Funds for Startups SEED CAPITAL visavis ANGEL INVESTORS

Funds for Startups SEED CAPITAL vis-a-vis ANGEL INVESTORS Venture capital

SEED CAPITAL AND ANGEL INVESTORS Seed Capital refers to the cash needed to get a business started. This cash could come from your family members, friends and other external individuals. These external individuals refer angel investors. These are wealthy personalities who have what it takes to fund your business at the initial stages. Angel investors normally fill the gap when you’re not able to source for the seed capital from your immediate family and friends. Indeed, not everyone has wealthy family members and friends. Hence, for such people, going to meet the angel investors can be the best option. Thus, seed capital is simply the fund you need to get your business off the ground.

SEED CAPITAL AND ANGEL INVESTORS An angel investor or angel is also known as a business angel or informal investor or angel funder. An angel investor is an affluent individual who provides capital for a business start -up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies. http: //inc 42. com/startup-101/top-37 -angel-investors-india/ https: //angel. co/gujrat/investors

VENTURE CAPITAL Venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The target is mainly for group of individuals who are interested in building real bigger firms or companies. The Venture Capital is mainly provided in real cash in exchange for the shares in the company that is demanding for such fund. Thus, the venture capital fund earns money by owning equity in the companies. The typical venture capital investment occurs after the seed funding round as the first round of institutional capital to fund growth Venture capital firm usually invests in novel technology or business model in high technology industries, such as biotechnology and IT.

VENTURE CAPITAL Venture capital is mainly sourced from venture capitalists that raise the needed fund from the pool of other people’s money. They usually invest these funds in lucrative companies that are sure to yield quality returns. Venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership. http: //inc 42. com/resources/top-47 -active-venture-capital-firms-india-startups/ http: //www. startbizindia. in/venture_capital_firms. php

The Similarities: Seed capital and Venture capital q Both are simply avenues designed to raise good cash for the smooth take-off of business ventures. q Angel investors usually offer seed capitals to individuals that need them especially those of them starting out in business. Some angel investors do get involved in Venture capital. They have their own system of investing in larger business ventures. q Both supply risk capital

THE DIFFERENCES: SEED CAPITAL AND VENTURE CAPITAL q Seed capital is mainly for individuals who are starting up. Seed capital could be used by a single individual to get his or her business off the start-up line. You can always get this assistance from investors who are always there to help. Venture funds are normally used in helping big companies get started. The venture capital investors that grant the funds always like to invest in ICT and technological companies which they are sure will see the light of the day. q While Seed Capital is usually not all that too big money, Venture capital is usually a very handsome amount that can help a big company take off. In this case, the investors are also normally involved in the growth process of the company being sponsored.

The Differences: Seed capital and Venture capital q Under the seed capital investment, most angel investors involved normally invest their own personal funds directly. On the other hand, when it comes to venture capital, the sources of the fund are not directly from the pockets of the inventors involved. Venture capitalists get the money from the pool of professionally managed fund belonging to others. This is the main reason why, they don’t invest in ordinary individuals. This risk might be too much. q Generally if the business is at an early stage then Business Angels are the most likely source of funding. Venture Capital firms may come on board at a later stage when the concept is proven and initial revenues obtained in order to more quickly expand the company.

THE CASE OF PRIVATE EQUITY Both Angel Investors and Venture Capitalists will hold private equity from having made investments directly into private companies. However Business Angel Investors will be individuals, often successful business people, who are investing their own personal funds into a potentially rewarding business opportunity. Whereas Venture Capital is invested by firms or companies that use other people's money. They raise that money by offering investors a chance to take part in a fund that is then used to buy shares in a private company.

BANKS: FUND-BASED LENDING Fund-Based Lending and Tenure of Loans: The traditional distinction is q Short term loan q Long term loan/Term Loan Samir K Mahajan

SHORT TERM LOAN FUND-BASED LENDING contd Short-term loans are credits which mature within one year. Most of these loans are granted with the primary purpose of financing working capital need of the borrowers resulting from temporary build-up of inventories and receivables. In such case, repayment of loan would flow in out of conversion of current asset (inventories and receivables) to cash. Sometime seasonal loans are granted to borrower whose business is subject to sale cycles, and periodic peaking of inventories and other current assets. The amount of credit made available is based on the estimate of peak and non-peak asset funding requirements of the borrower. The borrowers draw upon the seasonal funds during the peak period of production to meet the seasonal demand repay the loan when inventories are liquidated and cash flow from sales starts. Samir K Mahajan

SHORT TERM LOAN contd. FUND-BASED LENDING contd Both working capital and seasonal loans are made as secured loans. The short term secured loans are based on the underlying (existing) strength of prime securities such as: inventories, receivables or book debts, and other current assets. Size of prime securities directly affect the amount that can be granted as loans. The other type of loans backing the loan payments are collateral securities. Further, there may be unsecured loans granted for ‘special purposes’ such as : unexpected/unusual increase in current assets or a temporary cash crunch in the borrowers funds. They fall outside the short-term working capital requirement of business. Such loans may be granted as ‘temporary ‘or ‘ad hoc’ loans. E. g. overdraft q CASH CREDIT q BILLS PURCHASED/DISCOUNTED q OVERDRAFT Samir K Mahajan

