For a startup looking to raise funds, the most conventional method of raising capital is through an angel, seed, Private Equity, or Venture Capital investor, depending on the stage of growth the startup is at.
However, there are several other avenues for startups to raise funds apart from the conventional methods. In fact, some startups are looking at these alternative methods to try and avoid the risks and troubles that come with PE funds.
While lack of funds is the major reason for most startups shutting down, raising funds comes with its share of costs such as dilution of ownership, pressure on performance from the investorâ€™s side and interference in the operations of the company.
Speaking at an event at Hyderabad-based startup incubator T-Hub, Sanjay Jesrani, founder and CEO of angel investment and advisory firm Go North Ventures, says that there are great opportunities available today in the form of corporate and strategic partnerships, venture debt and more, that startups can leverage as well.
Several corporates are opening up to partnering with or investing in startups to help drive innovation in their companies.
Addressing startups, Sanjay says that if you are doing interesting things, and can excite the innovation programme teams in large corporates with the solution you are building, there is a great opportunity.
â€śIn a large company where there is a lot of capital, it builds what I call corporate cholesterol. While they may have a huge base of customers, they often get business they can execute on their own. And for them, startups are like statins â€“ cholesterol busters,â€ť Sanjay says.
Startups can hence look at several corporate innovation programs to sign partnerships and get business or investments out of large companies.
â€śThere is a Chennai-based food startup that gained good traction with their healthy snacks products but was failing to excite investors as it wasnâ€™t a model that gave very high returns. At a time when they were struggling to find VCs, a customer liked their products so much that he decided to invest Rs two crore in them,â€ť Sanjay says, adding that customer delight can sometimes take startups to places they didnâ€™t envision.
There are also several avenues for raising funds through crowdfunding today including platforms like Indiegogo, Kickstarter for startups to leverage.
For startups looking to raise funds after their seed and angel round, the revenue expectations of VCs from them, have increased multi-fold, leaving startups with great value, stuck in the valley of death.
Sanjay says that for such startups, venture debt has become a new way to raise funds. This is a form of financing generally given by dedicated venture debt funds. It consists of a 3 to 4-year term loan and is usually considered a good option as the startup doesnâ€™t need to dilute equity or give away board seats and doesnâ€™t require a valuation to be set.
Sanjay says that the government is in fact encouraging banks to offer venture debt. A few banks such as IndusInd already have programs around debt offerings to startups at around 10% collateral.
â€śIf you are confident of your growth, you shouldnâ€™t mind taking debt at about 10-12% per annum because youâ€™re not diluting equity and that cost of capital is far better than giving equity,â€ť he adds.
This is applicable for startups at a more mature stage, for raking in profits and is a good option to go for, instead of a Series A or B round of VC funding. Both the stock exchanges â€“ National Stock Exchange and Bombay Stock Exchange â€“ have platforms for small and medium (SME) businesses to list.
According to Sanjay, this is an extremely interesting option of raising funds and believes that it will get very popular over the next few years.
Most recently, Hyderabad-based startup Silly Monks was listed on NSE Emerge, the platform for SME Initial Public Offerings (IPO). According to Sanjay Reddy, co-founder and MD of Silly Monks said that he chose this route over PE funds as it would let him have a lot more control over operations and growth of the company.
Special programs, Soft Capital or Grants
VCs tend to shy away from investing in startups working in the biotech, medical devices, product development space, which involve research and development activity.
For such startups, there are a number of government programs, private research grants and soft loans that they can access, to raise funds for their business.
It has become a trend over the past few years where a number of celebrities invest in startups they connect with and also act as brand ambassadors for them. Alia Bhatt recently invested in a startup Stylecracker, Sachin Tendulkar is an investor in smartphone startup Smartron, and Salman Khan has invested in Yatra.com. These are only a few examples.
Sanjay says that if you can get a celebrity to be an investor and a brand ambassador for your startup, it could act as a great boost to the business.