Fundraising in Startups
By
D.Venkata Narayana, MBA,CMA,CPA
3rd session
Purpose of this Session
To enable the participants understand fundraising process in startups
To enable the participants understand what need to be done before approaching the Investors
Agenda
1. Startups – Meaning and Background
2. Startup Life Cycle
3. Key Requirements before reaching to Investors & Valuation
4. Key Questions of Investors
5. Classification and profiling of Investors to Pitch
6. Capital Structure –Equity and Debt
7. Risks Associated with Various stages of Funding
8. Term Sheet ,SHA and SSA
9. Compliances post Fundraise (Actual receipt of funds)
10. Key terms to know in startup world
11. Q and A
INTRODUCTION : Venkata Narayana D
• Qualified CMA and MBA Graduate
• 18 years of Corporate experience
• 12 years as Finance Controller and CFO
• Held CFO roles for US listed entities and Startups
• Raised $30 Million funds at Melorra as its CFO from various VC Firms
• Held Board positions for 6 years
• Visiting faculty at ICAI and few MBA colleges in Bangalore.
Startups
Startups are any form of organizations (Sole Trading, Partnership, LLP, Company, etc) that are intending to
create a product that doesn't exist or to provide a service that is not existing at present in the given
geographical market.
Example:
1.When Flipkart started its online business as a market place, the service was not existing in Indian market.
2. When Bluestone and Caratlane started selling online sale of real jewellery, it was unheard in Indian Market.
3.When Furlanco started rental of furniture and home appliances business, the same was unheard in India.
So, every new company is not a startup when you literally look at the above .However people knowingly or
unknowingly these days calling every new company as a startup.
So tomorrow, some one start a Mobile manufacturing company with features similar to existing models without
any difference in customer experience, then it is not a start up but a new organization.
Startup Life Cycle
Cash burn stage
Key Requirements before Reaching to Investors to Pitch
1.Business Model / Financial Model
• P&L for Projected period normally 5 years
• Balance Sheet for 5 years
• Cash Flow Statement
• Key Business Metrics performance
Ex: Visitors on site, CAC, CPO, Paid Vs Non Paid channels growth, GM ,CM, Revenue Growth, PAT ,etc.
V30 valuation Plan.xlsx
2. Investor Pitch Deck
• About the Problem, Promoter, Team, Product unique ness, Market potential size, etc
3.Valuation Methods
❑ Standard Earnings Multiple Method
❑ 5x Your Raise Method (five times the amount you are raising).
❑ Thinking About The Exit Method (Typically projected revenue multiple of the year of sale)
❑ Discounted Cash Flow Method
❑ Comparison Valuation Method (Uses the value of recently sold company as a bench mark)
❑ Gross Profit x Competitor’s Multiple Method (GP * Industry multiples)
Investor Deck_Kotak BIRA.pdf
Key Questions from Investors – Factors that need to addressed in B.Plan and Pitch
1. How much funds the company need till it generate Operational positive cash flows.
2. What are the key risks in the Business Model as per Promoter
3. In comparison with similar startups that already failed, How different is this startup in terms of safeguarding against
those risks?
4. What is the progress on key parameters like Unit Economics, CAC, Cash Burn, Revenue growth from last fund raise?
5. What is the current runway?
6. Do promoters has industry experience and do leadership team competent?
7. Organic visitors vs paid channels
8. Customer repeat rate and customer Cohort?
Classification and profiling of Investors to Pitch
Not every investor will be suiting your needs. Most Investors are very particular in what kind of companies (FMCG,
Automobile, E-Commerce, Tech companies, etc.
Even many will not be participating in all rounds, few want to participate at the seed round, some at growth and some at
maturity.
Even ticket size matters. Many investors will have very limited ticket size say $1 Mil, and some can go even up to $20 Mil
in first check.
So every prospective entrepreneur or entrepreneur in the startups need to study each and every Investor and categories those
who has the potential and those who has meets your company meet their criteria and requirements.
Only such highlighted and grouped investors need to be approached for funding.
Capital Structure
• How much Equity to raise now and how much Debt to raise is a major equity in front of
Founders all the time due to;
Equity Features :
Loss of control and Ownership
No Fixed commitment on cash outflows
Debt Features:
Complete in-house control
Fixed commitment towards interest payment and principle repayment
Risks at various stages of Funding in startups
STTR= Small Business Technology Transfer
SBIR= Small Business Innovation Research
Term Sheet ,SHA and SSA
• Term sheet The term sheet is the document that outlines the commercial terms by which an investor
will make a financial investment in your company. This is not a binding document.
• Example of contents: Rate of Interest, Tenure of Debt, valuation basis, Warranty rights, etc
• Share holders Agreement (SHA) is document among share holders that describes how the company
should be operated and lists the rights and obligations of the shareholders.
• Share Subscription Agreement (SSA): Specify the mechanism of the investment like Number of shares
being issued, Pricing of the shares, etc.
• Valuation Certificate: A valuation report is needed under Companies (Share Capital and
Debentures) Rules, 2014 before any allotment from The Registered valuer (RV).
Compliances post Fundraise (Actual receipt of funds)
Regulatory filings post receipt and deployment of funds
▪ PAS 3: Return of allotment of shares
▪ MGT-14. (Filing of Resolutions and agreements to the Registrar under
section 117
▪ Usage of funds- Deployment of funds.
▪ Issue of share certificates.
Key Terms to know in Startup world
1. Bootstrapping : Process of self funding a startup where in the promoter invests out of his own savings, uses his own
place for business, may be at times borrows with in the family.
2. Burn rate: This means companies is not making money but rather loosing money. So if some one say the burn rate is $1
Mil. Its means the startup is currently loosing $1 mil per month on the assumption in future its able to recover all this
and generate higher return.
3. Angel investors : Individuals with typical worth of morethan$1Million who invests in individual capacity.
4. Venture Capital Firms: The firms who typically invests in early stage , high risk companies which are yet to to be proved
in the market in terms of product acceptability and growth. Normally the ticket sizes ranges between $1 to $10 Million.
Most times prefer to participate in a consortium of Investors in a round.
5. Private Equity Firms : The firms who typically invests in stable business of proven concept and market acceptance.
Normally the ticket sizes will be over $100 Million. Prefers to Invest alone or significant share.
6. ESOPs (Employee Stock Options): Startups typically grant a % of share holding to senior employees say 1%. However
they will be entitle to get this 1% in a phased manner say 10% end of year 1 , 20% end of year 2, etc. This is done to
ensure the employee stays with the company for a longer period.
7. Unit Economics: Typically in startups it refers to how many times you need to sell your product in order to recover
direct cost plus marketing cost.
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