How to start a startup in India – 15 Chapter Detailed Guide you need to learn.
People often ask questions on my Youtube Channel about how they can start a startup
What is the procedure to start a startup in india?
From where i should i start?
What if my startup fails?
According to Forbes, about 90% of startups fail.
Why does this happen?
After reading this startup guide, you will get to know everything you need to know about startups.
What’s in it for me?
1. Methods to Raise funds for startup
1.1 How to raise money through Equity?
- As a Private Company
- As a Public company
1.2 How to raise money through Debt?
- How to contact?
- Preparation guide
1. What is a Startup? Startup vs business
A startup is a company which is in the early process of growth focussing on its capitalization by developing products or services and catering market demand.
Formed by a group of entrepreneurs, startup is usually started from scratch with little or no investment.
Startup tests your entrepreneurial and convincing capabilities and has a risky component.
Startups Vs Small Business
A faster rate of growth and
Limited rate of growth as
their agenda is
Financed externally through
Self-funded or through
The nature of startups is
disruptive as they try to bring
new changes in the market.
The nature of small
business is very traditional.
To evaluate an idea, it is required that you to ask yourself some important questions.
Which problem will the product solve?
For whom are you solving this problem & who will be your target audience?
Who are your competitors in this business and how will you differentiate yourself? Do you have something that cannot be replicated?
How much market will you be able to cover?
How are you going to fund the startup?
Are you able to arrive at a solution?
When you are able to answer these questions, you will be able to evaluate whether the business idea will work or not.
- Test your product/service with a smaller audience. Try to get feedback from them.
- After taking feedback, try to incorporate changes in your product/service and launch it for the public.
- Give more value to the customers.
4. Marketing and sales forecasting
Pilot Run gives an idea that how much your startup will earn in a year.
It is tough for a startup to predict as it is not established yet. During the process of marketing, a startup should be minimizing the cost.
The use of pamphlets and billboards has become redundant.
They add to the product’s cost. Therefore they should not be used.
Check my playlist on marketing 101 ( 68 Videos):
The other option is Digital Marketing where you promote your product through the internet. It helps in focusing on target audience and can be done at a very low cost for marketing the product.
Check my playlist on Digital Marketing (76 Videos) :
Marketing (Lead Generation) and Sales (Conversion) go hand in hand. You should know both.
6. How to finance your Startup?
How to start a startup, there is a question comes that where will the funds come from? How we will finance our startup?
There are three ways to finance a startup-:
It is when you invest or reinvest your own money instead of borrowing from other sources.
Bootstrapping uses personal reserves of the entrepreneur or maybe his/her family members.
No dilution of control
Low Rate of Growth
Equity is referred to as shareholder equity which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off.
Employed by several companies and people as a technique of creating massive purchases that they might not afford beneath traditional circumstances.
It is the quantity of cash borrowed by one party from some other party.
This is a debt arrangement offering the borrowing party permission to borrow cash on the condition that has to be paid back at a later date, with interest.
How to raise money through Equity?
There are two ways through which you can raise money through equity-:
How to raise money being a private limited company?
If you are a private limited company, you can raise funds through private investors.
There are 2 types of investors-:
1. Angel Investors
- They are big businessmen like CEOs of companies
- They do not provide larger funds but give business know-how from their experience.
- Find problems in your business model and guide you.
2. Venture capitalist
- They give larger investments but no business know-how.
- Create a pool of investments by collecting funds from different investors.
- They act like share brokers by helping to collect money.
2. How to raise money being a public company?
If you convert your company into a public company, you can raise money by issuing equity shares through SEBI.
SEBI is an institution which regulates public companies and lists them on the stock exchange.
A company issuing its shares for the first time, it is known as an IPO (Initial Public Offering)
Suppose your company has a valuation of 100 crores and you want to dilute 10% of the control.
When you issue shares worth 10 cr and if each share costs Rs.100. It means you are issuing 10 lakh shares to the public.
Trading is an act of buying and selling of shares. There are 2 types of trading:
1. Intra-day trading
Intraday trading means an investor sells his/her shares the same day they buy.
