What are The Startup Funding Options in India

The startup system in India has covered a long way with the increase in the number of tech startups and almost 42 firms have become unions in the year 2021. As per the report of Inc42 under Indian Tech Startup Funding Report 2021, the tech startup funding in India has increased to $ 42 billion with funding for about 1583 deals in the year 2021.  Apart from that the report also states that the startup funding received a great response with the presence of around 2487 investors across the globe. 

In the year 2014 to 2022, there has been an increase in the startups in India which is around $116 Billion in terms of funding.  It clearly shows that all these startups are bootstrapping.  With the growth in the business, a startup owner must fund the expansion, production, operation, and marketing. Further, depending on the stage of business and its capability to fetch good returns, funding from an angel investor or from a venture capitalist and later initial public offerings (IPO) must be considered. 

The following are 3 types of startup funding operating in India:

✅ Equity Funding 
✅ Debt Funding, and 
✅ Government Grants

It is to be noted that each of the funding options has its own advantages and disadvantages.  For example, in the case of Equity Funding, there is no pressure of repayment; however, a stake of the company must be compromised while making it one of the most expensive funding.

Apart from that, the ecosystem of startup funding has evolved with time beyond the consideration of venture capitalists and angel investors. In India, startups can generate funds from various kinds of platforms and investors based on their requirements and needs at each stage of business. 

Funding Options for Startups in India:

Angel Investors:

Angel investors can be individual investors or a network of individuals having close business connections. Mostly, angel investors are experienced entrepreneurs who have already come across the process of starting or funding a business. Angel investors can clearly understand the opportunities and main points of business startups.

The angel investors have a large sum of cash which they can invest in a business and also can take risks while investing in a venture at the seed stage. Prior to investing, these investors screen, research the startups and analyze how much the founder has already invested in the business. Once they get convinced, these investors can offer funding in exchange for equity ownership in the startup.

Angel investors are considered mentors for young entrepreneurs.  However, angel investors generally invest a lesser amount in a startup as compared to the venture capitalist but expect high returns from the business. 

Angel Networks and Platforms:

Angel networks and platforms are a place where angel investors join hands and pool funds to invest in startups.  Here, angel investors operate as a group and they may be ready to take hedge risks and can also offer large funds. The said platforms focus on getting the equity ownership in the startups and accordingly they get the benefits in case the startups grow and prosper. Some of the examples of Angel Networks and Platforms are LetsVenture, AngelList, Venture Catalysts, etc.

Venture Capital Funds:

Venture Capital Funds refer to the organizations or institutions engaged in providing capital to startups. These funds are required when the startup funding goes to the second level. It is an institution that provides large amounts of funds to a company for expansion and growth and also to monitor the progress of the venture. It also works as a means to make sure that the investment delivers the required sustainable development. These are basically equity-linked investments from startups in exchange for funding. Generally, Venture Capital Funds leave the ventures in case it releases an IPO.

Micro Venture Capitalist:

Micro Venture Capitalists are one of the branches of Venture Capitalists with a fund size of $60 million to $70 million Micro Venture Capitalists invest in the idea-stage of startups and in exchange get an equity stake in the startup.

Corporate Venture Capital:

Apart from Micro Venture Capitalist, another branch of Venture Capital is known as Corporate Venture Capital. Basically, Corporate Venture Capitals are large multi-national companies that can invest corporate funds into innovative startups and small businesses in order to acquire a target market or pool of talent or technology. Corporate Venture Capital offers the startups various resources including strategic direction, line of credit, and expertise in marketing. The association with such Corporate Venture Capitals provides a boost to startups. Apart from that, it also provides funds in return for an equity stake in the venture. Some of the leading Corporate Venture capital include Reliance Ventures, Mahindra Partners, and Tata Capital to name a few.

Venture Debt Funds:

For Startups equity is undoubtedly an expensive source of funding. Thus, some of the Non-Banking Financial Corporations otherwise known as NBFCs also provide a hybrid scheme of investment known as Venture Debt Funds. This fund provides debt financing to startups backed by Venture Capital Firms. When a startup is expanding, it needs additional working capital, in that case, equity or bank loan are not considered a good funding option. Venture debt funds provide funds in exchange for equity warrants and non-convertible debentures.  Some of the NBFCs offering Venture Debt Funds are Trifecta Capital and Alteria Capital.

Government Funds:

In the year 2016, the funding of startups in India went beyond venture capitalists and angel investors. At that time, the Government of India introduced a scheme called the "Startup India Program". The aforesaid program offers funds and grants at an 80% rebate on the cost of patent and income tax exemption for the first 3 years of registration or incorporation of startup under the scheme Startup India Program.

According to this scheme, the Government of India will issue funds as loans through the Small Industries Development Bank of India (SIDBI) Fund of Funds Scheme. The said scheme makes investments in alternative investment funds and venture capital that are engaged in investing in startups. Earlier, the Government of India launched a scheme named "Startup India Seed Fund Scheme" which was engaged in providing funding to startups in the early stage.

Accelerators and Incubators:

Incubators and Accelerators can be considered as pre-school for startups whereas all of the above-mentioned funding options are already doing business with startups. The said programs are meant for 4 to 8 months where the business owners in business under this program. Some of the programs are run by individual companies or provide funding and a platform that can connect with mentors, startups, and investors. Generally, incubators and accelerators are found in most of the major cities in India and it takes stake some part in large-scale tech companies or corporations. Some examples of accelerator programs are Google Launchpad Accelerator, GSF Accelerator, Y Combinator, etc.

Banks:

Having different funding options for startups in India, one of the most conventional funding options in India is a bank loan. Banks in India offer different types of loan schemes according to the business needs including startup business loans, working capital loans, and equipment loans under different terms and conditions. There are different loan schemes for different business stages. For a startup at the idea stage, banks need higher collateral, usually according to the source of income. Some of the popular banks and NBFCs offering loans are State Bank of India, Bank of India, Fullerton India and Omozing.Com, etc.

Crowdfunding:

Crowd Funding is one of the unpopular funding options for Indian startups. Various retail investors are looking for additional investment options assembled in a platform, skim through a business model, and invest as per the needs of the startups. As per the process of peer-to-peer lending, any investor can invest a fixed sum in a business idea with the intention to get higher interest. Apart from that, in the case of crowdfunding, there is also equity and another fact is the legality of crowdfunding is also uncertain.  It is of several scams and controversies. The Securities and Exchange Board of India 
(SEBI) also warned against digital platforms meant for crowdfunding. Some of the crowdfunding platforms are GripInvest, MightyCause, GoFundMe, SeedInvest, ImpactGuru, etc.

Revenue-Based Funding:

The revenue-based funding provides a startup an opportunity to get future revenue so that it can easily deploy for advertising, market spending, and inventory management.  The part of the payment is flexible, amount with a determined percentage of company revenue generated month after month. Recently, India has been witnessing an increase in several revenue-based funding companies that are engaged in addressing the revenue requirements of the companies. Some of the examples of revenue-based funding companies are Klub, Velocity, etc.