Today is one of the best times to start a startup. Access to both talent and market has much lower barriers to entry with the influx of millions of digital first consumers and the wider cultural acceptance of starting up.
Growth capital has also never been easier. There is ofcourse the traditional VC route of funding which makes a ton of noise but is honestly not for everyone and every business. I'll cover Venture capital along with some alternatives here that help you identify what makes sense for you.
1. Profits:
The holy grail. If you can consistently grow your business through your profits alone i.e. sufficient growth capital after covering all other expenses you're in the best possible position. Stop reading and stick to what you're doing.
Annualized rate of interest: 0%
2. Venture capital:
This option allows you to get capital in return from a share of your company; depending on how early you are, it could be close to 20-25% of your company. It does provide a lot of capital but it also means that there would be a lot of external influence on dictating how your company operates. India has a dearth of domestic venture capital the later you get and if you rely too heavily on this model it may be a death sentence given that often company – VC firm synergy just isn't there.
Time taken: 2-3 months in India
Capital allocated: Millions
Annualized rate of interest: Equity stake in your company
3. Revenue-based financing:
This method is quite new. It involves giving up a % of your future revenues in exchange for capital now. Most companies in India offering this service charge a flat fee along with an interest component that is mutually agreed upon along with a payback time period. The method of evaluation is along the lines of a VC looking at growth, margins, cash flows etc but takes a lot less time and effort. Ideally you should go for this model if you are close to profitability and don't have any form of collateral and are somewhat confident of growth. Much more importance is given to your growth potential rather than just existing financials.
Time taken: 1-4 weeks
Capital allocated: Rs 5 lakh to Rs 2 crore
Annualized rate of interest: Depends on the payback period but can be as high as 24%.
4. Loans from banks:
Growth capital from banks is something that most people don't expect to be easy to get but personally having worked with banks it's not as complicated as most people would make you believe. If you have a turnover north of 10 crore with profits upwards of 2 crore you can expect to start getting offers from banks. The downside is that there is a lot of documentation involved and can be frustrating to deal with if it's your first time. The bank does dig deeper into your business model but is still high level and will choose to value your existing financials more than your growth potential.
Time taken: 1 month or more
Capital Allocated: Varies from business category; ballpark of 20% of annualized profit
Annualized rate of interest: Up to 13%
5. Corporate credit card:
If you are a business that doesn't need a long credit cycle to realize growth then one of the new age credit cards may be the right fit for you. It's a much easier process now than it was a few years back offering a quick sign up process along with sky high credit limits. The fact that they help you manage a chunk of your expenses and start improving your company’s credit score from day 1 is a significant plus. The downside is that if you have longer payback periods i.e. 45+ days to realize revenue the other options listed above may be cheaper due to the late fees charged.
Time taken: 1 day
Capital allocated: Depends on underwriting but can go upto 2 cr
Annualized rate of interest: 0% if you payback on time
As time passes by more and more options will continue to be added but if you are exploring solutions dedicate some time to try out a combination of the options listed above. You will eventually hone in on one or two that makes sense for you short term and long term.
Amit Jangir - Cofounder, Karbon. TFE
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