2. Long Term Trading
Long Term trading means an investor sells his/her shares after a long period.
Types of market
- Capital Market
- Money Market
- Forex Market
- Derivatives Market
Stock Exchange is an institution where all the stocks like shares, derivatives etc traded.
There are 2 stock exchanges in India
- BSE (Bombay Stock Exchange)
Bombay Stock Exchange is one of the oldest stock markets and first for Asia. Here approximately 5000 companies and listed on which trading is done.
- NSE ( National Stock Exchange)
National Stock Exchange was formed in 1993. Here around 1600 companies are listed.
Points to be Noted for an Investor -:
- Share market is not gambling. If you have knowledge of the stock market, you can easily earn good returns by investing in it.
- Choose an appropriate sector to trade upon of which you have knowledge and experience like a B. Tech should focus on trading in computer companies.
- Diversification of funds is necessary as it will lower the risks and probably increase profits.
- Share markets give at-least 15% return if you have good knowledge and experience of trading.
How to raise money through Debt?
Recalling what I discussed,
Debt is when you borrow money from outsiders on the promise that you will return the money, particularly with interest.
There are two types of Debt:
Short Term Debt
Short term debts are those debts which have to be paid within one year of borrowing.
These are various types of short term debts available in the market.
Some of them are explained below.
1. BANK LOANS
Bank Loans are a very common type of short term debt. As the name suggests, it means a loan or debt borrowed from banks at a certain rate of interest.
A Startup which is very new in the business should take bank loans to establish the infrastructure because they are easy to take.
2. COMMERCIAL PAPER
Commercial Paper is an unsecured, short-term debt instrument issued by a company for the financing of accounts payable and inventories and meeting short-term liabilities.
3. CERTIFICATE OF DEPOSIT
A Certificate of Deposit is a money market instrument which is issued in dematerialised form for funds deposited in a bank for a specific period.
The Reserve Bank of India (RBI) issues guidelines for Certificate of Deposit at regular time intervals.
Long Term Debt
Bonds are long term secured investments in which investors lend money to a company or a corporation.
They are secured because holders of a bond are paid first when a company is dissolved.
Debentures are long term securities issued by corporates yielding a fixed rate of interest. They are not as secured as bonds as investors have to depend on the credit worthiness of the companies.
Debentures provide higher returns as compared to bonds. They can be easily purchased but the risk is also higher in this investment.
How to register a startup in India?
Step- 1 Incorporation of Startup
One must first incorporate your business as a Private Limited Company or a Partnership firm or a Limited Liability Partnership
You have to follow all the normal procedures for registration of any business like obtaining the certificate of Incorporation/Partnership registration, PAN, and other required compliances.
Step – 2 Register with Startup India
Step- 4 You must self-certify that you satisfy the following conditions
a) You must register your startup as a Private Limited Company, Partnership firm or a Limited Liability Partnership
b) The startup should not be registered more than 7 years.
c) The turnover of the startup should be less than 25 crores per year.
d) Innovation is a must
The startup must work either towards innovating something new or on improving the existing used technology.
e) Your startup must not be a result of the reconstruction of an existing business.
Step 5 – Immediately get recognition number
On applying you will immediately get a recognition number for your startup. The certificate of recognition will be issued after the examination of all your documents
How to calculate your startup valuation?
If your startup needs more funds, you go to private investors and convince them for more money.
First calculate the value of your startup.
There are 2 ways to calculate startup valuation
- Under the scorecard method, we compare a startup to other startups of the same category and are at the same stage.
- We take an average of investments taken by them.
- A comparison is made by adding and subtracting some percentage of the average valuation. This is based on various factors like management skills, infrastructure, patents, competition etc.
- Nowadays this method is rarely used.
To understand VC Method we will take the help of an example.
Suppose the current sales of a startup is 10 crores. The VC feels that he/she can sell the startup 10 times more to a bigger company after 5 years.
The valuation of your startup after 5 years is 10 times that is 100 crore.
We take the assumption that the company will earn a 100 per cent return on sales.
