The entrepreneurial journey and the ecosystem that supports it

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The entrepreneurial life cycle begins with an idea which needs start-up capital. After developing his/ her own conviction in the idea, the entrepreneur looks at various sources of funds to establish it as a business.Early sources of capital typically include:

A. Friends and family:
This is the first source of funds for an entrepreneur with limited funds of his/ her own. The investments here are primarily at the idea stage with little or no operational business. This is the most critical element of funding to help convert an idea into a business venture. In India, with a culture strongly rooted in communities, extended family has been the most important source of capital. A few shortcomings of this source of financing are tough scrutiny, need for validation of the idea and lack of informed business guidance. Furthermore, for entrepreneurs
who are not from financially strong family and community background, this source of capital is not available.

B. Incubators:Incubators are institutions which help entrepreneurs to develop their ideas to a point where investors can see the viability of the business model. Incubators usually provide hard infrastructure (for example, plug and play office space) and services such as mentoring, advisory, access to technology experts and
potentially seed funding. Incubators could be run by government, private sector and educational institutions. Incubators usually charge a small fee from the entrepreneur and could take a stake in the venture.

C. Angel investors: Angels are generally high net worth individuals (HNWIs), successful serial entrepreneurs or senior professionals. Such angels operate either individually or through formal or informal networks. They not only provide capital but they also act as great scouts of emerging ideas, helping them scale at a stage
where institutional seed and venture funds would typically not invest. They are viewed as a very critical element of the entrepreneurial eco-system and perform a number of different roles:

i. Provide high risk capital: Angel investors tend to play an even bigger role than institutional investors in funding new businesses. They typically have a higher risk appetite as they provide smaller ticket investments at earlier stages in the life of a venture well before formal venture capital funds show interest in the
venture. It is important to note that angel investors are often among the first “external” capital providers i.e. providers not related to the entrepreneurs and hence their investment provides the business model much needed credibility.

ii. Mentor entrepreneurs: Angel investors tend to invest in industries that they are well-versed with. They are also either senior professionals or entrepreneurs themselves and are thus able to guide emerging businesses. As individual investors, they are also able to establish personal rapport with the entrepreneur
and become an active friend, philosopher and guide.

iii. Provide access to networks: Being successful in their own right, angels have access to relationship networks that can help an entrepreneur on multiple counts:

a) Professional services: legal, accounting etc.
b) Supplier and buyers
c) Institutional investors for subsequent funding

D. Venture capital and seed funds:These are institutional investors which invest capital in firms with a proven business model and need capital to scale the business up. Such investors typically follow incubation or angel investments. A VC Fund is a pooled investment vehicle where institutional and high net-worth individual
investors pool their money which is then managed by an asset management company (AMC). The AMC typically comprises of a small group of professionals with entrepreneurial / operational experience and / or financial / investment
experience. The Fund typically pays the AMC a fee of 2.0 to 3.0 % of the total corpus on an annual basis (depending on the size of the fund) and 20% of the upside, subject to a hurdle rate. There is a private placement memorandum which defines the contract between the investors and the fund managers, outlining the areas in which investments will be made, size and number of investments, etc. Institutional investors in a Fund normally are banks, pension funds, insurance companies, university endowments, corporates, family offices and government.

E. Corporate investments:Large businesses can play an active part in investing in emerging ventures, especially in ones that are strategically important for them. Such ventures could be their vendors or those that work in related domains or sectors. A good example is the automotive industry where large OEM’s often invest in
developing vendors that supply them components. Globally, companies such as CISCO, Intel, etc. have also created corporate venture funds for this purpose.

F. Debt:Entrepreneurs, like any established business, need debt to finance working capital. Banks and financial institutions along with specialized vehicles which focus on new ventures are the best sources of such debt capital.

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How angel network works???-Indian Angel Network
• IAN has over 200 Angel Investors who comprise a significant representation of successful entrepreneurs / CEOs in India. They come together to invest entrepreneurial opportunities and to not only make financial investments but also bring to bear their strategic thought leadership, provide operational direction and leverage their large global networks to help the entrepreneur build a high growth company.

• Entrepreneurs from shortlisted ventures present to IAN members usually in a face to face meeting, where the deal is shortlisted for further detailed diligence. It is important to note, that even if the entrepreneur is declined at this initial stage, he receives significant feedback that helps him/ her refine the business model.A lead / lead group then engages with the entrepreneur and an extensive strategy and diligence, along with entrepreneur checks are
conducted, terminating in an offer of a term sheet (the amount of the investment offered, equity that the investors propose to take and key investment terms).

• The agreed terms of investment with the investment proposition is then shared with the entire IAN investor group who then individually decide and commit if they want to invest. This in effect means that every investment will have a different set of investors and there is no pooled money (like a VC Fund) concept.

• Once the investment is raised, financial and legal diligence completed, a Share Purchase Agreement is signed between the company and all the investors. One or two of the investors, usually members of the lead group take a board seat on the Company’s board representing the Angel investors. All inputs to strategy, suggestions etc. from the Investor group are channelised through these board directors insulating the entrepreneur from frequent investor
interaction.

• The entrepreneur of course has the ability to request for help or engage with any investor. This model leverages the best of the high powered angel group for the entrepreneur, help raise the next round investment, open up customers / partnerships, etc.

 

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Mohit Bansal(23) is B.Tech in Electronics and Communication Engineering from Indian School of Mines, Dhanbad, India. He has interest in business and entrepreneurship and has published couple of research articles. He is also associated with various NGOs. He is with Techaloo when it was just in concept stage. The Techaloo site was not existing even then. Currently Mohit is working with Mu Sigma as a Business Analyst Profile.

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