PREFACE
First of all i would love to
thank you all for visiting my blog(dhawalabhijat.blogspot.in) and encouraging
me to write this book. Infact this book is collection of all the essential
elements needed to be well understood and implemented to be a successful
startup.
I am whole heartedly dedicating
this book to my MOM.
Abhijat
INDEX
1
Startup Introduction
2
Difference between startup and bootstrapped
3
Discussion on Is this good time to start new business in INDIA.
4
Startup Ecosystem
5
Startup Funding
6
Angel Investor
7
List of Angel Investor
8
Ecosystem part 2
9
global startup Explosion
10
Startup relation with economic and job growth
11 References
Last few days I received loads of mails regarding
startup and what are my views on it. Few
of them have even asked some interesting questions.I will try my best to
minimize their doubt if NOT clear it,
1)What is a STARTUP?
1)What is a STARTUP?
A very common question asked by many of the
aspirants. My dear folk you can find a very long and descriptive answers on
internet and books but to my understanding its "JUST A STATE OF MIND which
need to be nourish with strategy, decision implementation etc as we do for a
seedling".
2)What is the difference between funded startup and bootstrapped startup?
First of all I would like to say that build company
for yourself for citizens of your country and infact for entire human being and
if possible make it for plants and animals as well but everyone today is
talking about building of startup ecosystem and similar to medical and
engineering to my understanding RAT RACE for startup has also begin.TRUST ME
FOLK MOST OF THE STARTUPS are just being built to raise a big fat money from
investors."More funding is also dangerous".Now lets come to question
i will reply in brief
Funded Startup:
we focused on building the
absolute best technology in the market. However, we neglected to focus on
what the target customer actually wanted to pay money for. Even though we
had the best product, we found that our target market didn’t know that they
needed our product. Instead of selling our product, I spent a majority of
my time educating the market on why our company technology was necessary and
how it would greatly benefit their business. The time spent educating was
time spent away from selling. And the more months we spent without
selling and closing deals, the more cash we burned.
Bootstrapped Startup :
My bootstrapped startup have never been sexy or TechCrunch worthy; instead, we focused on a very simple
problem of common person. Next month hopefully our CTO MR
Abhishek Gupta will come out with flying colors.We are not funded yet and we don't know
when can we get funding .So just turning the table i and my friend thought why
not to work on a business model so that at least it can incur initial operating
cost. So again "INNOVATION" came into existence but this time not for
product but for strategy and its implementation. I again repeat to my
understanding "Startup is just a state of mind"
3)Is it good time to start a new business in INDIA?
My dear friends and well wishers its always a good time to start a business or work on an idea else AMBANI, TATA, BIRLA, DLF, SAHARA and list goes on would never have come into the existence.Some Ideas are strong enough to carry the entire business on it's shoulder.Then again you will be thinking why it's so hue and cry for startup ecosystem and our honorable Prime Minister Mr Modi visit to silicon valley.Folk my answer again remains the same "Startup is just a state of mind".
The only difference which has occurred
is state of mind has started changing. Society and young citizens have
started considering startup as future.A best example would be acceptance of
Porn actress Sunny Leone as bollywood actress.Due to change in mindset it
has also changed the environment around it which can be very well justified by
Newton's third law of gravity "Every action has equal and opposite
reaction".
Few important changes which really excites you to
leave a MNC'S job and go for startup
3.1)Indian Economy is Booming with Endless Opportunities
Though the Indian economy continues to boom at a
very fast pace, the Indian market or domestic demand is still under served. The
Indian metros have become well developed over the last decade; however,
thousands of tier-II and tier-III cities in India are still under developed.The
increasing penetration of internet enabled smartphones and e-commerce in India
is set to transform the second tier or third tier cities – unlocking massive
demand for goods and services. It is this aspect of the Indian market potential
that has made countless foreign companies invest billions of dollars into
India.
“India’s start-up ecosystem booming :in 1st 6 mths of 2015, had received $2.5 bn funds
from VCs compared
to $2.3 bn in all of 2014 according to VCCEdge. So currency is real with those
who are funded even if they are not yet making profits ! Don’t doubt it, even
though several start-ups will have hard landing and only a few will do well “
Starting a new business in India used to be
cumbersome and expensive. India was ranked at 179/189 in terms of “Ease of
Starting a Business” by the World Bank just a few years ago. However,
e-commerce and a pro-business Government have now made it very easy and
affordable to start a new business in India.Plenty of information is now
available through websites likes IndiaFilings.com for
Entrepreneurs looking to start a new business. Also, for those starting a new
business, the required formalities can be completed from the comfort of their
homes at a very affordable cost. To register a Private Limited Company it costs
just Rs.16000 and a Limited Liability Partnership can be registered for
just Rs.8000 in India through IndiaFilings. Therefore, the internet has helped
make starting a new business in India very easy and affordable.Further, the
Government has also introduced various measures to reduce the amount of
formalities required to start a business in India. The newly introduced Form
INC-29 drastically reduces the number of procedures required for
incorporating a company in India, making it possible to incorporate a company quickly.
