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Fundraising

Most Challenging Fundraising Climate more than a Decade for Startups

Following is a detailed guide on how start-ups have been dealing with the fundraising climate for over a decade

Introduction:

With the advancement of technology, there are multiple startups emerging out there and coming up with new innovative business ideas. Every startups lifeline is money. And timely funding a business is essential to survive with tough competition. However, if someone isn’t aware of the tactics of successful fundraising, each and every step can become challenging.

Earlier, getting funding for a business idea was an extremely daunting tasks. Investors saw it as a huge risk and hence, funding was barelu possible for a startup back in the day. However, things have rapidly transformed now and are looking great for the startup ecosystem. The number of startups that became a unicorn in the pandemic is tremendous. Numbers and books of the company show nothing but high return on investment for investors. 

It has lead to an upsurge in fundraising offers for startups and it almost seems like every other invstor is looking for a business idea to put their money into. However, it is a fact that there are too many fishes and investors in the sea. Startups have the leverage right now as they are entitled to look into the investor before they go ahead with the funding. It’s safe to say that there is alot of healthy competiton in the market.  

After China’s rise in the micro, small and medium enterprises, India is the largest contributor by offering at least 30% of GDP, and has remained constant over the past few years. They generate more than 80% of the jobs in our country, with an investment size of 20%. The good thing is that most of the MSMEs (Micro, Small and Medium Enterprises) are present in rural areas, and 51% are creating real economic value.

But unfortunately, most of the MSMEs remain on the micro level. They have always found it difficult to grow. One of the most common reasons being lack of funding and investment opportunities. No one wants to invest in an MSME and that leads to stagnation of growth. 

Typically, loan funding has been the primary source for small entrepreneurs. And in this regard, taking help of legal resources for financing may prove beneficial as well.  This is because, today businesses face many challenges, which include finding reliable fundraising sources.

Main Challenges Faced by Startups

Here are some of the challenges faced by startups today in India;

  • Lack of Commitment to Creating a Balance Sheet

Typically the owners transact more on a cash basis to avoid any taxes. In the process, they never come up with a balance sheet that shows the growth in the business over the time period.

  • Lack of Collateral to Support the Loan

Entrepreneurs today fail to build a personal balance sheet supported by some income tax documents, especially while creating fixed assets. This is where they fail to get the needed loan from a bank or a financial institution. 

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  • Absence of a Detailed Business Plan

Most often the entrepreneur’s run the business based on personal experience and fail to document the operational details. While approaching banks or other institutions for investments, they find it pretty challenging to get funding. This is because, they mainly fall short of forming a detailed business plan outlining the model scalability, competition, market size, marketing strategy, product development, cost competitiveness, management bandwidth, and full-fledged strategy road map.

  • Inability to Assess the Accurate Requirements of the Funds

Generally, MSMEs need to prepare the financial estimate for the entire year, but they fail to include all the working capital requirements to meet the business requirements. Due to this, businesses generally suffers in the process as they want working capital regularly and often fail to achieve that. 

  • Unable to Substantiate the Need for Funds

Another common challenge that several entrepreneurs face today is the ability to get the funds at the right time. The lack of preparation makes it challenging to demonstrate facts and figures for the borrowers to complete the process of lending money. 

Mitigating the Challenges

It’s best to understand that the Indian economy is transforming to a great extent in the formal structure, which different systems and processes would drive. The key here is integrity. If this step is taken correctly, within just a few years, some of the banks would gain a lot of confidence in MSMEs, which will make collateral creation a little easier, and it would not become a massive issue during the time of borrowing.

One of the crucial exercises is creating a business plan. This is also required while fundraising for startup in the long run.  You can hand write it on four pieces of paper, covering all the major concepts. How should the plan be viewed in order for it to become as effective as the operational plan? It must be assigned to compile the bankable document with all the supporting data after it has been completed internally or externally. A number of intermediaries are available for this purpose, but make sure they keep in mind all the nuances and avoid going into too much detail for the sake of the cost.

Besides checking the raw material price seasonally, check the fluctuations and keep a tab on the selling price movements, demand, and supply elements during peak and non-peak seasons. You can map them in a sheet to estimate appropriate fund requirements. 

You can also conduct a detailed study of the needs for projects on working capital loans and compare the same with future projects. Once the document is ready, you have to be prepared to face the fundraising questions from the lenders. It is the most critical element for building trust with such prospective lenders.

Do you aware of the Must Read Topic: Benefits of Starting an Online Fundraising Campaign

Documents Needed By Startups For Fundraising

Here are some of the most important documents needed by the Startup Fundraising owners to raise funds; 

  • A Pitch Deck

A pitch deck is a presentation prepared by the business owners that is presented to the investors in order to persuade them to raise funds. A pitch deck is the entire startup idea presented in written form. There are multiple components of the pitch deck which include the market strategy, summary slides, financial projections, etc. 

  • Nondisclosure Agreement for a Startup

It is a protective measure for startups to have nondisclosure agreements while they get going with the fundraising campaign. NDA is a primary document that keeps the trade secret of aspiring business ideas safe. It plays a crucial role in the fundraising process for startups.

  • Due Diligence Report

It is the analysis and research that takes place before any venture, investment, acquisition, etc. The findings of the due diligence are summarised perfectly in a report known as the due diligence report. The analysis of due diligence takes place to study the diverse elements to provide clarity about the entity. The reports help determine the proposed venture’s financial viability at a comprehensive level.

Positioning yourself as a perfect contender for funding requires professionalism and a pre-planned approach. The documents are essential prerequisites to start the funding journey. You must be a little prepared for the documentation to ensure the fundraising process goes smoothly.

Conclusion

If you have a start-up looking for fundraising and struggling with the same, then you are at the right place. Vakilsearch could be of immense help in assisting you and other similar startups to raise funds for your business and grow exponentially. The professionals here are just a call away and you can be reach out to them anytime. All startups can get the right help from the legal team here, which is highly professional. Call us today to know more. 

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