Early Stage Funding for Startups

This month for the virtual Q & A #AsktheExpert on Start-Up Hyderabad’s Facebook page, we had Sushanto Mitra & Vinutha Rallapalli from Lead Angels answering queries on “Early Stage Funding for Startups”.

Sushanto is the founder & CEO of Lead Angels, an early stage investment network, and has been working in the early stage ecosystem in India for the last 15 years. He was most recently Director of Hyderabad Angels until June 2013. His prior assignments included Chief Executive Officer , Society for Innovation & Entrepreneurship, IIT Bombay and Director of Techcap India a boutique investment bank focused on early stage companies. His earlier stints included companies like PriceWaterHouse Coopers, HCL Insys and Softek.

Vinutha Rallapalli is a Chartered Accountant with an experience of over 8 years in various roles across accounting,audit and transaction advisory. For the last four years she has been in the startup world in UK and India. Her last role was as manager of Hyderabad Angels. She is the VP and also handles Operations (South India) for Lead Angels.

Here is a quick overview of the questions asked and what the experts responded with regards to “Early Stage Funding for Startups”.

Q: What are the key points investors are looking before investing into the startup?
A: a) The Team b) The Market c) Scalability d) Competitive advantage.

Q:One of the biggest question most startups have is ‘valuation’. How do you ‘value’ a company for the angel round?
A: Valuation at the early stage is more a matter of negotiation. It is also dependent on the amount of stake the investor desires to hold in the company.

Q: For early stage Startups getting funding is an important part.what we should offer & what we shouldn’t offer to funders from our side ?(Thumb rules & precautions)
A: Investors appreciate honesty from startups, honesty about their strengths weaknesses and shortcomings as a team. With respect to what should be offered and what shouldn’t be. It depends entirely on the value that the investor brings to the table apart from the money and the strategic nature of the investment.

Q: Could you clarify an early stage start-up. Most of the start-ups pivot several times before getting some chance of creating a business. Is it by time (say 1 year/2 year) or by capacity to build a business?
A: Startups are typically slated as early stage in the first three years of operations. However it depends on how quickly the company scales and business model matures. To answer your query on pivoting, if there is a complete flip in the business model it would be considered as an early stage yet again.

Q:Is debt a good option? It seems there are some provisions of getting loan from banks under “Make in India”.
A: Debt if available is a better option. You may want to explore the CGTSME scheme. Debt if serviceable by the general operations of the company is definitely a cheaper option than equity.

Q: What is your view on early stage tech startups that have founders who are not from a tech background?
A: If technology forms a critical part of the growth and scaling up its wiser to have the techies in house if not founders/co-founders.

Q: As an early stage tech startup, we have found that hiring talent through freelancing websites such as oDesk and Elance is cost effective and efficient. What is your view on startups that are with a team of quality freelances in their first 2 years?
A: Our experience has been given the volatility of freelancers, in the initial period its more critical then ever to have a core team that believes in the product and can deliver.

Q: Will the funding be given to a service based company, catering services in Branding and Advertising segments?
A: We look at companies that are not capital intensive in nature, are easily scalable and having a competitive advantage. If your company fits the bill you can apply to us.

A few thoughts from the experts:

Sushanto:
I would say Focus..Laser Sharp Focus would be critical in success of the idea that you pick. Its critical to pick a niche that works for you and your team and explore the same and reach sufficient traction before branching out to other segments.

Vinutha:
This is a good time to raise money as there are a lot of funding networks/VC’s looking for disruptive ideas than anytime before. However finding the right growth partner is critical and it needs to be in alignment with the companies requirements for growth and scaling up.

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