomplices, the business size, associations and finding the ideal time to contribute. While it’s a
challenging task for most startups, a fortunate few don’t confront numerous issues with it.
4. Management:
As the business starts to take shape, it requires every bit of awareness to sustain the flow. Indeed,
even from the beginning, an unmistakable outline ought to be as a top priority to maintain a strategic
distance from any irregularity in the inflow which can enhance itself medium-term to make things
wild.
5. Recruitment:
This is specifically relative to your entrance to the capital. As I’ve stated, funding is a test for most
startups, so procuring talented labor with a top to bottom learning of the concerned field, frequently
ends up troublesome. Experienced people, then again, don’t want to include themselves with the
hazard inclusion of new companies. It’s a tough issue and a lasting issue except if you have a
committed and similar pack of friends.
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6. Right Mentor:
Having the business sharpness dependably keeps one a stage in front of others. This is, maybe, a
significantly more serious issue than the gathering of financing. Cash can’t concede you vision and
shrewdness, however, its essential for different things. So watchful and little strides at once can
enable you to assemble energy in the end over the long haul. Ability, persistence, and strategies are
the 3 aspects to remember.
7. Lack of marketing strategies:
Lacking information in marketing systems. In India, each state is interested in culture, food, and
customs, language, outfit, etc. So what is moving in Maharashtra like hotcakes may stay
immaculate in Tamilnadu? An exhaustive learning of area insightful need and a down to earth
advertise overview is of most extreme significance before venturing into the hazardous ocean of
new companies.
8. Government’s Involvement:
India lacks a clear long-term start-up roadmap, as economic liberalization is quite new to India.
Given the size of the nation and the priorities, the government seems to keep the road-map on the
back burner.
9. Peer pressure:
Peer pressure is far more visible in a connected/gossip-loving society like India’s.
10. Investment Prospects:
When guys of the calibre of Sequoia are investing in eye hospitals and retail chains, you have to
realize how weak the venture system here is.

➢ Success stories in start-up in India:

1. Make my Trip
2. Flipkart
3. Zomato
4. Redbulls
5. [Link]
6. InMobi
7. FreeCharge
8. Ola Cabs
9. Teach for India
10. Make a Difference (MAD)

➢ Feasibility Analysis:

Meaning:
Feasibility analysis is the process of confirming that a strategy, plan or design is possible and makes sense.
This can be used to validate assumptions, constraints, decisions, approaches and business cases.

Objectives of Feasibility:
1. Determine the outcome of proposed action
2. Projected revenue vs cost savings
3. Identify the customers
4. Customers current and future needs
5. Interest of customers
6. Interest for new service or product
7. Satisfaction of the product
8. Ascertain the SWOT analysis of Company
9. Determine the financial benefits
10. Competitors SWOT

Contents of Feasibility Report:

1. Title page or Front matter
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2. Body of the report

3. Sections of the report
4. Last page

Steps in conducting Feasibility Study:

I. Conduct a preliminary analysis
II. Prepare a projected Income statement
III. Conduct a Market Survey
IV. Plan a Business Organization and Operation
V. Prepare a opening day balance sheet
VI. Review and analyze All data
VII. Make Go n Go Decision

Feasibility studies should include the following steps:

1. Preliminary analysis
Just as the feasibility study determines whether a proposed project is worth the effort, the preliminary
analysis determines whether the feasibility study itself is justified. The fact is that conducting a
feasibility study is an intensive, time-consuming process, and the preliminary analysis will look to
uncover any roadblocks that would render the feasibility study useless.
2. Defining the scope
Before you can determine the potential impact of a project, you have to get clear on the project’s
scope. This includes defining the project’s goals, tasks, phases, costs, deliverables, and deadlines. The
project scope also identifies internal stakeholders as well as external clients and customers.
3. Market research
Is there demand for this particular venture in the market it seeks to serve? This is critical information
to know before committing to a project, and it’s precisely what market research seeks to answer.
Market research also gives insight into the current competitive landscape and helps identify factors
like geographic influence on the market, the market’s overall value, and its demographics.
4. Financial assessment
Naturally, the feasibility study will break down and analyze the financial costs and risks involved with
the project. Costs may include human resources, equipment, material, software, hardware, facilities,
and third-party services. Additionally, the financial assessment will look at the potential impact that
project failure will have on the bottom line.
5. Roadblocks and alternative solutions
What are the potential problems and circumstances that could lead to project delays or even failure?
What are some alternative solutions that would circumvent those problems? Most feasibility studies
will include an assessment of these factors, too.
6. Reassessment
At this step, you should seek a reassessment of the entire feasibility study from top to bottom by a
fellow PM, a manager, or someone else in your organization. Having a fresh set of eyes on the study
will help ensure you don’t miss any key elements or miscalculate potential project impacts.
7. Go or no-go decision
When it’s all said and done, the feasibility study comes down to one decision: Is the project approved
to move forward or not

➢ Cost of Capital:
Capital:
Capital in business refers to the sum of financial assets that are required to produce goods or
services. These funds can be used to initiate operations, meet daily expenses or grow and expand the
business.
Meaning of Cost of Capita:
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Cost of capital represents the return a company needs to achieve in order to justify the cost of a capital
project, such as purchasing new equipment or constructing a new building.
Cost of capital encompasses the cost of both equity and debt, weighted according to the company's
preferred or existing capital structure.

