Ready access to early-stage finance, especially seed capital, is a critical factor in a favourable entrepreneurial ecosystem. It is a key factor in deciding whether to become an entrepreneur as well as in deciding the nature of the enterprise to promote. This is especially important for younger and first-generation entrepreneurs. There are two basic types of early stage finance: debt (largely from banks and financial institutions) and equity (from sources such as angels, venture capital funds and private equity funds). While traditional bank financing largely relies on the criteria of adequate collateral and established track record to judge credit-worthiness before disbursement of funds, the equity based sources are less risk averse and restrictive in financing start-ups.
However, as of now, traditional debt based models cover a wider range of entrepreneurial sectors, compared to venture capitalists (VCs) and private equity (PE) funds. Since VCs and PE funds, by and large, are more visible in the knowledge-intensive sectors, it is expected that a combination of novel debt and equity models will spur early-stage finance for first-generation entrepreneurs in the foreseeable future.
The NKC Study found that a majority of the entrepreneurs interviewed (63%) had actually been self-financed at the start-up stage. In the NKC sample, bank loans accounted for start-up finance for 22% of the entrepreneurs while 9% received loans from state finance corporations. VCs and angels account for the early-stage capital needs of 6% of the entrepreneurs interviewed. Of the entrepreneurs who approached banks, 61% did actually receive bank finance.
On a closer examination of the sources of self-financing, the study found that nearly half of the self-financed entrepreneurs borrowed start-up money from family or friends. Nearly a third of these entrepreneurs invested their own savings into the start-up, while money from an existing family business helped only about one-fifth of the self financed entrepreneurs. This could be a reflection of greater confidence among new entrepreneurs in their own abilities as well as the crucial significance of the socio-cultural support systems of family and friends.
Deeper studies says that following is the statistics of the self financed business.
• 47% – Borrowed from 3Fs(Family friends and fools)
• 22% – Family Business
• 31% – Own Savings.
Bank Finance: It was earlier noted that of the entrepreneurs who actually approached banks, 61% did receive some funds from banks. Since most of the entrepreneurs were self-financed (for various reasons), NKC asked the entrepreneurs — in order to understand what they think of bank financing — to rate their perceptions on access to bank loans at the start-up stage and then at the growth stage (on a scale of ‘difficult’, ‘average’ and ‘easy’). From the responses, it is observed that access to early stage finance from banks is perceived to be very difficult at the start-up stage but becomes comparatively easy at the growth stage. Of the entrepreneurs interviewed, 42% said
that it was difficult to obtain finance at the start-up stage, 20% said that it was easy and 38% scored the ease or difficulty of access as ‘average’. However, at the growth stage, it was almost reverse. While the average stayed the same at 38%, 49% found it easy and only 13% found it difficult to access finance at the growth stage. Thus, entrepreneurs believe that the stage of a business influences perceptions of risk on the part of the banks and that a successful track record makes it easier to access bank credit. They said that it is most difficult to access credit from banks for their ventures precisely when they need it the most.
Perception on VC capital..
The interviewed entrepreneurs found it in this way.
• 34% – satisfactory
• 27% – Indifferent
• 16% – unsatisfactory
• 16% – very unsatisfactory
• 7% – very satisfactory