This implies that after 5 years the valuation of the startup would be 100 crores.
4 years after, it will be 50 crores,
After 3 years- 25 crores,
And after 1 year the value will be 6.25 crore. This is the current valuation.
There can be fluctuations as what we assume may not prove to be true. This depends on various factors that we discussed in the scorecard method.
Here the 100% rate of return represents the internal rate of return. The valuation after 5 years that we discussed is known as the exit value of the startup.
The current valuation is the post valuation of the company.
It is the valuation of startup before the VC takes the commission. After subtracting it, the left amount is the pre-valuation.
Pro tip -:
A startup owner should always focus on negotiating with investors on post valuation and not pre-valuation.
How to pitch investors?
Pitching investors is not as easy as it seems. There are many famous companies that were rejected by investors.
Here I will discuss the basics on ways to pitch an investor.
There are two types of finances-:
- Under this, you ask for loans from our family members or friends. you have to return this amount at a specific rate of return.
- The other way is you invest your personal savings in the startup.
2. Private Financing
- Under this, you ask for investment from angel investors or venture capitalists
- Private financing is risky as investors want to receive returns by 5 years.
PHASES OF INVESTING
To finance the startup, there are three phases that you should follow.
You should remember that you do not ask for money from the investors in the beginning.
Phase 1 – Bootstrapping
Business Bootstrapping is investing your money into the startup.
It is important for a startup owner to first invest his/her personal reserves in the business to establish its infrastructure.
Phase 2 – Ask Family or Friends for loans
Now suppose your funds from bootstrapping are finished. What to do now?
in this phase you will ask money from friends and family members. you will borrow money from them at certain rate of interest.
It would not liquidate your equity and you will be able to run the startup for some time.
Phase 3 – Ask for investment from big investors
Now suppose your company has achieved a breakeven point. you are earning some revenues too. Now you need money to grow your startup.
In this phase, you will pitch your idea so they can invest in your business.
These can be angel investors, venture capitalists or both.
You will lose equity for the amount you acquire.
What to you need to do if you lack money ?
If you lack funds for the startup, you need to check two things.
Will you be able to expand your startup?
2. Revenue Stream
How much revenue will the startup be able to earn in the upcoming years?
If you can fulfill these things, there is a possibility that you will get early investments.
Getting investments depends upon certain hidden factors as well like,
- Quality of Team
- Product/ Service.
- Never say that your product/service does not have competition. Reason- the investors might feel that its market is entirely new and it will be tough to establish and promote it. Chances are that would not get the investment.
- Always be informed about the amount of money you need to take from investors and where are you going to invest in.
HOW TO CONTACT INVESTOR?
Many times people ask me how should they contact investors for their startup? Where can they find them?
Here is a step by step guide on how to contact investors for startup.
1. List of investors
List down famous angel investors/ venture capitalists who have invested in a similar business.
Jot down the names of prospective investors who you wish that they invest in your startup.
2. Try to find them on websites like LinkedIn
The next step is to find those various websites like LinkedIn. You get a lot of information about them from their profiles including the way to contact them.
3. Research about investors and jot it down
Research everything you can about the investor.
It includes their likes and dislikes, companies that they have invested in, their background etc. Jot it down.
You should know about your investors well. This helps to create a good impression.
4. Attend industry related events and participate in B-Plan events
To meet new investors, attending business related events, proves to be helpful as you can pitch your ideas to the investors you meet and set up a meeting with them.
It helps in building contact with big investors and help in getting finance.
One more way to contact investors is participating in B-Plan competitions. In these types of competitions, you usually pitch your startup idea to judges and sometimes if your idea is really good the judges help you get investments.
It is important that you should go to only those events which are beneficial for your startup.
Reason- Some events are paid and you can’t afford to waste money.
5.Draft a good email and try to meet them.
When you pitch investors, draft a good email to send. It makes your startup look attractive.
Try to meet them and set up an appointment to discuss your startup idea and ask for investments.
HOW TO PREPARE BEFORE MEETING THE INVESTORS?
1. Know your pitch
It is important to know your pitch properly.
