This session was conducted online by DARE Magazine, details below:
The audience at Amit Grover’s session had plenty to learn today. His talk on funding was extremely informative and was an eye opener for many new start-ups who insisted on getting more out of Amit even after the session was over. Here are some of the highlights of the discussion.
He started with explaining that it is necessary for entrepeneurs to familiarise themselves thorougly with certain terms of finance before looking for ways to raise money for their ventures. Example: turnover, gross profit margins, net worth, equity etc. He took the audience through the growth stages of a company through an informative graph (refer graph below). Right from the ideation to maturity, Amit stressed on the importance of taking one step at a time in order to make your business a successful one.
Stages of a company:
Inception stage –> Prototype stage (where your idea is converted into a product/ service) –> Roll out stage (you grow as a company, but you are still in the negative growth area) –> Growth stage (reaping positive cash flows and furthur growth in terms of expanding offices, hiring more people) –> Expansion and Maturity stage(implementing new strategies, diversifying company)
“The biggest risk in your company is between your inception and your growth stage, that is the time period when you are in the negative growth period,” says Amit.
Sources of Funding:
Inception stage: Friends and Family are usually the contributors of finance in the starting days of your venture
Prototype stage: Angel investors or Angel network. Ex:Mumbai Angels
Roll out stage: VC firms, strategic or corporate investors. Ex: IDG Ventures, Excel Partners, Seqoiua capital.
Growth stage: Here it is possible to take up bank financing. Ex: ICICI ventures or any other banks which give loans as working capital.
After Growth stage: Initial Public Offering, list company in BSE/NSE.
Apart from these traditional sources of funding Amit also discussed how funds can be raised from some government funded incubators. e.g., CIIE at IIM-A, FITT at IIT Delhi. Crowdsourcing can also be a source of funding for start-ups. e.g., GrowVC. Few other non-traditional sources were also discussed. e.g., ‘Power of ideas’ campaign run by the Economic Times (Times of India Group) supported by DST provide prize money to businesses. Similarly, cash prizes are given in contests like Maruti challenge which can act a much needed source of income for start-ups. Various schemes under which an entrepreneur can procure funding were also discussed.
“The next step after this is to identify what stage you are in to determine the kind of funds you want to raise. There are a few points you need to keep in mind”, says Amit.
* What exactly does the entrepreneur need the money for?
* How much does he need
* Time when breakeven is expected
* Determine what you want to expand to next, so that you can give a meaningful exit to your previous investor
Some of the questions which were discussed:
Q. Can you specify tools used by investors for valuation of the ventures?
Amit: At every stage, these tools change. e.g.,For a mature company which is known to have some kind of past performance venture DCI (Discounted Cash Flow) method is used, wherin you say these are the projections and the company is expected to generate the required cash flow. Another example is the Peer Valuation method wherin you compare the worth of a company in comparison to another in the same sector. Some of the investors are concerned with the amount of equity they want, and give the valuation accordingly. But at the early stages of the company, these valuations are very fluid and depends upon the negotiations that happen between the entrepreneur and investor.
Q. If a venture is steadily growing, what are the sources of funding one should look for?
Amit: It depends on the type of sector you are in. Whether it is equity or debt would depend on it. Personally, I would delay the process of funding as late as possible and build the venture through boot strapping to the point where you are mature enough to take either debt or equity. When you come to the point of whether you should take a loan or an equity, it is always good to first cover the basics. Keep in mind that you should be able to return the loan without any stress on your resources. Also see if the VC is adding any value to your venture instead of just adding to it in terms of money.
After the webinar, we requested Amit to answer the questions for those audience whose questions had gone unanswered, and he obliged us within few hours. Here are they:
Q: How do we decide/ finalize what % should be given to the investor ? [Abhinav Sahai]
Amit: The % equity shared with the investor is decided based on cash invested divided by valuation of the company. Cash invested by investor is based on requirements of the company, and investors’ preference. Valuations depends on multiple factor including future performance expected, profitability, team, market size and competition.
Q: What are the options available to already running business, say for the last one year [Harikrishnan Subramoniam]
Amit: Angel investors like Mumbai Angels and individual high networth investors (HNIs) are a good option in case you are looking for equity investment. In case of debt, you can go for a public sector bank or CGTMSE loans.
Q: When do you decide to go for investment? Should you do an internal assesment first, of your profitability? [Roshan Kumar]
Amit: Yes, it is critical to do an internal assessment of the profitability, as well as multiple other factors including team, market size, growth prospects, competition etc. You should go for investment when you feel that your venture’s high growth objectives can be achieved with investments.
Q: How to evaluate the venture at the inception stage, keeping in mind that you need around 5-6 lacs money to start operations. [Jai Anand]
Amit: For 5-6 lakhs investment, friends, family or individuals you can trust and vice versa are the available sources of fund. The only way to evaluate this stage of venture will be to spend time and effort with the team behind the venture, and see if they have the right spirit and motivation to start. The valuations etc. are highly subjective at this stage.
Q: Is it possible to get VC funding in an idea stage of a project? [Vasudev Masur]
Amit: No, it is not possible (unless you are a celebrity entrepreneur with a track record of past success or had an exceptional professional career and good rapport with the VC).