3.2)Entrepreneurship has become Socially
Acceptable
Gone are the days when friends
and family chastised entrepreneurship and preferred their family
members opted for employment over entrepreneurship. The success of many
young Entrepreneurs has showcased the opportunities in Entrepreneurship –
making it more socially acceptable. Today, family members are willing to
support Entrepreneurship with capital and emotional support – increasing the
number of Entrepreneurs and their chances of success.
3.3)Its Easy to Manage a Business in India
The Government has also taken various steps to make
it easier to manage a business in India by reducing the compliance burden. The
Limited Liability Partnership (LLP) Act, 2008 and Companies Act, 2013 have
introduced new business entities like LLP, One Person Company and the concept
of “small company” making it less cumbersome to manage a business entity.
Further, the Goods and Services Tax (GST) is
expected to be rolled out in April, 2016, overhauling the existing
indirect tax structure in India – making it transparent and less
cumbersome. Know more about the advantages of GST implementation in India.
3.4)Its Easy to Find Capital
The booming Indian economy and bustling Indian
startups are attracting a lot of investors from foreign countries making today
the best time for starting a new business in India.There are now plenty of
well established Private Equity firms operating in India and many more looking
to start operations. Further, many High Networth Individuals (HNIs) and
Celebrities are also beginning to understand the potential of Indian startups,
making it easy to find seed capital for starting a new business. Know more
about Private Equity in India.I will be providing you with the list of Angel
investors in a while.
"India -The Fastest Growing and 3rd
Largest Start-Up Ecosystem Globally: NASSCOM Startup Report 2014"
Key Highlights
- 3100 startups
present in India, 3rd largest base in the world
- 800+ start-ups
setting up annually
- By 2020 there would
be ~11500 startups; employing over 250k people
- 300 VC/ PE &
~225 angel investment deals worth over USD 2 billion
- Over 20 M&A’s worth ~USD 1 billion in
last 3 years.
4)Till now we have seen lots of
support for STARTUP ecosystem but even then we can't ignore the fact that
"90 Percent of startups fails" so where is the problem and what all
things we are ignoring while starting a new company .
4.1)First and Foremost reason is they make a product which NO one wants .Yes all of you will be astonished but according to the FORTUNE report "A careful survey of failed startups determined that 42% of them identified the “lack of a market need for their product” as the single biggest reason for their failure."
4.2)Most of the entrepreneurs work in their business NOT on their business:The founders ,CFO, CMO etc starts to segregate their responsibilities in the initial run which is NOT good for any startup.Initially if you see most of the successful startups core team member wears different hats of responsibilities.
4.3)In the initially few months company is NOT growing fast:YUP this can be end of the company and if not end then sure start of the death of the company because Growth — fast growth — is what entrepreneurs crave, investors need, and markets want. Rapid growth is the sign of a great idea in a hot market.Most of the startup need funding, but when the company didn’t grow fast enough, they aren’t eligible to secure more funding. That is the beginning of the end.
"Rapid growth early on is a sure sign of future success."
4.4)One another important reason why startup fails is they run out of CASH: Why did they run out of cash? Because they didn’t grow fast enough. If your startup can grow fast, you can effectively bypass some of the biggest startup killers — losing to the competition, losing customers, losing personnel, and losing passion.
4.5)Lack of co-ordination between the team and they don't know how to recover:
Every startup is backed by a team of people. The more versatile that
team, the better chance they have of succeeding.“Versatility” is often viewed
in a limited sense, that of possessing more than one skill or talent.
Versatility in the startup environment involves much more than someone’s
skillset. It involves mindset. Startup teams must possess the ability to change
products, adjust to different compensation plans, take up a new marketing
approach, shift industries, rebrand the business, or even tear down a business
and start all over again.
"Co-founders have a higher success rate than companies with a single founder"
5)HOW A STARTUP FUNDING WORKS?
First, let’s figure out why we are talking about
funding as something you need to do. This is not a given. The opposite of
funding is “bootstrapping,” the process of funding a startup through your own
savings. There are a few companies that bootstrapped for a while until taking
investment, like MailChimp and AirBnB.
If you know the basics of how funding works, skim
to the end. In this article I am giving the easiest to understand explanation
of the process. Let’s start with the basics.
Every time you get funding, you give up a piece of
your company. The more funding you get, the more company you give up. That
‘piece of company’ is ‘equity.’ Everyone you give it to becomes a co-owner of
your company.
5.1)Splitting the Pie
The basic idea behind equity is the
splitting of a pie. When you start something, your pie is really small. You
have a 100% of a really small, bite-size pie. When you take outside investment
and your company grows, your pie becomes bigger. Your slice of the bigger pie
will be bigger than your initial bite-size pie.
