In accordance with the notification G.S.R. 364E dated April 11, 2018, issued by the Department of Industrial Policy and Promotion (DIPP), the term “Startup” pertains to an entity that is legally incorporated or registered within the jurisdiction of India.
- A company is classified as a startup within the following parameters: a period of up to seven years from the date of its incorporation or registration.
- However, specific conditions must be adhered to for startup classification, including an annual turnover that does not surpass INR 100 crore in any preceding financial year.
- Furthermore, the entity should be actively engaged in enhancing processes, innovating products or services, developing novel solutions, or demonstrating a scalable business model with substantial potential for wealth generation and employment creation.
- For entities operating in the biotechnology sector, startup status ceases after a period of 10 years from the date of registration, or when the turnover for any preceding year exceeds Rs 100 crore.
- Startups typically require funding to support diverse aspects of their business operations, including business development, product innovation, and working capital requirements. Herein lies the exploration of various avenues for startup funding:
Equity Financing: Equity financing pertains to raising funds through the sale of company shares, thereby allowing investors purchasing said shares to obtain ownership stakes within the company. This category encompasses various forms such as equity shares, share warrants, and similar instruments. Prominent sources of equity financing include:
- Angel Investors: Individual investors who provide financial backing and mentorship to startups.
- Crowdfunding Platforms: Online platforms where individuals contribute smaller amounts to collectively fund startups.
- Venture Capital Funds: Professional investment firms that provide capital to startups in exchange for equity.
- Initial Public Offer (IPO): The issuance of shares to the public, facilitating the entry of a startup into the stock market.
Debt Financing: Debt financing involves raising capital by issuing debt instruments or securing loans from financial institutions. These funds are typically utilized for resource procurement, working capital management, and business expansion. Common forms of debt financing include:
- Debentures or Bonds: Fixed-term debt securities issued to raise capital.
- Bank Loans: Funds acquired from banks with an obligation to repay, often with interest.
- Factoring: The sale of accounts receivable to a third party at a discount for immediate cash flow.
Grants: Grants are financial awards extended by government bodies or entities to support a company’s objectives or incentivize performance. Two main categories of grants in the Indian startup context are:
- Government Grants: Monetary support provided by government agencies to nurture startup growth.
- Corporate Grants: Financial assistance offered by corporations to encourage innovation and collaboration.
Seed Funding: Seed funding refers to early-stage investment, usually at the ideation or inception phase of a startup. These funds are directed toward initiating a business and carry a high level of risk due to the nascent stage of development. Seed funding is often obtained from sources like family, friends, angel investors, venture capital firms, and incubators. It can be secured through equity issuance or debt financing. Government schemes and grants also contribute to seed funding.
Growth Stage Funding: Growth stage funding is sought by startups in their expansion phase, once products or services have been introduced to the market and the business model is poised for growth. Angel investors, venture capital funds, and bank loans are common sources of growth-stage funding, either through equity shares or debt instruments.
Conclusion:
The Indian startup ecosystem is experiencing substantial growth, necessitating adequate funding for business establishment and expansion. Understanding the diverse avenues available for fundraising is crucial for startup success. These funding sources empower entrepreneurs to secure financial backing, pave the way for market penetration, and foster an environment conducive to sustained business growth.
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