Seed funding, challenges and opportunities

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In his well-documented book, India Unbound, one of the most fascinating thinkers of modern India Gurcharan Das points out that the idea of ​​entrepreneurship ranks third in the caste system (Vaishya community or business community). He adds that knowledge (Brahmanism) first appears in the social hierarchy, which is one of the reasons India does not produce many entrepreneurs. To date, many businesses are family or inherited. This book was published almost twenty-one years ago. The reason India cannot produce entrepreneurs made sense to readers, critics, academics, and intellectuals when the book came out. But in the last twenty years, things have changed.

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Today, more and more young people want to start their own business. Various studies show that the tendency to start their own business is very high among millennials (those born in 1998 or later). This is because they have known a lot of uncertainties in their lives (2008 global financial crisis and current pandemic). Given this inclination, it is important to understand the start-up sector in India which attracts many young people. More so, it is just as important to understand the challenges, the opportunities of this sector as this will help us to understand the growth prospects of this sector. Here is the bottom:

In the first nine months of 2021, private venture capital (PE-VC) investments continue to grow and have reached a record high of $ 49 billion. This is 52% more than what was invested in the same nine-month period last year and exceeds the investment figure of $ 39.5 billion for the year 2020. The number of transactions between January and September 2021 reached 840 transactions compared to 651 transactions in January-September 2020, according to Venture Intelligence data. This count excludes PE’s investments in real estate. Some notable venture capital funding deals announced in India between January and July 2021 include $ 3.6 billion raised by Flipkart, $ 502 million raised by Mohalla Tech (ShareChat), Zomato’s capital raising of around $ 500. million dollars and 460 million dollars raised by Think and Learn (Byju’s). This shows the growing acceptance of the ability of Indians to do well as entrepreneurs. On top of that, a crucial factor that many point out is that today, any good idea that is commercially viable and that caters to a space where demand or incremental demand is high will not go without funding. Funding a good start-up idea is not a big challenge. The other major factor being that most of these ideas are lightweight assets and solve a problem for the end user, making them appealing to the investment community.

Most, however, point out that there is still a “perceptual challenge” faced by many people who want to start a business. And this challenge is: to understand the solvency of start-ups. Many point out that banks and other finance entities view start-ups from a very traditional business perspective. Start-ups are valued using the debt ratio, earnings, and other income and balance sheet variables. The point they lack is different from traditional businesses where the bank takes risks such as equity contribution risk, project risk, operational risk and market risk, most start-ups have already reached a reasonable size and have significant initial funding before going to traditional businesses. lenders. . But venture capitalists and other strategic investors such as private equity firms are looking at the scalability of the business. They look at what a start-up intends to deal with. If a start-up intends to respond to a demand, then its success is sealed. If it is not bank financing, there are investors who are looking for interesting ideas. Analysts and economists note that there is liquidity around the world that chases good ideas.

Supporters of the start-up business model say that in terms of traditional metrics for valuing a business, it’s important for funders to look at a startup’s revenue visibility, profitability, and gross margins. It is estimated that a start-up based on a solid idea takes three to five years to reach a break-even point. Once the breakeven point is reached, these companies operate like any professionally managed listed company with extensive professional oversight. Also, start-ups are new age business ideas that address new age issues or demands. The losses of start-ups based on a viable idea are largely due to marketing, personnel costs and technology expenses. In large part, these losses are not related to a poor response to the business model. In addition, losses are largely financed by equity, financing is necessary for growth. Therefore, most believe that funding entities need to look at start-ups from a new perspective.

On top of that, often the lack of understanding of a startup’s business model becomes a huge obstacle to its funding. Often times, companies take the time to reap the desired results. Habit formation takes time for consumers. The process is to attract consumers and then convince them to buy products by providing them with quality and profitable services. Once a consumer is accustomed to purchasing a service, there comes a time when they can purchase services more frequently. Many traditional and old funding entities do not understand or are not convinced of this process. But given the huge response to initial public offerings (IPOs) from startups lately, some investors are finding some value in these companies.

In addition, since most start-ups do not have predecessors or peers in the industry, they operate and are deprived of any potential funding. This is one of the main reasons why banks and other finance entities stay away from financing start-ups. But a counterpoint to this line of thinking is why would a startup have a peer? A start-up is an innovative idea. It is not a Me-Too business entering a business because it has low barriers to entry. A start-up idea is an exploration of virgin territory. This is a fundamental reason why a start-up has no peer or predecessor. Finally, most traditional financing entities such as banks seek collateral when financing manufacturing companies. These entities follow the same approach when it comes to financing a start-up. Again, this expectation of a guarantee or a guarantee flies in the face of entrepreneurship. The guarantee of most start-ups is the strength of their brand that they have gained over time. It is an intangible asset. But it is still an asset. The formidable response to the IPOs of recently listed start-ups is proof of the willingness of big investors to pay more for brands that have established themselves in recent times.

In the years to come, more and more people will prefer to start their own businesses. Indeed, in a growing economy like India, demand is either growing or stable. Any service that meets consumer expectations is rewarded by Indian consumers. The success of Amazon and Amazon Prime Video is one example. But the only way for a start-up to receive acceptance from traditional funding entities is when they not only meet a real demand that is sustainable, but also provide their services and finances over the long term. term. A start-up founded on a well-documented premise that responds to a real lack of a service and delivers it is likely to score well not only financially but also in terms of the quality of the services. Indeed, it is only by achieving these goals that start-ups can be taken seriously by the markets.

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