How to raise money for start-ups: Raising funds for a large number of start-ups and entrepreneurs remain a challenge even three years after the formal launch of Start-up India scheme by Prime Minister Narendra Modi. Several startups have great business ideas but they fail to convince potential investors with their business model who thoroughly assess the pitch. Investors are willing to back those startups that have unique solutions for the problems, ability to execute and scale up an idea, and a sound business plan among other things. Investors also look at a start-up’s potential to become a big company. Two Mumbai based investment funds said they receive a large number of applications, however, most of them are rejected due to several reasons, one of the most important factors for rejecting a start-up’s funding pitch is the absence of a sound business model.
Anil Joshi of Unicorn India Venture says a sound business idea is one of the most important things while evaluating a start-up’s application for funding.
“Once we receive an application, either directly or through a reference, we assess their business idea. We look at things such as the problem being solved by the startup, quality, and uniqueness of the solution offered by the start-up, any intellectual property right (IPR) available with the founders and the start-up’s ability to segment and defend a market. We also look at the team’s ability to execute and scale up a business idea,” Anil Joshi told Financial Express Online.
Sushanto Mitral of Lead Angels Network, a pan-India network of over 100 investors, says that investors like him consider several things in the business model of a start-up.
“The first thing we evaluate in their business model is the potential size of the market, then we look at the competitive advantage of the start-up. We also look at how sustainable and scalable their business model is,” said Sushanto Mitra of Lead Angels Network.
The success of a start-up depends on several things, however, having a sound business idea is one of the most important things. Investors not only look at the nature of the problem and the solution offered by a startup but they also look at how capital efficient a start-up is and robustness of its revenue model.
Investors prefer those start-ups where a company follows typical Indian business model of spending less money. A business model that follows the frugal engineering model used by Tata Motors for manufacturing world’s cheapest car Tata Nano is preferred by them. The idea is to cut down all the unnecessary costs and expenses as a start-up will not have the economy of the scale during the initial years of its operations.
“When we assess a start-up’s business model then we also look at the fact whether this start-up can become a big company or not. And one of the most important thing for us is whether the company is capital efficient or not,” said Sushanto Mitra.
“Other than the business idea, the second most important thing for us is their revenue model. If a start-up has a strong revenue model then it is easier for us to provide funding,” said Anil Joshi of Unicorn India Venture that provides initial funding of Rs 50 lakh to Rs 5 crore to technology start-ups.
Once investors are confident about the quality of the solution offered by a start-up and its business model then usually they do not take more than three-four months to provide funding to the applicant.
“Typically, it takes 2-3 months to wire transfer the money. Usually, we take 6 weeks to evaluate the proposal and another six weeks to wire-transfer the money following the signing of a shareholders agreement,” said Anil Joshi whose fund also offers debt funding to startups in addition to equity funding.