When Google went public, Larry and Sergey had about
15% of the pie, each. But that 15% was a small slice of a really big pie.
5.2)Funding Stages
Let’s look at how a hypothetical startup would get
funding.
5.2.1)Idea
stage
At first it is just you. You are pretty brilliant,
and out of the many ideas you have had, you finally decide that this is the
one. You start working on it. The moment you started working, you started
creating value. That value will translate into equity later, but since you own
100% of it now, and you are the only person in your still unregistered company,
you are not even thinking about equity yet.
5.2.2)Co-Founder
Stage
As you start to transform your idea into a physical prototype you
realize that it is taking you longer (it almost always does.) You know you
could really use another person’s skills. So you look for a co-founder. You
find someone who is both enthusiastic and smart. You work together for a couple
of days on your idea, and you see that she is adding a lot of value. So you
offer them to become a co-founder. But you can’t pay her any money (and if you
could, she would become an employee, not a co-founder), so you offer equity in
exchange for work (sweat equity.) But how much should you give? 20% – too
little? 40%? After all it is YOUR idea that even made this startup happen. But
then you realize that your startup is worth practically nothing at this point,
and your co-founder is taking a huge risk on it. You also realize that since
she will do half of the work, she should get the same as you – 50%. Otherwise,
she might be less motivated than you. A true partnership is based on respect.
Respect is based on fairness. Anything less than fairness will fall apart
eventually. And you want this thing to last. So you give your co-founder 50%.
Soon you realize that the two of you have been
eating Ramen noodles three times a day. You need funding. You would prefer to
go straight to a VC, but so far you don’t think you have enough of a working
product to show, so you start looking at other options.
The Family
and Friends Round: You think of putting an ad in
the newspaper saying, “Startup investment opportunity.” But your lawyer friend
tells you that would violate securities laws. Now you are a “private company,”
and asking for money from “the public,” that is people you don’t know would be
a “public solicitation,” which is illegal for private companies. So who can you
take money from?
- Accredited
investors – People who either have $1 Million in the bank or make $200,000
annually. They are the “sophisticated investors” – that is people who the
government thinks are smart enough to decide whether to invest in an
ultra-risky company, like yours. What if you don’t know anyone with $1
Million? You are in luck, because there is an exception – friends and
family.
- Family
and Friends – Even if your family and friends are not as rich as an
investor, you can still accept their cash. That is what you decide
to do, since your co-founder has a rich uncle. You give him 5% of the company
in exchange for $15,000 cash. Now you can afford room and ramen for
another 6 months while building your prototype.
5.3)Registering the Company
To give uncle the 5%, you registered the company,
either though an online service like LegalZoom ($400), or through a lawyer
friend (0$-$2,000). You issued some common stock, gave 5% to uncle and set
aside 20% for your future employees – that is the ‘option pool.’ (You did this
because 1. Future investors will want an option pool;, 2. That stock is safe
from you and your co-founders doing anything with it.)
5.4)The
Angel Round
With uncle’s cash in pocket and 6 months before it
runs out, you realize that you need to start looking for your next funding
source right now. If you run out of money, your startup dies. So you look at
the options:
- Incubators,
accelerators, and “excubators” – these places often provide cash, working
space, and advisors. The cash is tight – about $25,000 (for 5 to 10% of
the company.) Some advisors are better than cash, like Paul Graham at Y
Combinator.
- Angels – in 2013
(Q1) the average angel round was $600,000 (from the HALO
report). That’s the good news. The bad news is that
angels were giving that money to companies that they valued at $2.5
million. So, now you have to ask if you are worth $2.5 million. How do you
know? Make your best case. Let’s say it is still early days for you,
and your working prototype is not that far along. You find an angel who
looks at what you have and thinks that it is worth $1 million. He agrees
to invest $200,000.
·
Now let’s count what percentage
of the company you will give to the angel. Not 20%. We have to add the
‘pre-money valuation’ (how much the company is worth before new money comes in)
and the investment
$1,000,000 + $200,000=
$1,200,000 post-money valuation
·
(Think of it like this, first
you take the money, then you give the shares. If you gave the shares before you
added the angel’s investment, you would be dividing what was there before the
angel joined. )
·
Now divide the investment by the
post-money valuation $200,000/$1,200,000=1/6= 16.7%
·
The angel gets 16.7% of the
company, or 1/6.
· How Funding Works – Cutting the Pie
·
What about you, your co-founder
and uncle? How much do you have left? All of your stakes will be diluted by
1/6. (See the infographic.)
·
Is dilution bad? No, because
your pie is getting bigger with each investment. But, yes, dilution is bad,
because you are losing control of your company. So what should you do? Take
investment only when it is necessary. Only take money from people you respect.
(There are other ways, like buying shares back from employees or the public,
but that is further down the road.)
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