Mapping Need-Gap to Idea

How to get a startup idea

The first step for an entrepreneur, before starting a new company, is finding the right idea for the startup.
The best way to get good startup ideas is not to try to think of startup ideas – that would be the wrong way to
start. The best way is to look for problems, preferably problems you have faced yourself. However, it does not
necessarily have to be a problem you have experienced personally. It could be something you have seen other
people, your friends or family, face regularly.
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Idea Assessment

Technical & Market Feasibility (Does the need exist?)

a. What pain point are you solving for?
b. Who are you solving this problem for?
c. How are you going to solve the problem?
d. Is anyone else doing it? How are customers currently solving for their problems?
e. Can you do it differently from them?

2. Financial Feasibility (Can you monetise the idea?)

a. Would your customers pay for your solution to the particular problem?
b. How big is the market? How many customers would potentially pay for your solution?

Identifying Target Segment & Market Sizing

As an entrepreneur, once you have identified your idea, it is important to identify your target
segment. Once your target segment is identified, you would need to size the market to understand
how big the market is, that you are going to target.

Understanding your Target Segment

Understanding the target segment is important for succeeding. One of the key things entrepreneurs
should keep in mind, as they start up, is to stay focused. It is best to choose a smaller segment of
customers within the overall market and serve that one segment really well. Before you start your
venture, defining the one customer that your venture is going to serve is very important. Your
understanding of that one customer will help you plan your product and marketing correctly. While
considering the target customer for your own venture, below are the things to consider:

 Market segmentation is a marketing strategy which involves dividing a broad target market. Market
segmentation can be based on:

o Geographic factors (region, city, rural)

o Demographic factors (age, family size, gender, income, occupation, education)

o Behavioural factors (benefits, attitude)

 Is there a target segment where you can offer the customer clear and fascinating benefits at a price
they are willing to pay?

 Are these benefits, in the customer’s minds, different from and superior in some way to what is
currently being offered by other solutions?

How large is this segment and how fast is it growing?

 Is it likely that your entry into this segment will provide you with the platform to enter other
segments you may wish to target in the future?

Sizing the Market

Once you have understood how to identify your target market. You need to understand how large is the
market that you targeting? There are two broad approaches to size your market:

1. Top-down approach: Here you understand and calculate basis the broad market, number of people,
who consumes, how much etc, to arrive at the total market sales

2. Bottom-up approach: Here you understand and calculate basis the sales of a single entity or a
business that is a part of the market, to arrive at the total market sales

While estimating the size of your market, you must make sure the data points come from valid, vetted
or credible reports.

Summary

Identifying Target Segment & Market Sizing

Understanding your Target Segment

Sizing the Market

You should be able to

Identify and assess your target segment

 Assess the attractiveness of your market by sizing the market using top-down or bottom-up
approach

Analysing Environment and Competitive Advantage

Environment analysis is an important tool that helps in an organisation's decision-making process and also
helps foresee the organisation’s future. Understanding the industry helps you understand your competitive
advantage. There are various factors which one needs to look at while analysing the environment.
 Analysing Environment
You might have an amazing idea, and a great vision, but for it to be a success, the environment must be
suitable. It is important for you to know whether the opportunity is a substantial one and for that you
would have to analyse the environment. In order to analyse the environment, you need to understand
various factors like:

1. Demographic factors

2. Technological factors

3. Social-cultural factors

4. Economic factors

5. Political-legal factors

Understanding Industry (Porter’s 5 Forces Model)

An Industry consists of groups of sellers, suppliers, competition and substitutes. To be able to assess the
attractiveness of an industry you are in or trying to be in, it is ideal to use the Porter's five forces framework. It
is a very important to get a good understanding of whether the industry you are targeting is attractive or not.
Porter’s five forces is a competitive analysis model; it helps you to understand the nature of competition
within your industry, and hence it is used to analyse the industry you operate in. It provides a good, simple yet
powerful, framework for developing an understanding of the competitive forces in your industry.

The five forces that must be analysed in-depth are:

1. Threat of entry: Ease with which new competitors can enter the business
2. Buyer power: Strength of the buyers to command tough terms for the industry
3. Supplier power: Strength of the suppliers to squeeze margins out of the industry
4. Threat of substitutes: Ease at which an alternative option can substitute your product
5. Competitive rivalry: Extent to which firms within an industry put pressure on one another

Competitive Advantage
After understanding Porter's five forces you learned about the various factors that help you build
sustainable competitive advantage which are:
i. Proprietary elements

ii. Superior organisational processes

iii. Business model differentiation
iv. Business with network effects

You should be able to :

Analyse the attractiveness of the
industry by conducting a Porter’s
five forces analysis for the purpose
of understanding:

 Threat of entry

 Buyer power

 Supplier power

 Threat of substitutes

 Competitive rivalry

Choosing the Right Legal Structure

In today’s fast changing business world, it becomes imperative for you to have an understanding of the
legal structures available for incorporating various businesses. At the same time, you also need to be
updated on any change in the rules and regulations pertaining to your entity. Hence, a timely review is
required.

