Criteria to fund your own business
How many times have you hated the monotony of your working life, the hard work you put into making money for others, and secretly wished you had your own business venture? If the answer is often, you have been bitten by the entrepreneurial bug.
Starting out on one's own was never easy, but today there are a number of funds and support networks that promise to make the ride smoother. If you have a good business idea, getting funds from investors or venture capitalists was never easier than it is at present. "We look for passion, energy and commitment in the entrepreneur.
Academic qualifications, past experience and the ability to convince are also key criteria for funding," says Prashant Choksey, co-founder of Mumbai Angels, an angel investor firm which funds start-ups. Vineet Rai, co-founder of Aavishkaar, a venture fund which invests mainly in businesses that focus on education, health, clean energy, agriculture and financial inclusion projects in rural areas, agrees. "Having a good idea is not enough," he says. "How much preparation you have put in, your confidence, the scalability of your business: all these are equally important."
Investors look at feasibility and prospects of growth. They should be convinced about your unique selling proposition (USP). "Before funding an idea, we see if it can make money, is scalable and can give us an exit in a maximum of six years," says Choksey. All this leads up to the vital point investors who fund start-ups look at, which is returns. They help the business grow in its initial stages but also like to have an exit option.
How is value calculated? It is based on an evaluation of the business. No doubt it incorporates an element of subjectivity. "Valuation is almost an art. We do the valuation based on the type of business, the product it makes, the credibility of the promoter, his projections and past transactions, if any, in a similar business," says Prachi Mathur, Associate Vice President, Intellectual Capital Advisory Services Pvt Ltd, which provides advisory services and facilitates investments by companies, non-profit development agencies and governments working in developing markets.Once investors are convinced your business is sustainable and can grow, they look at the core team to check if it is competent enough. "You may have a brilliant idea but we may still not fund it if your team is not good enough," says Choksey. While having prior experience in the business is an advantage, it is not the only criterion. "If the person is able to convince us that he has the ability to handle the business, we may fund his venture," says Rai of Aavishkaar. Investors also look for commitment. If your idea is to set up a business only to later sell it off, most investors will be alarmed and shy away. In a nutshell, they look for commitment on your part, as well as the unique selling proposition, scalability and sustainability of your venture, plus the execution ability of your team.
While making a pitch to investors, make sure the presentation is not too verbose. You should focus on the main points and express your thoughts in as few words as possible so that those listening do not lose interest.
You must give a clear picture of your products and services, the possible difficulties in implementing the growth plan you have in mind and the details of how you intend to take the business forward. The industry you operate in and the kind of competition you face should also be covered. You must also have detailed knowledge of the size of the market you will be competing in, your distribution and marketing strategy, your potential customers and likely closest competitors.
Investors would also want to know your revenue and profit forecast for the next five years along with the likely expenditure. You must also try to give them an estimate of when the business will break even.
Investors usually fund by way of equity, taking up a signifi cant minority stake. This can be anywhere up to 49 percent. However, it depends on the valuation. Most investors prefer to buy a lower stake as it enables them to exit the business easily. "We generally like to take a minority stake. However, it depends on valuations," says Rai of Aavishkaar. "We generally fund anything between `1 crore and `35 crore." Mumbai Angels Network invests up to `2 crore.
Entrepreneurs often ask family members or friends for money to fund their efforts. But not everyone has a rich family or a friend. Angel investors, who usually invest a lower amount than venture funds, could come to the rescue in such cases. Angels typically invest their own funds, unlike venture capitalists, who handle the pooled money of others in a professionally-managed fund. Angel capital fi lls the gap in start-up financing after friends and family have provided seed funding.
It is usually difficult to raise more than a few lakh rupees from friends and family. On the other hand, traditional venture capital funds are not able to consider investments under $1 to 2 million. Thus, angel investment is a common second round of financing for high-growth start-ups. Venture funds are registered with the Securities and Exchange Board of India.