What are quantum's of equity to be taken for different levels of investment Critical parameters to look for in a start-up that needs funds

1. P R A S H A N T K U M A R
M A N A G E R I N C U B A T I O N
C R A D L E - E D I I
I N D I A
9 5 8 2 9 3 1 9 7 4
Startups, investors and finance

2. Most common questions for anyone to become an
entrepreneur
 What to do: problem related to creating a business
idea, finding business opportunity or having a vision
 Why to do: issues related to reward/incentive
analysis, risk evaluation or any other benefits
 How to do: issues related to legalities and
requirements such as clearances, licenses, approvals
required. Issues related to resource availability
including finances, technology and manpower supply

3. What is a Start-Up
Addressing the Nation on the 69th Independence Day, PM said, "We
are looking at systems for enabling start-ups. We want to enable
start-ups to make India No. 1 in this field…. Start-up India; Stand
up India."
• A startup is a young company that is beginning to develop and grow, is in the first stages of operation,
and is usually financed by an individual or small group of individuals
• A startup is a young company which could be an entrepreneurial venture or a new business, a
partnership or temporary business organisation designed to search for a repeatable and scalable
business model
• A startup is a young company that searches for a an unknown business model in order to disrupt
existing markets or create new ones
• A startup is a young, dynamic company built on technology and innovation wherein the
founders attempt to capitalize on developing a product or service for which they believe there is a
demand
India is the 4th largest ecosystem in the World for Starts-Ups, after the US, the UK and Israel
According to the NASSCOM around 11,500 Start-ups will come up in the Country
by 2020 creating over 2.5 lakh jobs, compared to the current 75,000 jobs
Over USD 3.5 Billion has been poured into
380 disclosed deals in the H1 2015

4. Definitions of startups
 A startup business is defined as an organisation:
 Incorporated for three years or less
 At a funding stage of Series B or less
 An entrepreneurial venture/a partnership or a temporary business
organisation
 A startup is defined as a business that:
 Engages in development, production or distribution of new products,
processes or services
 New and existence for not more than five years
 Revenue of up to INR 25 cr.
 Not formed through splitting or restructuring
 Formed through splitting or restructuring

5. Startup India – Action Plan
 Single Window Clearance even with the help of a mobile application
 10,000 crore fund of funds over a period of 4 years.
 Credit Guarantee Fund for Startups
 80% reduction in patent registration fee
 Modified and more friendly Bankruptcy Code to ensure 90-day exit window
 Freedom from mystifying inspections for 3 years
 Freedom from Capital Gain Tax for 3 years
 Freedom from tax in profits for 3 years
 Eliminating red tape
 Self-certification compliance
 New schemes to provide IPR protection to start-ups and new firms
 Stand India across the world as a start-up hub
 Tax exemption for investments made above Fair Market Value (FMV)
Encourage entrepreneurship
&
Stand India across the world as a start-up hub

6. Idea
prototype
outside perspective (sampling)
Functional prototype
Customer acquisition (traction control)
Monetising strategies
Scale your product/solution
Create a pitch
Finding the 'Money'
Refine your product
Business and Revenue generation
S
T
A
R
t
Up
J
O
U
R
N
E
y

7. Things Investors Look for in a Startup
 Momentum(need to see traction): Everyone has
their own definition of momentum (user numbers,
revenue, channel partners, biz dev deals, whatever)
 Management Team: Different VC’s have different
calibration points on the continuum of management
 Market Size: almost all VCs care about investing in big
markets with ambitious team
 Money : VCs will put a certain amount of money to
work and will want to own a percentage of your company
stake to pay attention and need a ROI of at-leaset 5X to
10 X in return.
Investors are driven by profits, not by a philanthropic instinct to
help make founders dreams come true.

8. “There is an opportunity gap when the scope for
growing income at a very fast rate is limited for
those who have too little to invest , but expands
dramatically for those who can invest a bit more.”
Banjaree &Duflo- Poor Economics

9. Startup seeking financing option

10. The quality and “connections” of the
management team
The size of the business opportunity/
funding need
The scope for building a sustainable
competitive advantage
The level of risk/ securityAnd the timeliness
of the proposal
Determine
attractiveness
of your
business to
investors,
lenders and
funders
What’s important when seeking finance
The ability of the entrepreneur to negotiate
well and of the team to execute the business
plan convincingly
Determine the
type, price and
quality of the deal
that can be
achieved

11. Different types of finance available
 Bootstrapping through Personal resources (time and money = sweat equity you are
investing)
 Family Friends & Fools – People who will give you funds with little questions
 Reward based crowd funders such as Fundable.com.
 Government Grants
 Customers and Suppliers- “Build slowly at low risk by obtain credit from suppliers and
growing business through profits from paying customers”
 Loan providers- “Increase business growth ambitions by increasing investment by taking
out debt”
 Banks ( Overdraft-unsecured and secured loans)
 Community Finance Institutions ( Soft/ unsecured loans for riskier ventures)
 Leasing Companies.
 Invoice lenders (Factoring, invoice discounting)
 New loan markets such as Market Invoice and Funding Circle.
 Investors-
 Private Investors- Business Angels such as Angel Capital
 Venture Capitalist
 Crowd funding
 Government Backed Investment Funds
Investors Want (Survivability, Profitability, Growth)