Never waste the time of the investor as you deliver the pitch for your startup. You should be very clear what are you going to present in front of investors.
It means you introduce your idea to the investor and try to set up a meeting with him/her. It is not a formal engagement.
Note: First impression is the last impression. Try to have a good impact on the investor.
Elevator pitch should be customised according to investors and based upon their facial expressions and personality.
2. Know the pitch clearly.
Always remember what you say while delivering your pitch.
To present a good pitch do not memorise it. Practise it thoroughly.
Try to narrate your pitch different people like your family, friends etc. to get a flow and try to correct flaws.
3. Share your ideas of your startup.
We often don’t share our startup ideas with people.
The reason behind this is we fear is that it might get stolen. This sometimes proves to be our mistake.
4. Find and Plan your goals.
You should know what your ultimate goal of taking investment. What are you going to achieve in the upcoming years in your startup?
Convince the investors on the basis of your revenues and milestones of business. Show your positive side to the investors and manipulate them into giving you the investments.
6. Know your investors well.
To have a good impression on the investor, try to research everything about him/her. Try to know his/her attitude, achievements, companies invested in etc. by researching about them on various websites.
HOW TO MAKE PITCH/PRESENTATION?
You should know why have you started this startup. How is it going to help you. What is the purpose behind starting the startup.
2. What problem does the product/service solve?
It is important to know what audience does your product/service caters to.
For presentation you should understand the requirement of the product in the market. What problems will the product/ service will solve.
3. Market size
It means that what is the total market size of your product.
- TAM ( Total Addressable Market)
Size of the market will that your product will be able to address.
- SAM (Segmented Addressable Market).
Size of the market that comes under your sector.
- SOM (Share of Market)
Size of the market that your startup will be able to capture.
Demo of product
Give a demo of your product/ service to the investors. You show what the product is, what are it is features and what benefits they will get if they invest in it.
Have good information about your competitors and their products and you can differentiate your product with theirs.
A business model is an important part of the pitch.
I have curated more than 64 Business Model videos. Check the playlist below:
Revenue and Expenses:
You should have a clear idea about how are you going to earn revenue. What will be your marketing strategy? How will you invest your money? What is the duration of the break-even point?
You must showcase expenses that will be incurred, salaries will you pay. Explain cost to make the product and the expenditure on marketing.
Describe the burning rate and surviving cost of your startup.
It is the amount of money you spend in a month or year.
Surviving cost is the minimum amount your startup need to survive.
It is necessary that you always give realistic figures that are believable to establish a trust for the startup. What you need to do is try to ask for investment from them at a certain rate of return.
Describe the qualifications and expertise of the team in your Presentation.
A good team can create wonders for a good idea. Try to establish confidence for your team members towards the investors.
Always try to answer the questions with confidence to show that you have proper knowledge of how are you going to run the startup.
Be honest about what you think and feel about the startup and try to be realistic.
After pitch you should ask certain questions to them like
- What will be their role in the startup?
- What will they provide?
- How are they going to invest i.e will they pay in instalments or lump sum.
- How many people are involved in the startup from their side?
Pro tip -: Have proper information about everything when you sign a contract with investors.
After you have presented everything, the decision lies with the investors.
There are two possibilities-:
- Accepts your offer
- Refuses to invest
I will discuss how should you react in both situations.
WHAT IF INVESTOR REFUSES?
Never respond rudely to the investors if they refuse to invest in your startup. Be polite and accept their decision.
2.Respond authentically and honestly
- React authentically,
- Be honest
- Control yourself
- Do not fake your reaction
3. Take a feedback for next pitch
Try to take a feedback from them. Ask what you lacked in the presentation and what you can improve in the next pitch.
4. Follow-up for future milestones
Ask the investors if they need a follow up on how the startup functions in the future and the milestones it achieves.
It helps to create a good impression towards them. If you require money in the future, you can easily approach them.
WHAT IF INVESTOR AGREES?
1. Terms and conditions
Ask the terms and conditions of the Startup. Will they work with them or not.
