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Unconvention|L - Jaipur Digbijoy Shukla Director, Ennovent Impact Circle

Funding Landscape for Early Stage Social Enterprises

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An overview of financing options for early stage social enterprises.

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  • 1.Unconvention|L - JaipurDigbijoy Shukla Director, Ennovent Impact Circle

2. Before Going for FinancingAre you really committed to your idea?Do you have the courage to quit your cushy salaried job? INIAAre you willing to put in whatever little capital you have, or can raise fromfriends and relatives, tighten your belt and somehow execute your idea?DO YOU HAVE SKIN IN THE GAME????? 3. Typical Enterprise Funding LandscapeIdea/ INIAPrototype/Pilot Stage Market Entry/RevenueOpportunityCompetitionsGrants, Govt. Schemes, Incubator, AngelInvestors & Early Stage Impact InvestorsScale Up Proof of Business Model Impact Funds, Mainstream Funds, Venture Debt, Debt 4. Sources of Capital Early Stage Enterprises Self Family, Friends & Fools INIA Competitions Incubators Grants/Govt. Schemes Seed/Angel Venture Capital Debt Bank Loan 5. Competitions (Examples)Stage 1 funding, generally expected to requirean average of $50,000 (approx. Rs. 25,00,000),will not exceed $100,000 (approx. Rs.50,00,000).Stage 2 funding, generally expected to requirean average of $500,000 (approx. Rs.INIA2,50,00,000) will not exceed $750,000 (approx.Rs. 3,75,00,000). MA will make at least sixawards per year, subject to the evaluation andrecommendations of the EvaluationCommittees. More Details -http://www.millenniumalliance.inThe Global Social Venture Competition (GSVC)provides aspiring entrepreneurs withmentoring, exposure, and $50,000 in prizes totransform their ideas into businesses that willhave positive real world impact.More Details - http://www.gsvc.org/ 5 6. Incubators/Accelerators (Examples) Villgro provides entrepreneurs with Seed Funding (Villgro offers up to USD 60,000 in seed funding to early stage social enterprises.), Fellowship, Mentoring, Training, Networks. More Details: http://www.villgro.org/ INIA Centre for Innovation Incubation and Entrepreneurship provides aspiring entrepreneurs with mentoring, exposure and seed funds. CIIE directly manages incubation funds in excess of Rs 10 crores investing in seed-stage start-ups across technology sectors. More Details - http://www.ciieindia.org/6 7. Snap Shot Govt. Scheme (Source - http://www.venturecenter.co.in/funding) Organization SchemeFunding AmountTarget Purpose Dept. of TePP Project Fund INR 15 Lakh Individuals/Entrepreneur Grant to convert Scientific & s/Startups invention into a working Industrialprototype Research Department ofSmall Business Innovation Upto Rs 1 Crore, upto RsBiotech Companies /Early Stage Funding for Bio Technology Business Research 50 Lakh as grant and rest Entrepreneurs INIA high risk, innovativeInitiative (SBIRI) Phase 2as soft loan ideas/products for commercialization Department ofWater Technology Initiative Up to Rs 1 croreScientists / Technologists To develop low cost Science and(WTI) Programme sanctioned in recent/ R&D Labs domestic purification Technology (DST) projects, grant fortechnologies, otions fortechnologists in disposal of scientificacademic institutions /waste, initiatinggrant to cover 50% costapplication of nano-of consumables for technologyIndustry-Institutionpartnership Department ofDepends on Project (inEntrepreneurs / Industry Loan @ 5-6% / Equity Science andLakhs)/ Institutions Partnership for working Technology (DST)in indigenous technologies National Rs 10 Lakh to Rs 30 LakhEntrepreneurs /Angel Funding/take Research Incubatees at Business Equity in the company DevelopmentIncubators focus on ruraland exit when a financial Corporationinnovationsinvestor is on board 8. GrantsWhat is it?In its simplest form a grant can be characterized as a gift provided for thepurpose of public benefit. It is not repayable to the donor nor does it give rise toany ongoing financial obligation of the grantee to the donor. INIASources of grant capital vary from:Government AgenciesCorporate FoundationsHigh net worth individualsNon profit organizationsPrivate foundationsSource: www.socialedge.org/blogs8 9. GrantsTechnicalities?A grant agreement a legally binding contract between the donor and the granteewill detail such things as:INIAPurpose for which the grantee is to use the grant monies;How the grant monies will be disbursed;Agreed milestones the grantee must meet to qualify if the grant is structured withprogressive disbursements over time; andReporting requirements (including social performance metrics) of the grantee tothe donor;Donors have become increasingly focused over the years in imposing increasedaccountability on grantees in achieving and measuring the social impact achievedwith grant money.Source: www.socialedge.org/blogs9 10. GrantsQuestions You Should Ask!Will the grant money allow pursuit of established strategy or does it cause divergence from strategy?Is the grant for general operations or for a specific project?INIAIf for general operations, what period of time does the grant cover and what additional monies (if any) are needed to complement the grant?If for a specific project, is the grant sufficient to cover the total cost of the project (capital cost, operating costs plus working capital)? If not, how will the balance