The Startup India Initiative was introduced on January 16th, 2016, with the aim of providing assistance to entrepreneurs, developing a strong startup ecosystem, and changing India’s status from a nation of job seekers to a country of job creators. A specialized Startup India Team oversees these programs and reports to the Department for Industrial Policy and Promotion (DIPP).
Important Foundations for Startup Support
1. Simplifying and supporting – faster compliance, a simpler way for failed firms to exit the market, legal assistance, quick tracking of patent filings, and a website to reduce information asymmetry.
2. Financing & Rewards – A fund of funds to bring more cash into the startup ecosystem, exemptions from income tax and capital gains tax for qualified firms, and a credit guarantee programme.
3.Industry-Academia Partnerships & Incubation – creation of various innovation laboratories, contests, and scholarships.
Benefits of Startup India
- A simple online process will enable startups to self-certify their compliance with six Labor Laws and three Environmental Laws.
- Labour laws inspections will not take place for five years, except in cases where a credible and verified written complaint of violation has been filed and approved by an officer at least one level senior to the inspecting officer. This policy applies specifically to startups.
- Regarding environmental laws, startups categorized as ‘white’ by the Central Pollution Control Board (CPCB) will have the option to self-certify their compliance. In such cases, random checks may be conducted to ensure compliance.
- The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
- The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
- The Payment of Gratuity Act, 1972
- The Contract Labour (Regulation and Abolition) Act, 1970
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
- The Employees’ State Insurance Act, 1948
- The Water (Prevention & Control of Pollution) Act, 1974
- The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003
- The Air (Prevention & Control of Pollution) Act, 1981
Eligibility Criteria for Startup Recognition
- Period of existence and operations should not be exceeding 10 years from the Date of Incorporation.
- Incorporated as a Limited Liability Partnership, a Registered Partnership Business, or a Private Limited Corporation.
- Should have an annual turnover not exceeding Rs. 100 crore for any of the financial years since its Incorporation.
- It was improper to create an entity by dissolving or reorganising an already existing firm.
- Should strive to produce or improve a good, process, or service, and/or have a scalable business plan with lots of potential to make money and create jobs.
Startup India: 80 IAC Tax exemption
After being recognized as a startup, an entity can apply for tax exemption under section 80 IAC of the Income Tax Act. If the exemption is granted, the startup can benefit from a tax holiday for three consecutive financial years during its first ten years of operation since its incorporation.
Eligibility Criteria for applying to Income Tax exemption (80IAC)
- The entity should be a recognized Startup.
- Only Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC.
- The Startup should have been incorporated after 1st April, 2016.
Startup India: Tax Exemption under Sec 56 of the Income Tax Act (Angel Tax)
After being recognized as a startup, the entity can apply for exemption from Angel Tax.
Eligibility Criteria for Tax Exemption under Section 56 of the Income Tax Act
- The entity should be a DPIIT recognized Startup
- Aggregate amount of paid up share capital and share premium of the Startup after the proposed issue of share, if any, does not exceed INR 25 Crore.
Why Funding is Required by Startups
Startups may require funding for one or several purposes, and it’s crucial for entrepreneurs to have clarity on why they are seeking investment. Prior to approaching investors, founders should develop a comprehensive financial and business plan.
- Prototype Creation
- Product Development
- Team Hiring
- Working Capital
- Legal & Consulting Services
- Raw Material & Equipments
- Licenses & Certifications
- Marketing & Sales
- Office Space & Admin Expenses
Types of Startup Funding
|Working Capital||Equity Financing||Debt Financing||Grants|
|Brief||The process of equity financing entails exchanging a share of a company’s ownership for capital||Debt financing refers to the act of borrowing money and returning it with interest||A grant is a typically monetary award that an entity gives to a company to support a specific objective or motivate performance|
|Nature||There is no requirement to repay the invested funds||The invested funds must be returned within a specified time frame along with interest||There is no obligation to repay the invested funds|
|Return to Investor||
Capital growth for investors
|Involvement in Decisions||
equity investors prefer to be involved in the decision-making process
Debt fund investors typically have limited involvement in the decision-making process
No direct involvement in decision making
Stages of Startups and Source of Funding
There are various funding sources that startups can explore, but it’s important to choose a source that matches the company’s stage of operations. It’s worth noting that raising funds from external sources is a time-consuming process that can take over six months to complete.
Ideation – The initial stage of the startup lifecycle is when the entrepreneur has an idea and is working to bring it to life. Typically, the amount of funds needed at this stage is small. However, funding options at this stage are usually limited and informal.
