START UP COMPANIES IN INDIA & ITS FUNDING

 

INTRODUCTION OF STARTUP COMPANIES

 

A startup company is a newly established business venture that aims to develop and market an innovative product or service in the market. Startup companies are characterized by their entrepreneurial spirit, innovative thinking, and high growth potential.

The primary goal of a startup company is to develop a business model that can be scaled up rapidly, generating significant revenue and profits. These companies typically operate in emerging or disruptive industries and rely on technology or intellectual property to create a competitive advantage.

Startup companies often face a high level of uncertainty and risk in their early stages, as they attempt to validate their business model and attract customers, investors, and talent. They usually require significant investment and resources to develop and launch their product or service, and may operate at a loss for several years before achieving profitability.

Despite these challenges, startup companies offer significant opportunities for growth, innovation, and disruption in the market. Many successful companies, such as Google, Facebook, and Amazon, began as startups and have gone on to become some of the most successful companies in the world.

WHAT DOES INDIAN LEGISLATION SAY ABOUT STARTUP COMPANIES ?

In India, there is no specific legislation that defines a startup company. However, the Government of India has provided certain guidelines to recognize startups and provide them with various benefits and incentives.As per the notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT), an entity is considered a startup if it meets the following criteria:

- It is a private limited company, registered as a partnership firm or a limited liability partnership (LLP).

- The age of the startup should not exceed 10 years from the date of its incorporation or registration.

- Its turnover for any of the financial years since its incorporation or registration should not exceed INR 100 crore.

- It is working towards innovation, development, deployment or commercialization of new products, processes, or services driven by technology or intellectual property.

- It has not been formed by splitting up, or reconstruction of a business already in existence.

Startups meeting the above criteria can apply for recognition as a 'startup' under the Startup India Scheme. Once recognized, the startup can avail of various benefits and incentives provided by the government, such as tax exemptions, access to funding, incubation facilities, and more.

In addition to the above criteria, the DPIIT has also listed down specific categories of startups, such as biotechnology, artificial intelligence, nanotechnology, and more. Startups falling under these categories can also avail of additional benefits and incentives under the Startup India Scheme.

It's important to note that while there is no specific legislation defining a startup company in India, the government's recognition and support of startups through the Startup India Scheme has helped to boost the startup ecosystem in the country.

WHAT COMPANIES ACT, 2013 TALK ABOUT STARTUP COMPANIES ?

The Companies Act, 2013, does not specifically talk about startup companies. However, the act provides provisions that can be beneficial for startups in India. Some of these provisions are as follows:

One Person Company (OPC): The Companies Act, 2013, introduced the concept of One Person Company (OPC), which allows a single person to incorporate a company with limited liability. This provision is particularly beneficial for startups that have only one promoter or founder.

Fast Track Exit: The act provides for a fast-track exit scheme for companies that are not in operation for a period of one year or more. This provision can be useful for startups that fail to take off and wish to close down their operations.

Private Placement: The Companies Act, 2013, allows private companies to issue securities to a maximum of 200 investors in a financial year. This provision can be useful for startups that wish to raise funds from a limited number of investors.

Sweat Equity: The act allows companies to issue sweat equity shares to their employees or directors. Sweat equity shares are equity shares issued at a discount or for consideration other than cash. This provision can be useful for startups that wish to incentivize their employees or directors with equity ownership.

Dormant Company: The act allows a company to declare itself as a dormant company if it has been inactive for a period of two years or more. This provision can be useful for startups that have not yet started their operations but wish to maintain their legal existence.

KINDS OF FUNDING AVAILABLE TO STARTUP COMPANIES

Seed Funding, Angel Investing, and Venture Capitalist are three common terms used in the startup world. These terms are important for entrepreneurs and startup founders to understand, as they are crucial in determining the success of their business. In this article, we will explain what seed funding, angel investing, and venture capitalist are, how they work, and their differences.

Seed Funding

Seed funding is the initial investment that a startup receives to get off the ground. Seed funding is usually provided by the founders, friends, and family members. It is also possible for a startup to receive seed funding from angel investors or venture capitalists. The amount of seed funding can range from a few thousand dollars to a few hundred thousand dollars.