of the project be funded?How does the grant interact with existing or future funding sources?Is the grant structured to maximize social impact?Are the milestones the donor is requesting achievable?Are the reporting requirements (including social performance metrics) manageable?What resources are needed to meet the reporting requirements of the donor?What is the cost of meeting such reporting requirements?Source: www.socialedge.org/blogs10 11. DebtWhat is it?Debt can be simply defined as money that you borrow to run your business. Generallyspeaking, debt can be divided into two categories: Debt financing requires theentrepreneur to repay the borrowed money to the lending institute. This may include INIAeverything from a loan to bond, credit. An important consideration with this kind offunding option is that, it requires the entrepreneur to have exceptional credit history.Long Term Debt Financing usually applies to assets you are purchasing for your socialenterprise, such as equipment, buildings, land, or machinery. With long term debtfinancing, the scheduled repayment of the loan and the estimated useful life of theassets extends over more than one year.Short Term Debt Financing usually applies to money needed for the day-to-dayoperations of the social enterprise, such as purchasing inventory, supplies, or payingthe wages of employees. Short term financing is often referred to as an operating loanor short term loan because scheduled repayment takes place in less than one year.Source: www.socialedge.org/blogs11 12. DebtWhat to Watch out for?Debt entails the payment of interest. Debt financiers require a borrower to have aclearly defined and proven revenue model that can be relied on for servicing ofthe loan and in most cases backed by collateral security. INIAAside from loan repayment, what are some of typical terms and conditions thatone can expect to see in a loan agreement: Amount Purpose Final date of maturity Interest rate Other fees Principal and interest payment schedule ( ie. amounts and payment dates) Financial, operating and reporting covenants Events of default Form of securityRemember that the cost of finance for any loan is not just the interest rate butalso must take account of any upfront or additional ongoing fees that may becharged as part of the loan. Source: www.socialedge.org/blogs 12 13. DebtPros:Good source of financing and cheap compared to equity mostly for companieswith steady growth, consistent sales & solid collateral.Debt financing can be obtained from commercial banks, NBFCs and other financialinstitutions like NSDC etc. INIAHere the entrepreneur gets to maintain his ownership & maximum control overbusiness.Cons:Debt financing requires monthly payments on a regular basis irrespective of howthe company is doing.This sort of financing is most often limited to businesses with a solid & successfultrack record. In addition to providing collateral in a lot of cases as security.Typically go to enterprises with at least three years of operations with provencredit history and profitability and growth. These are available at interest rates of16-20 %, while loans against property cost 12-18 %.This requires the filing of formal application either online or at the lendinginstitute and a lot of paper work at times.Source: www.socialedge.org/blogs13 14. DebtUseful Tips in Managing DebtDefer the start date of repayment by adding a "grace period." Startup loans oftenhave a six- to 12-month grace period before repayment starts, providing entrepreneurswith some time to ramp up the business. INIAUse interest-only payments. If your lender wants to be repaid immediately, offer tomake interest-only payments for a period of time to keep your monthly budget incheck.Institute graduated payments. You can create a unique repayment schedule with lowpayments at the start of the loan and higher payments at the end when your businessis proven. Source: www.socialedge.org/blogs 14 15. Equity Angels/FundsWhat is it?Equity financing seeks ownership in company in exchange for money invested. ImpactFunds and Impact Investors look at a balance of social/environmental impact and returnson their investments.INIAAn Impact Fund fund has limited partners (LPs), usually corporates, foundations,endowment funds or high net-worth individuals who give their money to the fund toinvest on their behalf.The fund has team members (partners) who are responsible for investing from the fund.They usually pick sectors to invest in (energy, healthcare, microfinance etc) dependingon the experience of the team members. The experience matters since the teammember helps guide the company they invest in with their experience and connections.Angel Investors are high net worth individuals, who invest in a start -up in return for aminority share in the business. They are usually serial entrepreneurs or heads of majormultinational firms .Source: www.socialedge.org/blogs15 16. EquityWhat to watch out for?Before trying to raise venture capital, decide what your business will look like in 5 -7 years. Impact Funds invest in businesses that are likely to scale in operationsand impact, and theyd like to get their returns.Venture Money is RIGHT for your business if: You are trying to build a large business over 5-7 years andINIA Your business could go public or be acquired for a large amount You are comfortable with involvement from partners of the VC fund on strategic operations of your businessHaving a venture investment in your company means you are signing on to be ahigh growth company and will do the things necessary to grow quickly and buildthe talent base, processes, and infrastructure that is necessary to support a highgrowth business. This is usually good when all goes well, but during rough times,its difficult to manage.The right venture investor can be VERY helpful to building your business. Theirexperience, advice, and connections have been invaluable. But its a little likemarriage so choose your partner carefully; its pretty hard to get your venturecapitalists out of your company if you decide later that you dont like them.