Author Archives: Aristotle Consultancy

Government eases funding rules for startups

Govt. eases funding rules for StartupsA recent notification issued by the ministry of corporate affairs (MCA) makes it easier for startups to access funds via the convertible note route.

This notification is part of the all-round initiatives planned by the government to strengthen the startup ecosystem in India.

Funds received by a startup amounting to Rs 25 lakh or more by way of a convertible note, in a single tranche from a person, will not be treated as a `deposit’. The convertible note is to be either converted into equity or repaid within a period of five years.The Companies (Acceptance of Deposits) Rules have been accordingly amended via a notification dated June 29.

Owing to this relaxation, the stringent rules relating to informing the registrar of companies (RoC) or creating a deposit repayment reserve in the books of accounts will not apply to the startup receiving funding via convertible notes. However, it should be noted that the relaxation is available only to startups that meet the governmentprescribed norms (as defined by the department of industrial policy and promotion, or DIPP).

This notification is the second such initiative to ease funding challenges for startups. TOIhad in its edition da ted June 20 reported that eligible startups will be exempt from angel tax. They will not have to pay any tax on the differential between funding received from non-registered funds or high net worth individuals and the fair market value of their entity.

Startups are defined by a DIPP notification dated February 17, 2016, to mean “an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial ye ar”. Second, such an entity is required to be engaged in “development, deployment or commercialization of new products, processes or services driven by technology or intellectual property”.

If a tax holiday is to be availed, the entity is required to be set up between April 1, 2016 and March 31, 2019 and an approval of an inter-ministerial board set up by DIPP is required. The tax holiday is available for a period of three years in a block of initial five years.

571 apply for Startup India initiative

A status report issued by `Startup India’, the government initiative under the auspices of the DIPP, provides an indication of the interest in the programme. Till June end, 571 applications had been received from entrepreneurs. While 106 of these applications were complete, all of them will not get a tax holiday (even as other incentives could be available) as a majority of these companies were incorporated prior to April 1. Only 12 entities qualify for the tax holiday, subject to clearance by the inter-ministerial board. Five of these entities have yet to provide the required documents. DIPP is reaching out to top companies requesting them to set up new incubators or scale up existing incubators in collaboration with educational institutions. An online learning module will soon be available for entrepreneurs.

Source – ET Retail

5 Benefits Of Starting A Business Overseas

Starting a business overseasStarting a business overseas can be an exciting time for an entrepreneur. There are many people who dream of starting a company in another country, but very few of them actually go through with it. They are missing out on a huge amount of potential because opening a business abroad comes with a lot of key benefits.

These are the main reasons why now is the time to start considering a business move abroad.

Open Up Untapped Markets
The biggest problem entrepreneurs have today is that they are constantly competing with others in their home country. Getting a unique idea is nearly impossible, and the chances are that there are at least a hundred other companies with similar concepts. Standing out from the crowd can be hard, but it’s not the same all over the world.

Something found in India could be non-existent in a country like Canada. Establishing a base of operations in another country could open up a completely new base of customers.

Government Incentives
A lot of countries have problems attracting foreign investors and businesses. To encourage people to come, they put the potential for tax cuts and grants on the table. Come up with a great business idea, agree to move to that country, and you can get a boost right from the beginning.

Just make sure that you’re weighing the pros and cons before you bother to chase these incentives.

Better Business Environment
Some countries are notoriously anti-business. That’s why more and more companies are deciding to move to other parts of the world where they don’t have to deal with the same bureaucracy.

More favorable rules can allow you to run your company without worrying about the paperwork that comes with running a company at home. Once you have your second citizenship you can get right to work with running your company.

More Business Recognition
Brand visibility is a major concern for newer companies. One of the first things to do when doing business in another country is to establish your brand. Many companies’ set up operations in their home country and then open a branch in another part of the world. This extra brand recognition makes it much easier to gain customers, and it gives your brand a sense of credibility.

Bring Your Business Back to Life
Not all entrepreneurs decide to start overseas. A lot of entrepreneurs decide to move overseas. Entering an overseas market can do a lot to bring an ailing business back to life. Companies that find themselves operating in saturated markets can acquire some breathing space by moving overseas.

Finding new customers and new outlets can completely turn your fortunes around.

