Starting a business – getting financed


When a company is formed it obviously must be financed. The seed money comes from the founders, families and friends and this is what is known as promoters’ capital. But this may no be enough and may need external financing.

Wealthy investors and financial institutions are the major sources of Venture capital. Venture capital represents funds invested in a new enterprise. Getting financed a new business is the biggest challenge of all. It is frustrating for any entrepreneur to sacrifice his grand plans on the altar of hard economic realty. Compared to development finance institutions, venture capital firms, which have come into their own in the last two decades, are more willing to invest in risks that they believe will pay off.

In recent times venture capitalism and private equity (VC and PE) activity in India has been witnessing a major boom giving entrepreneurs a reason to cheer. It was probably the dot com boom in the 90s that gave VC/PE industry a boost. Not withstanding the fact that those investing in IT start ups got their fingers burnt at the time.

The activity grew successfully after 2003 and from that time the sector has rallied and has been seen sustained growth. Now everyone wants to invest in India including Venture capital and Private equity firms in new emerging focus areas.

VC investments in India have grown from around $590 million in 2003 to around $1.4 billion in 2005. India now ranks among top 5 counties in Asia (excluding Japan) in terms of VC activity. With India Inc growing across several sectors there is a renewed demand to invest in Indian companies at various stages.

Over forty four U.S based VC and PE firms are now seeking to invest heavily in start ups and early stage companies in India. These firms have raised or are in the process of raising an average $100 million each. By end of this year experts anticipate glut in VC money for early stage investments in India.

If the funds continue to be invested only in currently favorite sectors such as IT, BPO, software and hardware products, telecom and consumer internet then there will be a glut.

Opportunities across the board are coming for VCs and PEs from other sectors like Logistics, textiles, telecom and design and they can be the strong focus areas for investments.

Private Equity and Venture Capital funds invested about $2.085 billion across 76 deals in the last quarter ending June 2006. The emphasis was on the manufacturing and IT sectors. However, it is difficult to get funding for early stage businesses and the options for new entrepreneurs are fairly few. A very limited number of funds are focused on start ups and early stage funding. This is why smaller entrepreneurs could be facing some difficulties.

Early stage investments have continued to dwindle or at best remained stagnant almost throughout 2006 so far. The facts are a number of companies are focusing on very niche segments and value added services is mushrooming today. VC operators will necessarily have to cater to high risk industries if they want to benefit from the new economy. With, more and more VC players making their entry there are hopes that nascent industries will not be deprived of critical investments for too long.