➢ Weighted Cost of Capital:

Meaning:
The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average
to all its security holders to finance its assets.
The WACC is commonly referred to as the firm's cost of capital. Importantly, it is dictated by the
external market and not by management.

Significance and Relevance of Cost of Capital:

1. Making Investment Decision
Cost of capital is used as discount factor in determining the net present value. Similarly, the actual
rate of return of a project is compared with the cost of capital of the firm. Thus, the cost of capital has
a significant role in making investment decisions.
2. Designing Capital structure
The proportion of debt and equity is called capital structure. The proportion which can minimize the
cost of capital and maximize the value of the firm is called optimal capital structure. Cost of capital
helps to design the capital structure considering the cost of each sources of financing, investor's
expectation, effect of tax and potentiality of growth.
3. Evaluating the Performance
Cost of capital is the benchmark of evaluating the performance of different departments. The
department is considered the best which can provide the highest positive net present value to the firm.
The activities of different departments are expanded or dropped out on the basis of their performance.
4. Formulating Dividend Policy
Out of the total profit of the firm, a certain portion is paid to shareholders as dividend. However, the
firm can retain all the profit in the business if it has the opportunity of investing in such projects
which can provide higher rate of return in comparison of cost of capital. On the other hand, all the
profit can be distributed as dividend if the firm has no opportunity investing the profit. Therefore,
cost of capital plays a key role formulating the dividend policy.

Process of Raising of Capital:

1. Understanding the management structure, governance and quality
2. Understanding key risks
3. Informing about long term strategy
4. Identifying key competitors
5. Funding purpose and requirements
6. Analysis of industry

Funding with Equity:

Equity Financing is the process of raising capital through the sale of Shares.
Equity Financing:
Equity financing involves selling a shares in your business in return for a cash investment.

Sources of Equity Financing:

1. Angel Investors: An angel investor (also known as a private investor, seed investor or angel funder)
is a high-net-worth individual who provides financial backing for small start-ups or entrepreneurs,
typically in exchange for ownership equity in the company. Often, angel investors are found among
an entrepreneur's family and friends.
2. Crowd funding Platforms: Crowdfunding is the practice of funding a project or venture by raising
small amounts of money from a large number of people, in modern times typically via the Internet.
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3. Venture Capital Firms: Venture Capital Firms: Venture capital (VC) is a form of private equity and
a type of financing that investors provide to start-ups companies and small businesses that are
believed to have long-term growth potential. Venture capital generally comes from well-off investors,
investment banks, and any other financial institutions.
4. Initial Public Offerings: An initial public offering (IPO) refers to the process of offering shares of a
private corporation to the public in a new stock issuance. An IPO allows a company to raise capital
from public investors.

➢ Advantages and Disadvantages of Equity Financing:

Advantages Disadvantages
✓ Alternative sources of Capital other than debts ✓ Dilution of ownership and
operational control
✓ Long term Fund concept for the investors ✓ Lack of tax shields, hence
payment of tax on dividends
✓ Shareholders are the owners of the company and are a
part of the management
✓ Shareholders or the Investors get access on the capital
✓ Angel investors and venture capitalists assists the
company in initial start-ups

➢ Financing with Debts:

Meaning:
Debt financing occurs when a company raises money by selling debt instruments to investors. Debt financing
is the opposite of equity financing, which entails issuing stock to raise money. Debt financing occurs when a
firm sells fixed income products, such as bonds, bills, or notes.

Debt Financing Options: Debt Financing can be funded by:

1. Bank Loans
2. Bonds
3. Debentures
4. Family and Friends

1. Debt Financing via Bank Loans: Bank loan is the most common type of debt financing. Bank loans can
be:
a) Secured Loans: In a secured loan, the company’s assets are kept as a collateral or safety deposit
with the lender. In case the company fails to pay the loan back, the lender can sell the asset and
get back the loan. Secured loans have low interest rates as the lender’s risk is greatly reduced
due to the collateral.
b) Unsecured Loans : Unsecured loans carry very high risk as there is no collateral asset against
the loan. The lender gives the loan after carefully examining the financial condition and growth
prospects of the company. Unsecured loans are not provided for more than 10 years.
2. Debt Financing via Bonds: A bond is a financial instrument which guarantees that the borrower will
repay the loan after a fixed period of time and also make timely interest payments. Bonds are usually
secured in nature.
3. Debt Financing via Debentures: A debenture is a type of unsecured bond. A debenture is backed by
credit worthiness of the borrower rather than an asset. Debentures are assigned credit ratings based on
their financial stability and growth prospects.