Common Legal Mistakes

Usually, it happens that in the rush for growing your business, you end up ignoring some common legal issues
that cost you heavy on time and money. Here are some common mistakes that can be avoided:
1. Ambiguity in terms of agreement – An element of ambiguity in the terms of agreement between multiple
shareholders may lead to consequences like co-founders leaving the organisation, differences on the rights and
responsibilities, etc.

2. Infringement of IP rights – In case of infringing upon someone else’s IP rights, your business ends up facing
immense damage to its goodwill, consequently leading to heavy monetary penalties and wastage of time in
resolving the same.

3. Non-disclosure of privacy policies – If you have an online presence, it is necessary to put the terms and
conditions along with relevant privacy policies up on your website. This is a must to build user confidence as
well as to protect you from legal lawsuits by consumers in case of a dispute.

4. Appointment of inept legal counsel – Wrong selection of lawyer makes it difficult for firms to troubleshoot
legal hurdles in their journey. This also leads to extra costs especially when the lawyer is unable to deal with
legal lawsuits.

5. Formation of wrong entity – Selection of a wrong legal structure leads to trouble for entrepreneurs, either in
the form of higher tax liability for the firm, recourse on personal liability of the owner in case of non-fulfilment
of the company's debt, etc.
Types of Legal Structure

Entrepreneurs should try and address these problems from day one itself in order to prevent these mistakes
from becoming big, complex and costly enough to avoid later.

Under the Indian legal system, there are essentially four types of legal components that are available. Each
has its own set of outcomes:
 Sole Proprietorship - A business run by one individual with no distinction being drawn between the
individual and the business. You are in business easily and have minimal filings and compliance requirements.
Talking about its pitfalls, the individual is personally responsible for all the businesses’ liabilities. It is also non-
scalable given that it appears less professional when compared to other forms of entities.
 General Partnership - Relevant when there is more than one founder. While the time required for being
operational is relatively less, similar to a sole proprietorship, you run the risk of unlimited liability here. A
Partnership Deed is signed by the partners to create a General Partnership.
 Private Limited Company - Efficient and widely used, this type offers greater accountability because of
mandatory registration and books to be maintained. Through a company, you can also seek investments
against shares. Employees can avail stock options, and there is no unlimited liability to worry about.
 Limited Liability Company – A hybrid entity created out of both a company and a partnership, this entity
has a restricted liability clause to support the founders of the company. It is also administratively easier to
manage as compared to a company.

Entity Registration Process

Knowing about the structure is essential, but the story doesn’t end there. Once you decide on the
structure
which you want to go with, there is a whole chain of processes to be followed in order to create the entity.
Here are a few steps with regards to each type of entity:
Sole Proprietorship
 No Formal registration required
 Decide on the name of the entity
 Open a bank account

General Partnership
 Create a partnership deed
 Include capital contribution and profit sharing ratio
 Include the duties & power of partners
 Incorporate the nature and place of business
 Register the deed, if required

Private Limited Company

 Obtain Director Identification Number (DIN) Obtain Digital Signature Certificate (DSC)
 File name with the Registrar of Companies (RoC) Draft Memorandum of Association (MOA)
 Draft Article of Association (AOA) Submit all the documents to RoC

Limited Liability Partnership

 Obtain Director Identification Number (DIN)
  Obtain Digital Signature Certificate (DSC)

How to Choose a Base Location

The journey of any entrepreneur is full of challenges. So it¡¦s important to steer clear of some of them by
identifying some key issues upfront. Namely, where should you set up shop? The following factors should be
considered when taking that decision:
„h Client Location: Try to establish your office, where your clients are located. However, if you¡¦re setting up
an online business, then client location doesn¡¦t really matter.
„h Skilled Employee Base: As you need to hire and retain a great pool of employees who would execute the
work for you, it would be helpful if your location allows you easy access to them.
„h Need of Overseas Setup: Setting up overseas offers you comparatively greater ease of doing business and
access to global capital. This may be beneficial depending on the scale of operations and nature of business.

How to Choose a Base Location

Selecting a legal expert is indeed a daunting task for every entrepreneur. You would typically have a bunch of
questions for your lawyer before deciding on the One. It could be questions regarding their knowledge level
about your industry, the level of their experience, the complexity of legal issues handled by them before, etc.
As a reference point, you may start off by taking referrals from friends and peers.

How to Select a Legal Expert

„h Select a legal structure on the basis of its features for your business
„h Understand the registration process of these entities
„h Choose a base location for your business venture
„h Hire an appropriate lawyer for your firm

Summary Permits, Registrations & Compliances

This is an important area that must be addressed by all entrepreneurs. Any negligence here may lead to
an irreversible loss. So, it is essential that you understand the legal aspects completely, before taking
any decision for the company. It is advisable to hire/consult a lawyer for all such aspects, but a good
understanding is a must. Types of Permits

Permits are a legal form of authorization that allows you to do certain activities on the basis of certain
permissions taken from the respective regulatory bodies. The purpose is of course to avoid any legal
implications in future. The various types of permits and registrations are listed below:

1) Tax Registrations – Applies to almost all forms of business, namely PAN, TAN, etc. Certain other tax
registrations apply depending on the nature of business, namely, Central Excise if goods are being
manufactured, and Service Tax for activities that qualify as “services” under applicable tax laws, etc.