- So do your due diligence on them!! Source: www.socialedge.org/blogs 16 17. EquityPros:This is looked upon as the best source of financing mainly by companies with high profitabilityor those with poor credit ratings.Angel Investors & Funds bring a lot of experience, connections and domain expertise which canadd value to the business such as potential customers, key hires etcAlso help in further rounds of financing and capitalization of the company. INIACons:The involvement of more number of investors can mean more loss of ownership and control.Venture Capitalists or angel investors may opt to have a say in every important businessdecisions.If there is no alignment things can go haywire!!!17 18. Convertible Debt Early Stage Financing What is it? Convertible debt is simply a loan (a debt obligation) that can be turned into equity (stock ownership), generally upon the occurrence of future financing.INIA Pros: Way to secure investment funds without setting a valuation on a company --an uncertain and disruptive process for the early -stage or pre-revenue company--that can protect early investors from dilution in the next round of financing. Avoid a possibility of a down round for the first set of investors Cons: Convertible debt often includes terms to provide a discount or bonus upon conversion into equity.18 19. Comparing Grants/Debt/EquityGrants DebtEquityAmount Varies Typically no more than 3-5 Varies times equity although highly dependent on the type of social enterprisePurpose Grant monies are often restricted to a Operating, working and Operating, working andspecific project rather than being able to capital expenditureINIAcapital expenditure.be used broadly by a social enterprise foroperating and capital expenditureRepayment and No repayment required Principal must be repaid Exit strategy that allowsServicingaccording to an agreed investors to realize return of schedule along with agreed investment interestCovenants Reporting Reporting and Financial ReportingEvents of Default Typically limited to compliance with the Non-payment of principal or Downside protectiongrant purpose and laws interest, non-compliance with covenants, cross default, etcSecurity NIL Fixed or floating asset Typically NIL charges may be requested by a lenderBoard Some grant makers will require a board NIL Board seat or ability toRepresentationseat especially if they are one of thenominate a board member toprimary funders of a social enterpriseprovide influence over keystrategic and managementdecisionsOwnership NIL NIL Yes along with voting rights in 19proportion to ownership 20. Funding Institutions vs Business Life Cycle Growth Challenges CAPEX IPO Investor Pressure Change ManagementMA Market Validation Late StageT Customer AcquisitionWorkingU No or low RevenuescapitalLow or ive Cash Flow Bank loansR Operational Private equityI Challenges Venture CapitalT IncubatorsY AngelsFaith Money Grants Time/Revenue 21. Approaching Impact InvestorsAn idea is worth the paper its written on, unless backed by a business. And a businessusually is:Tied to Solving a Large Problem, which If Solved, would Result in Huge Value to Someone,who (collectively) Would be Willing to Pay a Large Sum for the Solution.INIAInvestors (especially venture investors) expect the bold questions in the statement above to beanswered with crystal clarity. In addition, they like to have the following questions answeredas well.Why hasnt the problem above been solved before?What makes you and your team experts at solving the problem?Why cant other companies solve the problem?Why cant a company with $100M in capital solve the problem better than you?Investors (especially venture investors) invest in businesses that are innovative and teamsthat can execute well. If a large company like Unilver, Mahindra, or Reliance can do whatyoure proposing, they have 100x more capital than you ever will to pull it off. Be prepared toanswer why youre likely to succeed in spite of the competition. 