What are the modes available for investment in a Startup Company?

What are the modes available for investment in a Startup Company?. In the year 2022-23, more than 22,000 new startups have been registered in India. In the last five years, the startup and investing ecosystem in India has recorded massive growth - with over 115 unicorns (as of February, 2023), which is roughly about 10% of total unicorns that exist at a worldwide level. With every startup needing funds and investment, here is a crisp guide by Compliance Calendar on the various modes that are available for investment in a startup. There are several modes of investment available for a startup company, each with its own set of legal complexities, benefits and risk considerations. 
Startup India Recognition from DPIIT gives you the official tag to be called as a Startup. 
Equity investment - Funding versus dilution of stake

Equity investments involve buying a stake in the company in exchange for ownership of shares.

The investor becomes a shareholder and acquires a say in the company's decision-making process.

The Companies Act, 2013 governs the process and voting rights for shareholders.

While there are a host of advantages - such as access to a large pool of funds without immediate payback obligations and mentorship from investors, the dilution of ownership stake for an entrepreneur is a crucial decision.

Convertible notes: A debt that can change into equity

Convertible notes are a form of short-term debt that can be converted into equity at a later stage.

It allows investors to invest in a startup without having to determine the company's valuation upfront. It benefits investors by helping them secure a fixed and often high rate of interest and an equity stake later.

Typically, investors convert their debt into equity when the company raises a new funding round.

However, this route is not risk-free, as investors may feel a lack of control. Often, early stage companies may also find it hard to repay debt obligations. A lack of proper deal structuring can lead to financial hassles between investors and other stakeholders at the conversion stage.

Angel Investment and Venture Capital

An angel investor is a high net worth individual investing their own money in startups in exchange for equity.

At a larger level, a venture capital firm involves institutional investors investing in startups that have a high growth potential.

Angel investors and venture capitalists take a bet on an early stage company that looks promising.

Since this is an investment at a rather early stage of the company, most angel investors contribute not just funds, but a valuable basket of resources such as mentorship, networking and management expertise to a startup.

For a venture capital investor, high gains are often coupled with high risks. Some of these include risks of the startup not being able to generate enough revenue to go public and offer an exit to the investor or having too many investors which may lead to decision dilemmas.

Online Crowdfunding:

With the mushrooming of several online startup funding routes, including easy access to loans and pooled investments, online crowdfunding is a novel and unconventional funding source.

This involves raising small amounts of money from a large number of people through an online platform.

There may or may not be upfront fees, but an additional advantage not available via any other funding route, is a wider access by a startup to the general public, which can provide valuable insights on traction, trust and direct feedback from the public.

Incubators and Accelerator programs to watch out for:
 Incubators can be helpful in the entire process of setting up. Most often, there are programs that provide startups with funding, mentorship, and other resources to help them grow. Some of these may not involve funding but are nevertheless valuable in securing investments from potential sources are:

Atal Incubation Centres - Under the Atal Innovation Mission (AIM), the government aims to promote innovation, through incubation centres. These provide tech facilities, growth funds, capital, networking, co-working spaces, mentoring and support.

Incubators Scheme, Ministry of MSME - This scheme provides funds up to INR1 crore to a host institute (technology centres, colleges, labs etc) for promoting latest technologies in MSMEs at proof of concept level.

KAPILA campaign for IPR - The Kalam Program for Intellectual Property Literacy and Awareness Campaign provides mentorship and funding to startups for filing of their intellectual property via higher education institutions.

Tapping into government sources available for startups:

Fund of Funds - The Department for Promotion of Industry and Internal Trade (DPIIT) has recently revealed that a Fund of Funds for Startups with over INR1700 crores has been made available for investing in startups.

Startup India Seed Fund Scheme - This scheme has witnessed an outlay of over INR 250 crores for incubators.

Funding by SIDBI- The Small Industries Development Bank of India, with an aim to invest over INR 4000 crores in startups acts as a funding route for both working and fixed capital needs.

Additionally, several credit guarantee schemes - such as the Emergency Credit Line Guarantee (legal guarantee given by the government to banks for funding small, medium and large startups during the pandemic), Mudra loans, sector specific grants such as the BIRAC’s Seed Fund for biotechnology companies, grants by MNRE for renewable energy startups are great options to explore, in place of conventional funding routes.
Conclusion
 It's important to note that each mode of investment has its advantages and disadvantages, and it's crucial to understand them before making any investment decisions. Compliance Calendar can help investors find the best startup match based on the sector, stage, and location metrics of the startup. Our in-house financial and legal experts can also help you make the right choice on investments for your startup funding.

