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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 Globally, banks have withdrawn from startup loans after a string of experiments due to high risk involved.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

JSW Ventures Gets SEBI Nod To Invest $15 Mn In Early Stage Startups

JSW Ventures gets SEBI nod JSW Ventures has received mandatory clearances from SEBI to invest $15 Mn (INR 100 crores) in early stage startups over a period of three years. The initial focus will be on technology-enabled startups operating in education, healthcare, financial services, SaaS and enterprise software space.

The fund will be overseen by Parth Jindal, son of group chairman Sajjan Jindal, and Managing Director, JSW Cement. Gaurav Sachdeva, a former executive of Brand Capital, has been appointed as Managing Partner.

As per an earlier announcement, JSW Venture Fund is eyeing a sweet spot of INR 3- 6 crore per deal, investing across seed to Series-A rounds of funding.

“Technology innovation is happening across sectors, from old-fashioned verticals like real estate to research-driven work being done in machine learning and artificial intelligence. We think that the opportunity to innovate across sectors and businesses is immense and want to be a part of this transition,” said Parth.

He further added that, “As an early-stage fund, we will not only provide capital but will remain strong partners of our investee companies as they grow, leveraging the JSW Group’s expertise and experience to help them blossom into world-class companies.”

Team, product-market fit, scalability and technology innovation will be the key criteria while assessing companies. “We typically like to lead investment rounds and work with founders helping them discover and solve business critical problems,” said Gaurav.

JSW Ventures is part of the $11 Bn JSW Group with interests in steel, energy, infrastructure and cement. The cue for launching this fund came in late 2015. The fund will invest proprietary capital of the family and not as a strategic investment vehicle.

Source – Inc42

Tier 2/3 cities see rise in number of angel investors: LetsVenture

Angel Investor in IndiaAngel investors don’t just reside in big cities. Investors from smaller cities such as Guwahati, Kanpur, Vadodara, Raipur, Visakhapatnam, Agra, Jaipur, Chandigarh are increasingly ready to bet on innovative business ideas, says a study by deal making platform LetsVenture. According to the study which looked at deals struck by investors and startups on its platform, 13% of the investors in 2015-16 were from tier 2 and 3 cities.

Among the metro cities, Mumbai-Pune region and NCR have reported the highest number of angel investors at 337 and 307 respectively. In comparison, Bangalore came third with 298 angel investors.

It was a similar story when it came to the home base of startups. While Bangalore was leading with the number of startups in 2015, Delhi-NCR has moved to the top spot in 2016. Tier 2 cities saw an increase in the number of startups setting up base in these towns across India, with Pune recording the highest.

The study also looked at sectors that were most preferred by startups. E-commerce followed by healthcare, marketplace and data analytics were the most active sectors. Furthermore, seed funding in the first and second quarters of 2016 have seen a rise in seed deals versus those made in the same year-ago period. The year 2016 also saw a higher number of business-to-business (B2B) startups set up shop, as compared to 2015, when business-to-commerce (B2C) firms dominated.

Source – TechCircle

Early-stage entrepreneurs rationalize funding expectation

It’s not only investor appetite that has taken a turn of caution in the past few months, but entrepreneur expectations have been rationalised too, data from around 10,000 start-ups on deal-making platform LetsVenture shows.

Start-ups at ideation, beta, and proof-of-concept (POC) stages (early-stage start-ups, essentially) in the consumer sector have been seeking a lower amount when raising funds this year, compared to the last, while those making revenues are doing the opposite, given the investor-interest in companies that would turn a profit quickly.

The percentage of stake dilution that start-ups are offering has also come down in start-ups across the board.

Comparison Valuation B2B

In the business-to-business sector, however, expectations for fund-raise have largely remained the same, or even increased compared to last year, in line with the trend of investors looking to fund B2B start-ups which need far less cash to expand, many of which are even profitable, compared with cash-heavy, loss-making consumer Internet start-ups.

Comparison Valuation B2C

To be sure, entrepreneurs don’t always get the valuation they ask for or expect—the final number may look very different, but this is a fairly accurate representation of expectations.

Source – Livemint

Being A Startup Doesn’t Give You The Right To Be Unprofessional

Don't be unprofessionalIt’s very exciting as a founder when you start a company, you are full of energy and excited about the possibility of the future. Before you get to doing the fun stuff make sure you’ve got the foundation down. A lot of startups I’ve seen neglect some very basic things that will eventually cause the company to implode, whether its employees leaving because they don’t feel appreciated, or paying huge fines because they didn’t take care of basic accounting and taxes.

Basic Needs

Take care of your business’s basic needs. Doing accounting is one of those things which is so ‘uncool’ it’s boring as hell, however it’s oh so important. Getting your taxes right from day one is going to save you a lot of time and money later down the line. I used to be a part of a startup that neglected this and we ended up paying a huge fine. Get it done! DO NOT LEAVE THIS! I promise you if you don’t do this, you will fail as a business.

Another thing I see as a problem is basic employee benefits such as social insurance. These are basic benefits for employees that every business is obligated to provide by law. If you are a startup and don’t have social insurance for your employees, you are neglecting to take care of your employees basic needs.

Understand that as a founder, whether you are burning through your savings, or using investor’s money you are the beneficiary for your business. Chances are your employees are earning a salary and are not entrepreneurial and don’t care about your stock options. They want to save as much of their salary as possible and should they get sick or something happens they will want those benefits that the state provides them. As the founder of a company you may not need it because you come from a background of abundance and have private insurance, but your employees may not have the same benefits you do. Show some empathy and sort this out! There are so many startups I’ve seen and heard about that don’t provide social insurance for their employees its outrageous.

Another thing I see a lot is companies who never pay to train their employees or buy books or online courses for their team members. If you’re not doing this, well you should start. Everyone wants to grow, and by providing this as a company your employees will feel like your company is a place where they can develop their skills and grow as an individual.

Work Hours

Another issue I see crop up a lot is founders having absolutely no respect for employees time-off. Your employees are not your co-founders. You are paying them a salary for a fixed amount of hours to work in a day. Generally 6–8 hours / day depending on how the startup is organised.

Chances are your employees don’t care about stock options. If you’ve offered it to them, have you signed an agreement? Have you asked them if they want it? Your employees are only obligated to work the official work hours for you which is 8 hours / day 5 days a week, that translates to 40 hours / week. Any time beyond that you should thank them and make them feel appreciated. It doesn’t always have to be money, figure out a way to show real appreciation. Most of the time a heart-felt ‘Thank You’ or buying them dinner is enough.

Under no-circumstances should you contact your employees over the weekend to ask them to do something. If you really must ask them to do something because it’s an emergency, then ask nicely. If they can’t, respect it! Chances are if your employees are motivated and love working with you because they know that you are taking care of them, they will take care of the problem even if they’re on holiday. They need to have a life outside of work, be free to live their lives. They need to feel that they have some time-off from work, otherwise your company is going to suffer a burn-out and then your productivity will really take a nose-dive.

Family Values

Reading through this you may be mistaken to think “are employees motivated by these benefits?” No they’re not, they just need to know that should something happen the founder of company has their back. Taking care of basic needs will help your employees feel safe, because they see evidence that you took care of their basic needs. You’ve got their back.

Running a company is like starting a family. Your employees become your children. Would you ever let your children go without education, health-care and appreciation? Absolutely not! You would be classified as bad parents if you did. Taking care of your companies taxes, your employees taxes, providing training, having respect for your employees time off will make them feel safe, happy and appreciated. If you want motivated employees take care of them! They are the foundation for your business.

Source – Inc42