How Can You Start a Company Overseas?
This is not a decision to take lightly. It’s something that you have to give a lot of consideration to because it can easily go wrong. If you don’t conduct research into your target market and execute your launch strategy properly, you could easily lose a lot of money.

So other than your target market what do you have to take into account?

You need to think about the rules and regulations of that country. The way things are done in other countries may be entirely contradictory to what you’re used to. Be prepared to adapt to a new culture and new business ideas that are completely foreign to you.

Consult a legal representative with experience in working with new companies in the country of your choice. They will be able to update you on what you need to know and what you have to be prepared to do in order to conform to the various rules.

Source – Entrepreneur India

Notification removing angel tax adds confusion for start-up investors

Angel tax in IndiaEarlier this month, the Central Board of Direct Taxes (CBDT) issued a notification, repealing the much talked about angel tax in a bid to boost entrepreneurship in the country. However according to investors, the move has serious limitations and will only help a few start-ups owing to multiple riders associated with the definition of a start-up.

In a notification on June 14, the CBDT announced an amendment to Section 56(2) (viib) of the Income Tax Act. Under this, money raised by start-ups from domestic angel investors will not be taxed as income even if the investment exceeds the fair market value of the start-up’s shares. So far, the so-called extra inflow was taxable as income from other sources under Section 56(2) of the Income-Tax Act. It was charged the corporate tax rate which resulted in a tax of over 30%.

According to the government, an entity will be considered a start-up till five years from the date of its incorporation and if its turnover for any financial year has not exceeded Rs25 crore.

It is also supposed to be working towards “innovation”, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

In order to obtain the tax benefit, a start-up needs to get itself registered with the Department of Industrial Policy and Promotion (DIPP).

The catch is that out of multiple start-ups that will apply for this certification, not all will be eligible for that.

“The presumption is not everybody will get a certificate … The number of start-ups that have applied is far higher than what has been approved and that just tells you that there are many who will be just left out of the certification process for various reasons,” said Padmaja Ruparel, president at Indian Angel Network.

According to Dheeraj Jain, angel investor and partner at Redcliffe Capital, a UK-based hedge fund, while the government’s intentions were right, the on-ground reality post execution is different. “The Indian taxation system in itself is highly complicated, our government should endeavour to simplify it in order to give a much required impetus to entrepreneurs. Abolition of this tax after adding so many criteria does not help our situation, in fact it only adds another layer of documentation,” he said.

Ruparel also said that defining criteria such as “innovative” is subjective. “What is innovation? Those who are not “innovative” they will flip out of the certification process. There will be many who will not get covered. They will continue to be subject to section 56,” she said.

Sunil Goyal, founder and chief executive officer of YourNest Angel Fund termed the move as merely an incremental step. “The start-up needs to be registered and the process of that particular application, the criteria and the approval process is all very tedious,” he said.

Source – Livemint

Delhi-NCR is most funded city for startups in 2016

Startup IndiaDelhi-NCR has emerged as the most funded city in 2016, according to a report by startup analyses firm Tracxn. In the first six months of 2016, Indian startups raised $1.8 billion, out of which Delhi-NCR received $917 million.

This was helped by $250 million and $200 million funding raised in February by Gurgaon-based Ibibo Group and Delhi-based Snapdeal respectively.

Bengaluru was the second most funded with $489 million, followed by Mumbai with $296 million.

Pune and Hyderabad took the fourth and fifth spots, with $59 million and $4.6 million respectively.

The country’s capital also led in the number of deals (155). The average ticket size was $5.8 million.

This mirrors last year’s results for the same period, when Delhi NCR had been the most funded city, having raised $1.1 billion with an average ticket size of $10 million. Bengaluru and Mumbai had followed with funding of $951 million and $490 million respectively.

The funding amount has significantly reduced this year.

In the first six months of 2015, startups in the top five cities raised $2.7 billion, a billion more than this year’s figure.

Delhi/NCR most funded city in 2016

Out of top 10 funding rounds this year, six were raised by e-commerce companies, four of which were based out of Bengaluru.

“Delhi-NCR has a disproportionate number of ecommerce startups. E-commerce is a mature sector and most of these companies were raising later stage funding rounds,” said Tracxn co-founder Neha Singh. “The other cities have more technology-centric startups.”

However, the number of funding deals rose to 402, from 324 last year.

This signifies that the space is seeing a correction in the investment size and not in the general attractiveness of Indian startups.

Nitin Sharma, principal at venture fund Lightbox Ventures, said this was a good sign for the ecosystem since the angel, seed, pre-series A round funding flow is still healthy.

“A correction was bound to happen since the funding had expanded almost eight to nine times between 2013 and 2015, faster than what the ecosystem could absorb efficiently and sustainably. It’s a good time to invest. Valuations aside, startups being built right now are more lean and mean, and hopefully more product UX (user experience) focused than discount-dependent. Of course, the near-term challenge has to do with later stage rounds,” he said.

In June, Lightbox Ventures had participated in a $30 million funding round for Gurgaon-based used car marketplace Droom.

The study finds that Ahmedabad, Chennai, and Jaipur are emerging as new startup hubs.

The three cities raised $34 million and accounted for 30 deals this year.

Source – The Economic Times

Startup funding: Applying for a bank loan? Here is what you need to know

Startup fundingStartups in India for long have been the favorites of private equity and venture capital investors doling out funds. Banks, however, have been tough players on the funding scene. While banks in India (both private and public) are beginning to introduce initiatives to cater to startups, the efforts remain largely limited to regulatory guidance and corporate banking incentives. Some of them have stretched out as an incubator for startups but extending loans has been missing from most banks’ strategy to attract entrepreneurs. 

Industry experts say that banks look forward to debt repayment capability from the underlying business of the company, when considering extending debt to any borrower. In other words, there needs to be positive cash flow from operations to have sustainable debt servicing capability. Till then, it would be seen either as bridge funding or kind of equity funding (essentially). Debt being cheaper than equity, they say, holds true only for businesses with positive cash flows and debt itself can become a cause for the business to go down even faster. 

A section of industry observers opine that banks have always found it tough to lend to startups. Globally, banks have withdrawn from startup loans after a string of experiments due to high risk involved. Meena Ganesh, partner at Growthstory and CEO of Portea Medical, says that banks just cannot take the principal capital risk that startups have, given the fact that they make their profits from the spread of the borrowing and lending they do. “So, unless we change the norms of lending , account for the risk, perhaps have different terms of startup lending such as taking some warrants or equity to compensate for the additional risk , it becomes difficult to do startup lending,” she says.

According to Meena, startups that have broken even and are making cash profits, would be more amenable for bank loans, and so would banks that need funds not for product or concept development but purely for working capital or growth. Banks look for comfort on safety of principal and reasonable ability to service the interest from the cash flows. So essentially, until a company starts making profits, bank loans may be difficult to get. Unfortunately, common perception is that most of funds granted to startups are used for marketing, paying salaries and building technology. 

Nagaraja Praksam, an angel investor and member of the Indian Angel Network, says that most funded startups go through due diligence and that widely eliminates the risk for banks. Hence, being funded by venture capitalists could be one of the criteria for banks to extend loans to startups.

“One of the major needs for startups is working capital. Banks should come forward in helping startups as mostly, these are short term needs. Also, when the VC investment money comes into a bank, they could come forward in managing that and extending working capital based on that,” says Prakasam. 

Ash Lilani, co-founder and managing partner of Saama Capital, says that difficult bank loans for startups is a global problem and not just restricted to India. “The primary issue with banks are cash flow and collateral lenders and usually, startups have neither. Banks typically get excited once a startup reaches profitability and has built a collateral base through receivables and inventory,” adds Lilani.

There is a silver lining in the cloud for capital-constrained startups, though. 

Emergence of niche lenders such as the Silicon Valley Bank has helped create global venture ecosystem. Innoven Capital in India, for example, was the first player to establish venture debt in India. It focuses on startups and has built expertise in understanding the different cycles of capital raising and growth such companies experience, which has helped them create specific products that work for young companies.

Ajeet Khurana, an active angel investor who has invested in firms such as Koonk Technologies, Rolocule Games and Karmic Lifesciences, says that banks could take a leaf out of the venture debt industry and can definitely come up with a debt product for startups. “Three specific features that can go into a startup specific debt product are a moderate rate of interest of 12-14 percent, lending to funded startups and working closely with investors to encourage repayment compliance. Startups can provide limited equity warrants– in addition to the interest–to provide banks with a small additional incentive to loan them money,” he says.

Source – Kotak Business Boosters