In the year 2022-23, more than 22,000 new startups have been registered in India. In the last five years, the startup and investing ecosystem in India has recorded massive growth - with over 115 unicorns (as of February, 2023), which is roughly about 10% of total unicorns that exist at a worldwide level. With every startup needing funds and investment, here is a crisp guide by Compliance Calendar on the various modes that are available for investment in a startup. There are several modes of investment available for a startup company, each with its own set of legal complexities, benefits and risk considerations.

Startup India Recognition from DPIIT gives you the official tag to be called as a Startup.

Equity investment - Funding versus dilution of stake

Equity investments involve buying a stake in the company in exchange for ownership of shares.
The investor becomes a shareholder and acquires a say in the company's decision-making process.
The Companies Act, 2013 governs the process and voting rights for shareholders.
While there are a host of advantages - such as access to a large pool of funds without immediate payback obligations and mentorship from investors, the dilution of ownership stake for an entrepreneur is a crucial decision.

Convertible notes: A debt that can change into equity

Convertible notes are a form of short-term debt that can be converted into equity at a later stage.
It allows investors to invest in a startup without having to determine the company's valuation upfront. It benefits investors by helping them secure a fixed and often high rate of interest and an equity stake later.
Typically, investors convert their debt into equity when the company raises a new funding round.
However, this route is not risk-free, as investors may feel a lack of control. Often, early stage companies may also find it hard to repay debt obligations. A lack of proper deal structuring can lead to financial hassles between investors and other stakeholders at the conversion stage.

Angel Investment and Venture Capital

An angel investor is a high net worth individual investing their own money in startups in exchange for equity.
At a larger level, a venture capital firm involves institutional investors investing in startups that have a high growth potential.
Angel investors and venture capitalists take a bet on an early stage company that looks promising.
Since this is an investment at a rather early stage of the company, most angel investors contribute not just funds, but a valuable basket of resources such as mentorship, networking and management expertise to a startup.
For a venture capital investor, high gains are often coupled with high risks. Some of these include risks of the startup not being able to generate enough revenue to go public and offer an exit to the investor or having too many investors which may lead to decision dilemmas.

Online Crowdfunding:

With the mushrooming of several online startup funding routes, including easy access to loans and pooled investments, online crowdfunding is a novel and unconventional funding source.
This involves raising small amounts of money from a large number of people through an online platform.
There may or may not be upfront fees, but an additional advantage not available via any other funding route, is a wider access by a startup to the general public, which can provide valuable insights on traction, trust and direct feedback from the public.

Incubators and Accelerator programs to watch out for:

Incubators can be helpful in the entire process of setting up. Most often, there are programs that provide startups with funding, mentorship, and other resources to help them grow. Some of these may not involve funding but are nevertheless valuable in securing investments from potential sources are:

Atal Incubation Centres - Under the Atal Innovation Mission (AIM), the government aims to promote innovation, through incubation centres. These provide tech facilities, growth funds, capital, networking, co-working spaces, mentoring and support.
Incubators Scheme, Ministry of MSME - This scheme provides funds up to INR1 crore to a host institute (technology centres, colleges, labs etc) for promoting latest technologies in MSMEs at proof of concept level.
KAPILA campaign for IPR - The Kalam Program for Intellectual Property Literacy and Awareness Campaign provides mentorship and funding to startups for filing of their intellectual property via higher education institutions.

Tapping into government sources available for startups:

Fund of Funds - The Department for Promotion of Industry and Internal Trade (DPIIT) has recently revealed that a Fund of Funds for Startups with over INR1700 crores has been made available for investing in startups.
Startup India Seed Fund Scheme - This scheme has witnessed an outlay of over INR 250 crores for incubators.
Funding by SIDBI- The Small Industries Development Bank of India, with an aim to invest over INR 4000 crores in startups acts as a funding route for both working and fixed capital needs.

Conclusion

It's important to note that each mode of investment has its advantages and disadvantages, and it's crucial to understand them before making any investment decisions. Compliance Calendar can help investors find the best startup match based on the sector, stage, and location metrics of the startup. Our in-house financial and legal experts can also help you make the right choice on investments for your startup funding.