2. Investment criteria/ cash flow
It means that how are they going to invest. Will they pay in installments or in lump sum. How will that affect the cash flow?
You need to know how much they will interfere in the functioning of the business. What will be their role in the startup?
Try to ask for assistance in the startup. This means that if you have a problem regarding anything which you aren’t able to solve, they will guide and help you to solve it.
Ask for feedback regarding your pitch and problems in your pitch which you can improve in the next pitch.
6. Maintain a good relationship
After receiving investment, try to maintain a good relationship with the investor. You should not abandon your investors totally.
Ask for advice and suggestions on regular intervals and keep them updated regarding the business.
9. Funding Contract
Get a majority in the board of directors
After getting investments, your main focus should be to gain control over the startup. The investors will try to get majority seats in the board of directors who are responsible to run the startup.
Control over equity does not ensure a majority in the board of directors. as a startup owner, you should focus on getting the majority on the board of directors.
Reason- The startup idea is yours and you have put together everything. to ensure the proper functioning, the control should be in your hands.
Tag Along Clause
A tag along clause allows minor shareholders to tag along with a larger shareholder or group of shareholders if they find a buyer of their own shares.
It ensures that minor shareholders are not left behind if big shareholder decides to exit the startup.
Drag Along Clause
Drag along clause protects the right of big shareholders.
Suppose a big shareholder finds a prospective buyer for the startup.
He/she wants to sell the venture.
According to this clause, he/she can drag other small investors to sell the entire venture.
Share option pool
A startup usually doesn’t have enough money to give salaries to employees.
What they do is they give share options to employees.
This means that the startup is giving a part of equity to their employees as salary. This helps in developing their interest toward the startup as their salary depends upon the revenues of the startup.
Why do Startups Fail?
1.Wrong market/industry selection
There is a possibility that the market or the industry that we choose is not appropriate.
For example you are in the E-Commerce industry and your competition is with large e-commerce companies like Amazon.
Chances are that you would not survive in the heavy competition.
The reason behind this is you would not be able to match their level.
2. Faulty business model
Sometimes our business model is faulty. This implies that there is a problem with our calculations of revenues and expenses, which leads to losses.
3. Marketing myopia
It means you do not serve what the market demands.
Reason- You provide outdated technology which the market does not want.
This results in the loss of a considerable market share.
4. Weak feedback system
Week Feedback system leads to marketing myopia.
If the company doesn’t employ the suggestions of customers, they lose their share in the market. It is important for every company to adapt itself to a constantly changing environment.
5. No skill
You can’t run a startup or company if you don’t have skills for it.
You might face problems if you do not have appropriate skills to run the business. Being the boss of the startup, you should t solve the problems of your employees. A good manager is a need for a startup.
It is possible that your startup turns into a blunder.
6. No passion for business
You need passion if you want to run your startup efficiently. if you are starting a business by copying others, you might fail. Do not run the business for the sake of running it.
Reason- You would not put efforts in the startup as you lack interest in it or do not care about it.
7. Wrong team selection
A startup fails if the team is wrong. This means
- The team is not competent
- Lack of skills and expertise
Suppose they do not have the required qualities. No matter how good your idea is, startup can fail. The team should have appropriate knowledge and skills in the field they are supposed to work.
8. Do Not know how to raise funds
A good idea is of no use if you can not raise funds.
Reason – You will not be able to sustain in the market.
9. Do not know cash burn rate
Cash burn rate means the amount of money required to run the startup for 1 month. Startup owners don’t have idea about daily expenses incurred in the business.
Suppose your revenue is around 10 lakh rupees and your startup incur expenses are worth Rs. 1 Lakh in a month.
This implies that the burning rate is 10 times.
Ensure that your startup gets profitable in the period else you’ll be in loss.
10. Raising funds at an early stage
One of the major mistakes that startup owners commit is they raise funds at an early stage.
Reason- You lose your equity at a primary stage and lose control over the startup.
Raise funds when your startup achieves the break-even point.
Frauds in a Startup
You may have heard about various cases of frauds that startup owners commit with investors. I will discuss what these frauds are and how do they happen.