RNSFGC
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➢ Advantages and Disadvantages of Debt Financing:

Advantages Disadvantages

✓ Preserve company ownership. You won't give ✓ The need for regular payment. Taking on too much
up business ownership. Like Equity shares. debt makes the business more likely to have problems
meeting loan payments if cash flow declines.

✓ Tax deductible interest payment - unlike ✓ Adverse impact on credit rating. You must repay
private loans, interest, fees and charges on a the lender (even if your business goes Loss)
business loan are tax deductible.

✓ Business owner, you do not have to answer to ✓ Potential bankruptcy. Investors will also see the
investors. Terms – you may be able to negotiate company as a higher risk and be reluctant to make
fixed interest rates and flexible repayment options additional equity investments.

Bootstrapping:

Meaning:
Bootstrapping describes a situation in which an entrepreneur starts a company with little capital, relying on
money other than outside investments.
An individual is said to be bootstrapping when they attempt to found and build a company from
personal finances or the operating revenues of the new company.

Stages of Bootstrapping:
1. Beginner stage
The beginner stage starts with some saved money or borrowed/invested money coming from friends. For
example, the founder continues to work on their main job and, at the same time, starts a business.

2. Customer-funded stage
When money from customers/clients is used to keep the business operating and to fund its growth.

3. Credit stage
The credit stage involves the entrepreneur focusing on funding specific activities, such as hiring staff,
upgrading equipment, etc. At the credit stage, the business takes out loans or tries to find venture capital for
expansion.

Why do People Choose Bootstrapping?

Bootstrapping is typically the choice of beginning entrepreneurs. It allows them to create a company without
experience and attract an investor or investors.
The choice reasons for taking bootstrapping as a business model are different. Entrepreneurs begin to engage
in bootstrapping if they:
• Lack experience in formulating business plans and in entrepreneurship
• Lack skills for product promotion and contacts with suppliers
• Do not know how to raise financing
• Do not want to share income with investors
• Do not want to spend time searching for an investor

Advantages of Bootstrapping:
1. The entrepreneur gets a wealth of experience while risking his own money only
2. The “bootstrapper” reserves the right to all developments
3. The lack of initial funding makes entrepreneurs look for unusual ways to solve problems
4. Independence from investor opinions.
5. Attracting external funding is challenging and can be a very stressful and time-consuming task.
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6. Creating the financial foundations of business by an entrepreneur is a huge attraction for future
investments.
7. Providing value to people. Business is all about delivering a particular value through a product or
service.
Disadvantages of Bootstrapping:
1. Business growth can be difficult if demand exceeds the company’s ability to offer or produce services
or products.
2. The entrepreneur takes on almost all financial risks instead of sharing them with investors who invest
in supporting the company’s growth.
3. Limited capital and lack of investment
4. Stress problems

Crowdfunding:
Meaning:
Crowdfunding is the method of raising capital through the collective effort of large number of individual
investors. Crowdfunding is done primarily through online, social medias and website.

Benefits of Crowdfunding:
1. Crowdfunding is a way of raising money to finance projects and businesses.
2. It enables fundraisers to collect money from a large number of people via online platforms.
Crowdfunding is most often used by startup companies or growing businesses as a way of accessing
alternative funds.
3. Investors appreciate a low-risk venture, and crowdfunding offers just that. Since it's not part of the
financial market, investors don't have to worry about the effects of the economy or stock market
impacting their investment.
4. It's easy to invest in a crowdfunding campaign. Investors can put money into a project or company
through a direct online process.
5. Equity crowdfunding allows investors to fund multiple campaigns, which helps them to expand their
financial opportunities and diversify their portfolios.
6. Easier access to capital. Online crowdfunding platforms allow entrepreneurs and companies to
showcase their projects to a larger number of potential investors, as compared to conventional forms
of capital raising.
7. Less pressure on the management.

Types of Crowdfunding

While there are four types of crowdfunding, each receives money from interested donors. Here's a
breakdown of each one:
1. Donation: Donation-based crowdfunding is when people give a campaign, company or person
money for nothing in return. Let's say you create a crowdfunding campaign to purchase new
equipment for your company. The individuals who give you money do it out of support for the growth
of your business and nothing else.
2. Debt: Debt-based donations are peer-to-peer (P2P) lending, which is a form of crowdfunding. In
debt-based donations, the money pledged by backers is a loan and must be repaid with interest by a
certain deadline.
3. Rewards: This is when donors receive something in return for their donations. The rewards vary by
the size of the donation, which incentivizes higher contributions. Based on how much money
participants give to a campaign, they may receive a T-shirt, the product or service – often at a
discounted rate.
4. Equity: While some crowdfunding campaigns don't allow backers to own a portion of the company
they're supporting, equity-based crowdfunding allows small businesses and startups to give away a
portion of their business in exchange for funding. These donations are a type of investment, where
participants receive shares in the business based on how much money they contribute.
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Advantages and Disadvantages of Crowdfunding

Advantages Disadvantages

✓ It can be a fast way to raise finance with ✓ It will not necessarily be an easier process to
no upfront fees go through compared to the more traditional
ways of raising finance - not all projects that
apply to crowdfunding platforms get onto
them
✓ Pitching a project or business through the ✓ When you are on your chosen platform, you
online platform can be a valuable form need to do a lot of work in building up
of marketing and result in media interest before the project launches -
attention significant resources (money and/or time) may
be required
✓ Sharing your idea, you can often ✓ If you don't reach your funding target, any
get feedback and expert guidance on finance that has been pledged will usually be
how to improve it returned to your investors and you will receive
nothing
✓ It is a good way to test the public's ✓ Failed projects risk damage to the reputation
reaction to your product/idea - if people of your business and people who have
are keen to invest it is a good sign that pledged money to you
the your idea could work well in the
market
✓ Investors can track your progress - this ✓ If you haven't protected your business idea
may help you to promote your brand with a patent or copyright, someone may see
through their networks it on a crowdfunding site and steal your
concept
✓ Ideas that may not appeal ✓ Getting the rewards or returns wrong can
to conventional investors can often get mean giving away too much of the
financed more easily business to investors
✓ Your investors can often become
your most loyal customers through the
financing process
✓ It's an alternative finance option if you
have struggled to get bank loans or
traditional funding

Venture Capital:
Meaning: Venture capital (VC) is a form of private equity and a type of financing that investors provide to
start-ups companies and small businesses that are believed to have long-term growth potential. Venture capital
generally comes from well-off investors, investment banks, and any other financial institutions.

➢ Importance of Venture Capital:

1. Promotes Entrepreneurs: Just as a scientist brings out his laboratory findings to reality and makes it
commercially successful, similarly, an entrepreneur converts his technical know-how to a
commercially viable project with the assistance of venture capital institutions.
2. Promotes products: New products with modern technology become commercially feasible mainly due
to the financial assistance of venture capital institutions.
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3. Encourages customers: The financial institutions provide Venture Capital to their customers not as a
mere financial assistance but more as a package deal which includes assistance in management,
marketing, technical and others.
4. Brings out latent talent: While funding entrepreneurs, the venture capital institutions give more thrust
to potential talent of the borrower which helps in the growth of the borrowing concern.
5. Promotes exports: The Venture capital institution encourages export oriented units because of which
there is more foreign exchange earnings of the country.
6. As Catalyst: A venture capital institution acts as more as a catalyst in improving the financial and
managerial talents of the borrowing concern. The borrowing concerns will be more keen to become
self dependent and will take necessary measures to repay the loan.
7. Creates more employment opportunities: By promoting entrepreneurship, venture capital institutions
are encouraging self employment and this will motivate more educated unemployed to take up new
ventures which have not been attempted so far.
8. Brings financial viability: Through their assistance, the venture capital institutions not only improve
the borrowing concern but create a situation whereby they can raise their own capital through the capital
market. In the process they strengthen the capital market also.
9. Helps technological growth: Modern technology will be put to use in the country when financial
institutions encourage business ventures with new technology.
10. Helps sick companies: Many sick companies are able to turn around after getting proper nursing from
the venture capital institutions.
11. Helps development of Backward areas: By promoting industries in backward areas, venture capital
institutions are responsible for the development of the backward regions and human resources.
12. Helps growth of economy: By promoting new entrepreneurs and by reviving sick units, a fillip is given
to the economic growth. There will be increase in the production of consumer goods which improves
the standard of living of the people.

Advantages and Disadvantages of VC

Advantages Disadvantages
✓ Large amounts of capital can be raised ✓ Founder ownership stake is reduced

✓ Help managing risk is provided ✓ Finding investors can distract founders from their
business

✓ Monthly payments are not required ✓ Funding is relatively scarce and difficult to obtain

✓ Personal assets don’t need to be pledged ✓ The overall cost of financing is expensive

✓ Experienced leadership and advice are ✓ A formal reporting structure and board of
available directors are required

✓ Networking opportunities are provided ✓ Extensive due diligence is required

✓ Collaboration opportunities with industry ✓ Business is expected to grow rapidly

experts and other startups are available
✓ Assistance with hiring and building a team is ✓ Funds are released on a performance schedule
provided
✓ Increased publicity and exposure are likely ✓ Underperformers can lose their business

✓ Help raising future rounds of funding is ✓ Leverage in negotiations is rare

available.