CASH CREDIT MODE OF CREDIT DELIVERY/METHODS OF LENDING contd. A cash credit is a short-term cash loan to businesses to finance their "working capital" requirements. Under this, the bank guarantees a maximum amount that can be loaned on demand from the borrower. The borrower need not withdraw full cash credit limit in one instalment. The borrower is also under no obligation to actually take out a loan at any particular time. He can avail the facility according to his requirement subject to the condition that the total amount availed does not exceed the maximum credit limit. Interest is charged only on the amount utilised by the borrower. The bank also levies a minimum interest charge/ commitment charge on the amount not withdrawn. Cash credit is backed by prime securities and other current assets such as book debts and account receivables. The borrower can draw from the cash credit account on for operating expenses, and deposits the cash inflow when sales occur. The cash credit account is similar to current accounts as it is a running account (i. e. , payable on demand) with cheque book facility. But unlike ordinary current accounts, which are supposed to be overdrawn only occasionally, the cash credit account is supposed to be overdrawn almost continuously. The extent of overdrawing is limited to the cash credit limit that the bank sanctioned. Samir K Mahajan

BILLS PURCHASED/DISCOUNTED Bill discount is a short term credit facilities intended to provide current working capital to business. Under this method, the bank advances the loans on the security of bill of exchange after deducting a certain percentage technically known as discount from the true value of the bill concerned. In addition to advancing cash loans by discounting bill of exchange, a banker can purchase the bill outright and pay face value less bank charge. Purchase of bill are normally confined to bills payable on demand. A genuine commercial bill of exchange is self-liquating paper since it liquidates automatically out of the sale of goods covered by such bills. Samir K Mahajan

MODE OF CREDIT DELIVERY/METHODS OF LENDING contd. OVERDRAFT Overdraft occurs when the customer / borrower is allowed to withdraw funds in excess of the balance standing in his bank account, or even when the available balance becomes nil or goes below zero. In all of these cases, the balance of the bank account enters the negative, and the account is said to be overdrawn. However, bank fixes a limit beyond which the borrower is not be able to overdraw the account. It is not purpose oriented as in case of cash credit where in loans is advanced for operating expenses. Legally, overdraft is a demand assistance given by the bank, and is given for a very short period of time at the end of which the borrower is liable to repay the excess amount withdrawn and interest there in. The bank may allow overdraft in case of urgent credit need or cash crunch of the borrower against a collateral (say, pledging of Mutual Fund, KVP and other paper securities) or personal guarantee. Samir K Mahajan

TERM LOAN FUND-BASED LENDING contd Term loans are those maturity period is more than one year. Term loans are standard commercial loan, often offered for major capital investment in business such as: o acquiring long term/fixed assets (i. e. assets which will benefit the borrower over a long period exceeding at least one year) such as: purchase of plants and machineries o construction of building for factory o funding of business expansion or setting of new projects o modernisation and diversification plan of the borrower o purchase of new business q Term loans can be provided for financing permanent working capital too. Samir K Mahajan

FUND-BASED LENDING contd TERM LOAN contd. ü Typically, loans are fully disbursed at inception, and principals and interests are repaid depending on the borrower’s capacity to generate cash flow. ü These loans often have fixed interest rates , and are sought to be repaid in fixed and pre-determined instalments say quarterly or monthly basis. ü Security for the term loans are banks’ claim on the assets purchased from the term loans. ü Bankers tend to classify term loans into two categories: intermediate and long-term loans. ü Intermediate-term loans usually run more than one years but less than five years, and are generally repaid in monthly instalments from a business's cash flow. ü Long-term loans have period of 5 years and more , and can run for as long as 10 or 20 years. Samir K Mahajan

ASSET BASED LENDING Asset based lending is an emerging category of bank lending. Here, the banks look primarily to the earning capacity of the asset being financed, for serving its debt. In most cases, the bank will have little or no recourse to the borrowers. E. g. consortium advance, multiple banking arrangement, loan syndication ü Specialised lending practices such as: project finance fall under this category. Project finance is financing of long-term infrastructure, industrial project/asset, public services etc. ü Project finance comes from equity/funds from one or more sponsoring firms/companies, or issues of bonds by the project companies, and from bank in the form of no or limited recourse debt, syndicated loans. ü Project debt and equity used to finance the project are paid back from the cash flow generated by the project. Note: Non-recourse debt or a non-recourse loan is a secured loan (debt) backed by a pledge of collateral, typically real property say the asset of the project, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. Samir K Mahajan

MODE OF CREDIT DELIVERY/METHODS OF LENDING contd. LOAN SYNDICATION AND CONSORTIUM Loan Syndication and Consortium finance are resorted to when a client/borrower needs a huge sum of capital that may either be too large for a single lender to provide for, or may be outside the scope of a lender’s risk exposure levels. In such situation, multiple lenders will work together to provide the borrower with the capital needed at appropriate rates agreed upon by the lenders. Such loans are common in mergers, acquisitions and buyouts where borrowers often need very large sums of capital to complete a transaction and often more than a single lender is able or willing to provide. Loan syndication and consortium finance spread the risk of a borrower’s default across multiple lenders. However, both these mode of lending have slight different approaches. Samir K Mahajan

MODE OF CREDIT DELIVERY/METHODS OF LENDING contd. MULTIPLE BANKING In multiple banking, borrower approaches multiple banks to finance the entire requirement of funds, and different banks provide finance and different banking facilities to the single borrower without having a common arrangement and understanding between the lenders. Each bank deals independently with borrower with respect to documentation, monitoring and supervision of each one’s loan. Thus, borrower deals with all financing banks individually. To avoid frauds and duplicate lending, at the time of granting fresh advance, banks must obtain declaration from the borrower about credit facility already enjoyed from other banks. Samir K Mahajan