1. Dissolving the equity to increase personal net worth
Startup owners sell their share of equity at high prices. this results increased net-worth of the start up owner.
Suppose the startup is in loss or is not earning revenue. Even then the startup owner’s net worth will rise.
2. Increase in the salary of owners by using the money of investors
It is using the money received from investors to develop the startup is used for personal gains that mean increasing their salary.
The startup owners don’t think about the revenues and expenses of the company and use a huge amount of investment to fulfill personal purposes.
E-commerce business models
There are two types of E- Commerce Business models
- The sellers list their products on the website and the company gets a commission.
- Sellers do the packaging. If they are not able to do, additional charges are levied.
- Courier partners directly take it from the sellers.
If products get damaged, the entire responsibility lies with the seller.
The profit margin is less here.
- Products are directly purchased from manufacturers and sold to consumers.
- Here the inventory is packed and directly sold to buyers and all the profit is consumed by the company.
The profit margin is high
The responsibility of damage lies with the company.
Guide to start E-Commerce a website
- Product differentiation (unique product) for competitive advantage
- Calculate expenses and plan everything.
- Don’t spend rashly without getting at a breakeven point.
- Take the salary only after covering all expenses like salaries.
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Best time to take funding for your startup
- Calculate the time that will be taken to achieve breakeven.
- Decide the way you will achieve breakeven.
- Do not let the startup dissolve. This should be done when it is important.
- Have the maximum share in the startup.
Startup India is an initiative taken by the Government of India under the leadership of Narendra Modi to simplify the process of registration existing under License Raj and promoting entrepreneurship within the country.
It was launched on 16th January 2016 with an aim to make India a country of job creators from job seekers.
- Set up a 10,000 crore startup funding pool.
- Gave a reduction in patent registration fees.
- with the help of improved bankruptcy code, now the time to exit the business has been reduced from 180 days to 90 days.
- It gives freedom from mystifying inspections for the first 3 years of operation.
- Freedom from Capital Gain Tax for the first 3 years of operation.No tax will be levied on capital gains of startups for 3 years.
- Freedom from tax for the first 3 years of operation.
- Created an Innovation hub, under the Atal Innovation Mission.
- Targets 5 lakh schools, and involve 10 lakh children in innovation-related programmes.
- Encourage entrepreneurship within the country.
- Promote India across the world as a startup hub.
- Built Startup Oasis as Rajasthan Incubation Center
- The startup will be eligible for government tenders against big companies.
- 75 Startup support hubs have been set up by the government in NITs, IITs, IIScs, IIITs, IISERs etc.
- Startups shall be allowed for self-certification through the Startup mobile app with 9 labour and environment laws. In the case of the labour laws, no inspections will be conducted for 3 years.
WHAT WILL BE CONSIDERED AS A STARTUP?
1 Startup needs to be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India
2. Startup up to seven years from the date of its incorporation/registration is considered a startup. In the case of a startup in the biotechnology sector, the period shall be up to ten years from the date of its incorporation/registration
3. The turnover of a financial year should not exceed 25 crores.
4. A company is considered a startup if it is working towards innovation, development or improvement of products or services, or if it is a scalable business model having a high potential of employment generation or wealth creation.
How funds are released ?
The government’s motive is to create a domestic source of capital for seed and early-stage companies.
To provide equity funding support for development and growth of an innovation-driven startup, the government has set aside a corpus fund of 10,000 crores managed by SIDBI.
The Fund is in the nature of Fund of Funds.
The Government participates in the capital of SEBI registered Venture Funds.
What has been done yet?
- Only 600 crore have been released yet for 109 startup.
- 8000 startups have been recognised under startup India.
- Tax breaks have only been given 87 startups.
- Healthcare Sectors have not got due recognition
- Funds are not properly deployed
- Administration issues
WHAT NEEDS TO BE DONE?
- Strong Startup Support Infrastructure is needed to facilitate critical business requirements.
- Bureaucratic hurdles need to be identified and eliminated.
- Implementation of programs should be done properly.
Do share your views in the comment section: