You see new announcements every few months – Startup India, Swachh Bharat, Swasth Bharat, 10K crore for startups in this budget or that scheme, collateral free loans, large checks from VCs, 2% CSR spend and so on and so forth. The research reports signal large untapped market in rural India or some other under-served segment. You feel patriotic and giddy and finally take the plunge. You give the boss an earful, leave your full time job, tell your friends and family, and come up with an idealistic product or service and rush to save the world with your social enterprise.
And then the shit hits the roof!
The promised customers do not materialize because they either lack the income to pay for your product or service or are happy with a cheaper though inferior product or service. You deployed your life’s savings in the proof-of-concept or the pilot. The banks laughed when you asked for a collateral free loan under CGTMSE. The funds in other government schemes were not easily accessible because of various requirements or vaporware. The regular commercial investors ignored your pitch because it lacked the words “e-commerce” and “marketplace” and to get the CSR funds, you had to show history.
Now that your feet are on the ground, here are the next steps to keep your dreams alive and take your business to the next level. As a Social Enterprise, pursue all 3 funding options – Equity, Grant and Debt. Each option serves a specific purpose.
Equity comes in handy for pivoting until you figure out the right business model or for scaling the business once the model is proven. The fund raising strategy should be different depending on the stage of the business.
At a very early stage (just starting or less than 6 months), you might be better off raising money from friends and family. This also shows that someone other than your co-founders and you believes in the idea. It always helps when the founding members put personal savings in the business because it shows commitment.
Moreover, preserve that equity. You will face a lot of dilution later, so the more you can bootstrap the better. At the proof-of-concept or pilot stage, I strongly recommend joining an accelerator. The accelerators help fine tune the business model, guide in developing the investor presentation and the financials, make introductions to key investors and give a badge of authenticity to the business apart from providing business development opportunities.
Some of the entrepreneur friendly accelerators include Village Capital, CIIE and Villgro. Some of them also co-invest with various seed stage investors. Once you have started figuring out the unit economics and have some customer traction, it’s time to apply to various angel networks. These facilitate pitches to a group of angels in one shot and often use standardized investment documents to save entrepreneurs from various pitfalls at a time when few of us understand the complicated legal language (more on that in another blog entry) or have the resources to hire an expensive lawyer.
Some of the entrepreneur friendly social impact angel networks include I3N and Toniic. Once you have figured out the business model and the unit economics and are ready to scale, it’s time to pitch to the masters of the universe for Series A investment. These include funds like Acumen, Khosla Impact, Aavishkar, Lok Capital and others.
The good news is that your seed and angel investors probably already know these investors and can make warm introductions. And if you get past this stage and make it to Series B, it’s time to take out the champagne bottle assuming that the investors have not already replaced you with a more professional CEO.
You might be wondering why bother with the grants at all. The grants are non-dilutive and are specially very useful if you are serving “bottom of the pyramid” and want to offset startup cost, subsidize product development (certain types), scale a working prototype or replicate the service in another region. There are various online databases of grant makers and the RFPs.
If you have no prior experience writing a grant, I strongly recommend hiring a freelance grant writer from sites like Upwork for the first couple of proposals. Most grant applications focus very strongly on impact and many for-profit entrepreneurs are more skilled in counting dollars and cents than in writing emotional masterpieces.
One word of caution – If you are applying to foreign grant makers (and in some special cases for CSR funding of Indian corporates), please take a crash course in FCRA. More on that in another blog entry.
At this point, life seems to be getting rosier and you want to skip the last paragraph on debt. Don’t. Debt, though scary, can be a good tool when you have figured out the business model, know your margins and have a customer base but need short term working capital or need capital for capex when the equipment or other assets can be used as collateral.
Debt is also often less expensive than equity. If you need short term working capital because the payments cycles are longer, one option is to put money in a CD and then get a line of credit against that CD. Banks like Bank of India, allow you to draw and then pay back upto 80% of the value of the CD and you pay only the difference in the interest rate of the 2 instruments. Foreign lenders allow ‘Factoring debt’ against invoices; unfortunately regular Indian banks do not. There are some venture debt options like Intellegrow or Grameen Capital, which can make such loans or regular loans. The catch is that the interest rate they charge is often in excess of 18% given the risk and the RBI rate in India. So these types of loans are only available for certain type of businesses and after a certain stage.
The bottom line is that even if you were not born with a silver spoon in the mouth, there are various options to fund your dreams. So get started. There are no excuses.
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