To bootstrap a startup means to develop and expand the business with minimal or no external investment or venture capital. This approach involves depending on personal savings and generated revenue to fund the operations. Bootstrapping is often the initial choice for entrepreneurs as it allows them to retain control of the company without the obligation to repay any funds.
2. Friends & Family
This is a frequently used funding option by entrepreneurs in their initial stages. The key advantage of this funding source is the built-in level of trust between the entrepreneurs and investors.
3. Business Plan/Pitching Events
This refers to the financial rewards, grants, or prize money offered by institutes or organizations that organize business plan competitions and challenges. While the amount of money offered may not be significant, it can be sufficient during the idea stage. However, the quality of the business plan is usually the deciding factor in such events.
Validation – During this stage, a startup has developed a prototype and needs to confirm the feasibility of the startup’s product or service. This is commonly known as conducting a ‘Proof of Concept (POC)’ and once completed, the startup can proceed with the official market launch.
Incubators are institutions established to support entrepreneurs in creating and introducing their startups. Apart from providing valuable services such as office space, utilities, and administrative and legal assistance, incubators frequently offer grants, debt, or equity investments to startups.
2. Government Loan Schemes
The government has introduced several loan schemes that offer aspiring entrepreneurs access to low-cost capital without requiring collateral. Examples include the Startup India Seed Fund Scheme and the SIDBI Fund of Funds.
3. Angel Investors
Angel investors are individuals who provide capital to startups with high growth potential in exchange for equity. Entrepreneurs can approach angel networks such as Indian Angel Network, Mumbai Angels, Lead Angels, Chennai Angels, or relevant industry experts for this purpose.
Crowdfunding refers to raising money from a large number of people who each contribute a relatively small amount. This is typically done via online crowdfunding platforms.
Early Traction – At the Early Traction stage, a startup has already launched its products or services in the market. At this point, key performance indicators such as customer base, revenue, app downloads, etc. become crucial for the startup’s progress.
Series A Stage
1. Venture Capital Funds
Venture capital funds are investment funds managed by professionals that focus on investing in startups with high potential for growth. These funds have specific investment criteria, such as preferred industry sectors, startup stage, and funding amount, which should match the needs of the startup seeking investment. In exchange for their investments, VCs receive equity in the startup and provide active mentorship to help the startup succeed.
2. Banks/Non-Banking Financial Companies (NBFCs)
At this stage, startups that can demonstrate market traction and revenue may be able to obtain formal debt from banks and NBFCs to finance their interest payment obligations, particularly for working capital. Some entrepreneurs may opt for debt funding over equity funding as it does not dilute their equity stake.
3. Venture Debt Funds
Venture Debt funds are private investment funds that invest money in startups primarily in the form of debt. Debt funds typically invest along with an angel or VC round.
Scaling – At this stage, the startup is experiencing a fast rate of market growth and increasing revenues.
Series B, C, D & E
1. Venture Capital Funds
Venture capital funds that prioritize larger investment amounts in their investment criteria typically provide funding for late-stage startups. It is advisable for startups to approach these funds only after they have established a significant market presence. Alternatively, a group of VCs may collaborate and collectively invest in a startup.
2. Private Equity/Investment Firms
In general, private equity and investment firms do not typically provide funding for startups. However, there has been a recent trend of some private equity and investment firms offering funds for rapidly growing late-stage startups with a proven track record of consistent growth.
Exit Options –
1. Mergers & Acquisitions
The investor may choose to sell their portfolio company to another company in the market. This involves one company merging with another, either through acquisition of the entire company or a part of it, or by being acquired either wholly or partially.
2. Initial Public Offering (IPO)
An IPO (Initial Public Offering) is the process by which a startup goes public and lists on the stock market for the first time. Due to the extensive legal requirements and formalities involved in this process, it is typically undertaken by startups that have a strong history of profitability and consistent growth.
3. Selling Shares
Investors may sell their equity or shares to other venture capital or private equity firms.
Founders of the startup may also buy back their shares from the fund/investors if they have liquid assets to make the purchase and wish to regain control of their company.
Steps to Startup Fund Raising
- Assessing Need for Funding
- Assessing Investment Readiness
- Preparation of Pitch Deck
- Investor Targeting
- Due Diligence by Interested Investors
- Term Sheet
What do investors look for in startups?
- Objective and Problem Solving
- Management & Team
- Market Landscape
- Scalability & Sustainability
- Customers & Suppliers
- Competitive Analysis
- Sales & Marketing
- Financial Assessment
- Exit Avenues