12. Investment negotiations resemble a game
 Why focus on valuation?
 Understanding valuation is critical to successful investing
 What is the problem?
 the two sides(start-up and investor) don’t even speak the same
investment language
 What is divergence?
 Divergence is the difference between the growth rate of the
company’s valuation and the valuation of the shares investors
receive due to dilution by subsequent investors and other factors
 What do angels target for returns?
 Some angels target 5x to 10x ROI (cash-on-cash return on their
investment) in four to eight years, which yields an internal rate of
return of between 25 and 75 percent.
the objective of investment negotiations ought to be for investors and
entrepreneurs to share information as openly and completely as possible and
to work together toward a common goal of building successful companies
You can’t mange what you can’t measure

13. Quantum's of equity to be taken for different
levels of investment
 Equity: The investor group will typically want 40 to 60 %of the company, may be less for individual
investors (20-40%).
 Ownership compared to control: After a first round of financing, the founders’ total equity
percentage is often “diluted” to less than 50%.
 Option pool: investors require that about 20% of the company’s options be reserved to attract key
employees.
 Pre- and post-money valuation: Pre-money valuation must be reasonable. Post-money valuation
is the pre-money valuation plus the amount invested.
 Convertible debt: : Funding that can be converted into shares at a later funding round.
 Preferred shares compared to common shares: Investors typically take preferred shares, and
the founders and employees hold common shares.
 Anti-dilution: Anti-dilution ensures that equity stakes do not drop below a certain percentage(case
when value of the company decreases )

14. MISTAKES STARTUPS MAKE
WHEN RAISING CAPITAL
 Don’t understand share prices or valuations
 Confuse broad market with served market
 Make unrealistic assumptions about an exit strategy
 Don’t understand long term capital needs
 Have no clue about competition
 Don’t understand that marketing beats technology 9 out of 10 times
 Write a poor executive summary
 Use “off the wall” numbers or pull numbers from thin air
 Lack focus; e.g. many products or niches
 Develop too simplistic of a market plan / analysis
 Underestimate expenses
 Rely on financial plans with major inconsistencies; e.g. numbers don’t
match or tie
 Speak in “techno-jargon”. No one understands what they are saying

15. 2015 2025
Total no. of Start (~) 10,000 1,00,000
Employment
generups ation
(‘000)
n/a 3,500
Expected
contribution (US$ b) n/a 500
Global startup
ranking
3rd (Behind the US and the UK) Aims to be No. 1
Driving factors • An emerging
economy
• Youngpopulation
• Easing FDInorms
• Growing middle
class
• Rise in
discretionary
spending
• Focuson
standardof
living
• Increasinginternetusers
• Urbanisation
• Increasingdomestic consumption
Challenges for
startups
• Lack of awareness
• Multiple
clearance
requirement
• Multi-tax
existence (Octroi,
VAT, Excise,ST
etc.)
• Unorganised
market
• Infrastructurein
TierII& III cities
• Lackofearly
stage funding
• Lack of mentoring
• Stringent Exit policies
• Easeofdoingbusiness
• Corruption/redtape
• Technologicalrisk
Government
Initiatives (including
upcoming)
• Startup
Ecosystem
• Digital India
• Online clearance
portal
• Tax exemption
• MUDRA Bank
• India Aspiration
Fund
• Easing fund
raising
• Other funding
initiatives
• Setting of SETU
• Focused sectors
• Awareness
initiatives
• Setting up
incubators
next big theme for economic growth

16. Investor Investee City Startup
Sector
Startup Sub
Sector
Investment
ValueinUS$
mn
Warburg Pincus Ecom Express Pvt Ltd Gurgaon Logistics Ecom Logistics 132.70
Unnamed investors and
Rocket Internet AG
Pisces EServices Private
Limited- Foodpanda.com
Gurgaon Consumer Food Tech 110.00
RocketInternetand
Goldman Sachs
Pisces EServices Private
Limited- Foodpanda.com
Gurgaon Consumer Food Tech 100.00
Tiger Global and SAIF
Partners & Angel investors
Little Internet Pvt Ltd -Little Bangalore Consumer Discovery
platforms
50.00
OrbiMed and MAPE
Advisory Group
Net-Meds Marketplace Pvt
Ltd- Netmeds.com
Chennai Health Consumer Health
Tech
50.00
Accel Partners,
International Finance
Corp, Qualcomm
Ventures and Ventureast
Portea Medical Pvt. Ltd. Bangalore Health Consumer Health
Tech
37.50
Snapdeal, Sequoia India,
SAIF Partners, Ru-net,
JAFCO, and BeeNext
Nuvo Logistics Pvt Ltd -
Peppertap
Gurgaon Consumer Hyperlocal
Delivery
36.00
Tiger Global, Orios
Venture Partners.
ZostelHospitalityPvtLtd- Zo
Rooms
Jodhpur Consumer Travel &
Transport
30.00
SAIF Partners TrucksFirst Services Pvt Ltd-
Rivigo
Gurgaon Logistics Ecom Logistics 30.00
SAIF Partner, Accel
Partners and Bessemer
Venture Partners
UrbanClap Technologies
India Pvt
Delhi Consumer On-demand
services
25.00
Top 10 Startup Deals: 2015

17. Thank you