A little while ago, I talked to young business students about the entrepreneurial gene in the current breed of technologists in India. We talked about ideation, customer acquisition, economics, finances etc. and had an enriching discussion about challenges faced by non-tech start-ups from Tier 2/3 towns in India. I certainly gained a lot of inputs from the Gen-X there.
In the room, we figured that almost everyone had a start-up idea, which is great! Most successful entrepreneurs always think of the business model and revenue model for their idea, before taking the plunge. The business model will certainly evolve overtime as the idea starts taking shape and form, but one should always have a view of the how you intend to develop your market, your customer base and make monies. This is even more important, if you intend to attract investments from external sources. The one thing missing was awareness of the various stages that a start-up goes through from a financing perspective.
Thought it would make sense to pen this down for interested folks! Disclaimer : The depiction below is for basic understanding of the growth and financing process and should not be considered "God’s word" 🙂
The picture below should help understand the different growth stages that the start-up goes through along with their financing sources.
Bootstrapped/Initial : This is the first stage of a new business. The entrepreneurs plan to give the idea some shape or form and go thru market research, product development typically a MVP (minimum viable product) for demos, acquiring the first customer, testing their product so on. At this stage, entrepreneurs utilize their own funds or seeks help from friends, family and well-wishers to move forward. In financing terms, this is the Seed Stage of the start-up. Entrepreneurs at this stage may also get Govt. or Development group grants as Seed investments. At this point it is important to keep costs low, offer sweat equity to contributors, seek as much help as possible from experts in technology and the domain that you operate in.
Early Stage : As the idea starts developing into a formal business, the entrepreneurs are focused on generating commercial value from its product or service and validating the business viability with a few customers. Learning quickly, accommodating changes and time to market are key focus areas. This is where Angel Investors come in for a small equity in the business. Angel investors are typically high net-worth individuals with capital available for the purpose of investment in smaller businesses. Angel Investors often come together to form an Angel Network, which pools resources, makes informed decisions and offers advice to their portfolio ventures.
Growth Stage : A market ready product that is focused on accelerating market adoption via a focused customer acquisition strategy although there may not be profits coming in, define this stage. During the growth phase, the start-up is innovating fast thru as they grow their business. The entrepreneurs at this stage, focus on investing in the right talent, scaling the infrastructure and operations and invest heavily in marketing activities.
The growth stage is typically funded by Venture Capitalists in multiple series of funding. With each round of funding, the business goes thru formal valuation which is further enhanced by the amount invested against the equity offered. The VC funding often accelerate business operations and the management team can now focus on the core business without worrying about dwindling cash flows. Venture capital funding goes thru multiple rounds and are typically named as Series ‘A’, ‘B’, ‘C’, ‘D’ etc. with each series attracting a higher corpus and proportionally increasing the valuation of the company. The series funding is highly publicized activity, and at this time the entire ecosystem is watching the venture very closely. Over the time, the venture breaks even, starts making profits and in many cases goes thru a well planned acquisition strategy for in-organic growth.
Exit : With a strong and growing customer base, repeat business taking off, we now have a fairly mature business. The entrepreneurs, VCs, Angels and the management teams are seeking to exit the venture with high profits or Return on their investment with strategic acquisitions or an IPO in the open market. Before the final exit strategy, investors look for bridge loans also known as mezzanine round to help manage the IPO or go through an acquisition. Most start-ups do not get into an exit strategy at all, they focus on growth, expansion and diversification as strategies to sustain their ventures.
Throughout this process, it is important for the entrepreneurs to be focused on making their idea real and viable in the long-terms.
Here’s to building a strong start-up ecosystem in India!