22. Approaching Impact InvestorsA TEAM is of paramount importance to a technology startup. Without a team, theresa very small chance of raising venture financing, unless youre a recognized name andhave built successful businesses in the past.Impact Investors look for a team of founders. The reasons are simple, but often not INIAobvious.1. A team is always better than an individual. A team will have better ideas,complimentary skills, and the ability to support one another during tough times.2. A team reduces the level of risk, especially a good founding team that complimentseach other. Think of a team with a marketing, engineering, and sales background, notnecessarily 3 engineers .3. A team that has worked together for a period of time has worked out teething pains.Theyve learnt to work together and are likely to stick together.Impact Investors bet on a teams ability to solve the identified problem. Chances arethe initial solution is partly wrong, and a good team will figure out whats wrong withit and fix it. 23. ImpactWhat is the impact Social Economical INIA EnvironmentalWhom is the Impact for The Target Population Specific GeographyHow is Impact Delivered Delivery of quality goods/services Sourcing products/services from BoPImpact Core to the Business Is the Impact Component locked in the Business Model 24. WhatWhat is the spaceNot telecom / entertainmentWho are the market leaders INIATheir sizeThe opportunityMarket potential from external sourcesVery, very brieflyWhat is your product / serviceDoes it need seedingHow does it fit in the landscape 25. WhyWhy is your product / service necessary What pain is it removing for the customer Is it adding a service which will enhance a product / service Is the process different increasing productivity, reducing cost, etc. etc.INIAIs it doing something Different / DifferentlyIs it need to have / nice to haveIs there an IPWhat will the customer exactly get / see 26. WhoIdentify exactly who the customer is Is it creating a new customer base Enhancing a customer base Is your target the real customer ? INIAWhat are the parameters of your customer? Geography Age Urban / rural Etc etc. 27. MarketMarket size A billion dollar market is not YOUR market size - what is your market potential 1% of USD 1500 bn market - ??How has the market been validated by you?INIASpecific markets / geographies / segments which will beaddressed 28. CompetitionWho is your competition?Product / serviceCompanyAlternate processSize up your competitionINIASWOT of competitionLessons learnt from competitionTrends in competitive companiesNever say None Potential buyers could continue without your product / service 29. CompetitionExisting and future competitionFirst mover advantage rarely sufficientNeeds more vision and could beIP driven INIAmarket entry strategyInnovative commercial modelYour vision for the venture 30. USPWhat are your differentialsWhat is your USP of your propositionAny validation of your product/servicePain point in competition being addressed by you INIAProduct life cycleSpecific market / selling modalityCost differentialIs too common / too unique ? 31. Cross check idea / competition Who are the audiences you are addressing with your idea? What pain points you are addressing for these audiences? What evidence do you have that these pain points are real? What are the current solution approaches? INIA Whats lacking in these approaches? How is your solution approach better? How big is this difference and what is it worth to customers? Whats in it for other stakeholders besides end-customers? Why hasnt someone else thought of your idea yet? Are you sure nobody has thought of your idea yet? What is proprietary about your idea? 32. CustomerHow will you acquire customers Reflect market realities Customer behavior Partnerships conflict situations Demo / reference sitesCurrent customersINIA How did you acquire them Sales cycle time Why did they come to you vs competition Why did they go to competition vs youQuantificationaverage revenue / client or target Acquisition Cost / client No of customers to break even 33. CustomerPricing modelVs costVs competitionPilotHybrid sales model INIARetention of customersPlan for retention of customers before acquiring themAverage cost of generating business is 5 times from new customersvs existing customer !Customer / Order profileAre they one time / repeat ordersStickiness for customerWhy did you lose customersAfter sales support strategy 34. Delivery modelHow will you deliverBuild yourselfTechnology usedService provider partnerships INIABrandingAfter sales strategyAny relevant certificationsPermissions reqd./ received 35. Team Who is the team behind this ventureBackground and experienceContribution till dateBrief Job roleGaps in team INIATime contribution AdvisorsRolesNon compete Team and Advisor CompensationCashEquityESOP Mentor Team expansionAttractMotivateRetain 36. Cross check on your team Is the team leader strong and passionate? Will leader and team attract A players? Is the team appropriate for the stage of the company? Has the team worked together before?INIA What are the teams values and what type of culture will they create? Is there a strong technical leader? Is there a strong marketing leader? Does the team have deep domain or technical expertise? Does the team listen and take criticism in a positive way? Does team have a good blend of thinkers and doers? If current plan doesnt work out, will team adapt? Will the founders give up control if that is what the venture demands? Passion, Integrity, Resourcefulness, Perseverance, Risk taking ability, Mental horsepower 37. FinancialsCurrent / Projected for next 5 yearsTopline / bottom lineHeadcountProjectedWhen will it break even INIAProfitable businesses are more attractiveSelf investment & funding received till dateSkin in the gameInvestment soughtFor whatWhere will it take your ventureNext round requirementCash flow based workingsNo debt retirementValuation expectation 38. Risks and Mitigating themAre they risks to your plan No is not an optionWhat are the risks to your plan INIAHow will they be mitigatedExamples of early set backs and their handling is a good idea 39. ExitInvestors will monetize their investment How