Seed funding is used to create a prototype, conduct market research, hire a small team, and cover initial operational costs. In exchange for the seed funding, the investors receive equity in the company. Seed funding is the first step in the startup funding process, and it is essential for startups to secure it to move forward.

Angel Investing

Angel investing refers to individual investors who invest their own money in startups. Angel investors are usually wealthy individuals who are looking to invest in early-stage startups with high growth potential. Angel investors are interested in startups that have a unique and innovative idea, a talented team, and a large market.

Angel investors usually invest between $25,000 to $100,000 in a startup. In exchange for their investment, angel investors receive equity in the company. Angel investors usually invest in startups that are in the seed or early-stage, and they provide not only funding but also mentorship and guidance to the startup founders

Venture Capitalist

Venture capitalists are professional investors who invest in startups with the aim of getting a high return on their investment. Venture capitalists invest in startups that have a proven track record of success, a solid business plan, and a large market potential. Venture capitalists invest in startups at various stages, from seed funding to later-stage funding.

Venture capitalists usually invest larger amounts of money than angel investors. The investment can range from a few hundred thousand dollars to several million dollars. In exchange for their investment, venture capitalists receive equity in the company, as well as a seat on the board of directors. Venture capitalists also provide guidance and mentorship to the startup founders.

 

Differences between Seed Funding, Angel Investing, and Venture Capitalist

Seed funding, angel investing, and venture capitalist are different in several ways.

Seed funding is the initial investment that a startup receives, usually from the founders, friends, and family members. Angel investing is done by individual investors who invest their own money in startups.Venture capitalists are professional investors who invest in startups with the aim of getting a high return on their investment.

The amount of money invested is also different. Seed funding usually involves smaller amounts of money, ranging from a few thousand dollars to a few hundred thousand dollars. Angel investors usually invest between $25,000 to $100,000 in a startup. Venture capitalists invest larger amounts of money, ranging from a few hundred thousand dollars to several million dollars.

Another difference is the stage at which they invest. Seed funding is done at the very early stages of a startup, while angel investors and venture capitalists invest in startups that have already proven their potential.

WHAT ABOUT INDIAN SCENARIO OF STARTUP FUNDING

In India, Seed Funding, Angel Investing, and Venture Capitalist work in a similar way to how they work in other parts of the world, with some unique differences. Here's how they work:

Seed Funding in India

Seed funding in India is usually provided by the founders themselves, friends, family, or angel investors. However, in recent years, there has been a rise in the number of incubators and accelerators that offer seed funding to startups. These incubators and accelerators provide seed funding, mentorship, networking opportunities, and other resources that can help startups succeed.

Angel Investing in India

Angel investing in India is growing rapidly. There are many angel investors in India who are interested in investing in early-stage startups with high growth potential. Some angel investors in India are individuals, while others are part of angel networks. These networks are groups of angel investors who pool their money together to invest in startups.

In recent years, the Indian government has launched several initiatives to support angel investing in the country. These initiatives include tax benefits for angel investors, easier regulations, and the creation of a startup fund of funds.

Venture Capitalist in India

Venture capitalist firms in India typically invest in startups that have already proven their potential. They invest in startups at various stages of development, from seed funding to later-stage funding. Venture capitalist firms in India usually invest larger amounts of money than angel investors.

There are many venture capitalist firms in India, and some of the top ones include Sequoia Capital, Accel Partners, and Kalaari Capital. These firms provide not only funding but also guidance, mentorship, and networking opportunities to help startups grow.

Conclusion

In conclusion, Seed Funding, Angel Investing, and Venture Capitalist work in a similar way in India as they do in other parts of the world, but with some unique differences. There is a growing startup ecosystem in India, and the government is taking steps to support it. For entrepreneurs and startup founders in India, it's important to understand the different funding options available and choose the one that best suits their needs.

Article Compiled by:-

Mayank Garg

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretary etc.

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