When WhatINIABuilding an exit option is necessary for yourself, your team, andyour investors 40. Investor PerspectiveAlternative investment options Angel investing is an alternate asset classThis space / sector is one of many Your plans niches is just one of the many niches INIAYour plan is in competition with anotherRemember idea may be sold but investment may not happen 3BHK in Delhi vs 3BHK in Bangalore 41. Investor Pitch Template (Source: The Art of Start (Guy Kawasaki)Slide Content CommentsTitle Organization Name; your name andThe audience can read the slide title; and contact informationthis is where you explain what yourorganization does. (We sell solarlamps. We run a rural BPO. We are aINIAschool. Cut the chase!Problem Describe the pain that youre Avoid looking like a solutionalleviating. The goal is to get searching for a problem. Minimizeeveryone nodding and buying in. or eliminate citations of consultingstudies about the future size of yourmarket.SolutionExplain how you alleviate this pain This is not the place for an in-depthand the meaning that you make.technical explanation. Provide justEnsure that the audience clearlythe gist of how you fix the pain forunderstands what you sell and yourexample, we provide solar lightingvalue proposition solutions for off grid low incomepeople in North India .41 42. Investor Pitch Template (Source: The Art of Start (Guy Kawasaki)Slide ContentCommentsBusiness ModelExplain how you make money, who Generally, a unique, untestedpays you, your channels ofbusiness model is a scarydistribution, and your gross margins. proposition. If you truly have arevolutionary business modelINIAexplain it in terms of familiar ones.Underlying MagicDescribe the technology, secret The less text and the more diagrams,sauce, or magic behind your product schematics, and flowcharts on theor service. slide, the better. White papers andobjective proofs of concept arehelpful here.Marketing & Sales Explain how you are going to reach Convince the audience that youyour customers and your marketinghave an effective go-to-marketingleverage points. strategy that wont break the bank. 42 43. Investor Pitch Template (Source: The Art of Start (Guy Kawasaki)Slide ContentCommentCompetition Provide a complete view of the Never dismiss your competition.competitive landscape. Too much is Everyone customers, investors,better than too little.employees wants to hear why youre good, not why the competition is bad.INIAManagement Team Describe the key players of your Dont be a afraid to show up withmanagement team, board ofless than a perfect team. All start-directors, and board of advisors, as ups have holes in the team whatswell as your major investors.truly important is whether you understand there are holes and are willing to fix them. .Financial Projections & Key Metrics Provide a five-year forecast Do a bottom up forecast. Take intocontaining not only dollars but also account long sales cycles andkey metrics, such as number of seasonality. Making peoplecustomers and conversion rate. understand the underlying assumptions of your forecast is as important as the numbers youve fabricated.43 44. Investor Pitch Template (Source: The Art of Start (Guy Kawasaki) Slide ContentComment Current Status, Accomplishments Explain your current status of Share the details of your positive to Date, Timeline, and Use of your product or service, what themomentum and traction. Then Funds near future looks like, and howuse this slide to close with a bias youll use the money you are toward action. trying to raise.INIA Type of Impact and Targeted atHighlight the type of Impact you Try and bring out broad numbers Who are creating and define the target in terms of target number of group. households, number of peopleemployed etc.44 45. Some Tips Be brief and direct; get to the bottom line quickly Identify what the business is immediately Define the customers quickly and the customer problem clearly Define whats compelling and unique Describe how you will make moneyINIA Provide a phased snapshot of your company 12, 24 and 36 months out Describe how you propose to take your product to market Make bottom-up as well as top-down projections Know what 4 to 5 assumptions your plan pivots on Discuss the key risk factors State how much money you will need and how you will use it State your possible exit strategies Presentation should be self explanatory there will be investors who may not be in the room Clarity in text / relevant graphs more important than pictures Blue sky points not relevantInvestors are quite knowledgeable ! 46. And FinallyPut some of your skin in the gameGetting a high valuation early can be fatalSize of the pie wins every time over share of the pie INIA 47. Investment ProcessVery selective process One in hundred company completes the whole roundPreliminary Business Due ClosureEvaluationDiligence Meet the entrepreneur Detailed business due Issue the Term Sheet Discuss the businessdiligence, market Accounting dueopportunity estimations & analysis, diligencereferences Preliminary evaluation of Legal due diligencethe business and specific Meet the core team inindustrymultiple meetings and Definitive agreementsunderstand the business 1-2 weeks 4-6 weeks Entrepreneur presents tomultiple partners 4-6 weeks 48. Thank YouDigbijoy Shukla INIA Email: [email protected] Twitter:@digbijoyJoin the Global Network of Entrepreneurs, Investors, Experts for [email protected]