2) Office Setup Permit – These are permits which are required to commence any business as per certain
acts like shops and establishment act, municipal laws, etc.

3) Labour Law Registrations – These apply to the employer for the benefit of its employees namely
provident fund registration, gratuity, etc.
4) Industry Specific Permit – These are business specific permits which are required as per the industry.
So, permissions are to be taken from respective ministries. For example, if you are operating in the
media industry, you must get the license/approvals from the Ministry of Information and Broadcasting.

Tax Registration Documents

It is good to have all the tax registrations in place even before you commence your business. Most
startups tend to avoid and delay these activities, leaving it for the time when they start making
revenues. This is not advisable, as it is a must to have your house in order, for it to function well, and on
an ongoing basis. There are two basics that you need to have:

1. Permanent Account Number (PAN): It is a mandatory requirement for any business to have a PAN

number before opening a bank account. PAN is used for paying direct taxes.

2. Tax Deduction Account Number (TAN): This is required when you make any third-party payments, say
to the supplier of your goods/service. TAN is used for deducting tax at source.

For getting any other tax-related documents, please consult someone who is an expert into handling this
area. Compliance

Ineffective compliance creates a huge business risk for any entrepreneur. Issues with compliance keep
getting complex as your business grows. Having processes in place help you avoid legal hurdles; gain
investor confidence and improve operations. Not following the same, can lead to a number of setbacks,
like loss of management time in correction, monetary penalties and loss of reputation.

For compliance purposes, you need to make certain filings for annual compliance, quarterly compliance
and conduct board meetings as per policy. For all these, it is advisable to hire a Company Secretary.

When you seek investments, one of the first things that potential investors will look for is whether the
company is legally compliant or not and whether the reported numbers are audited or not, etc.

In the case of the burgeoning e-commerce space, it is becoming important to follow relevant e-business
policies. There are certain areas which need to be addressed like:

1) Ensuring data privacy

2) Having robust terms of use

3) Following payment gateway rules You should be able to:

 Understand the different types of permits required for your business

 Think through the required tax registration documents as per the law

 Acknowledge the importance of compliance and follow them

Intellectual Property Rights

Importance & Types of IP

Intellectual property rights help us gain an edge over other competitors in the market, and at the same time,
it is critical for you to avoid any infringement on somebody else’s IPRs.
There are a few aspects of IPRs which you must look at for registering your creation:
1. Trademark – This is something you can do for protecting your brand/logo. This helps you in differentiating
your products/services from other players in the market.
2. Copyright – It is a legal right which is given to the creator of the product for a fixed time period.
Through this the author enjoys the exclusive privilege to publish, broadcast, adapt, make derivative works,
showcase and monetize the same. It could either be a literary work, a dramatic work, a music or artistic work.
3. Patent – The focus here is on proving the novelty of your creation. It needs to be a new invention for you to
get a patent. Availing patent protection is a bit more complex than getting a trademark or a copyright.
Generally, these are given for machines and pharmaceutical products.
4. Design – Registered designs are used to protect the external appearance of any object.
These are primarily meant for protecting designs meant for commercial/industrial use. For instance, a Coca-
Cola bottle.

IP – Investor’s Perspective
Whenever the company seeks funding from the investor community, IP – how it is managed and protected
- becomes an important criteria for them to decide. It helps investors figure out the long-term growth of the
company. They check on a few key aspects like:
1. IP ownership rests with the company and not with the founder
2. Ensure that there are no arrangements of IP sharing.
3. How frequently are the IP rights being reviewed?
4. What are the legal implications for changes made to the brand or logo?

IP Registration Process

When it comes to registering your IP, say, for instance, trademark, the first thing which you need to figure out
is to decide on its geographic spread - national registration or international registration. Under the Indian
national regime of registration of trademark, you can apply to any of the five registrars located at Mumbai,
New Delhi, Kolkata, Ahmedabad, or Chennai for complete protection across India. The Registrar shall examine
the application, post which it shall be published in the Indian Trademarks Journal. If no opposition is raised by
any third party within 90 days, the Registrar accepts the trademark application.
Under the international regime, India is a signatory to various treaties, which allow for registration of a
trademark in multiple countries with a single application process. Depending on the targeted countries you
wish to register your trademark in, you can select any of the various international treaties such as the Madrid
Protocol, European Community Trademark, etc.

You should be able to:

1. Acknowledge the importance of having IPRs
2. Protect your IPRs as per investor’s requirements
 3. Understand and register the different types of IPRs

Contracts
A contract is a binding agreement between 2 or more parties. Preferably, it should be in a written format, so
that there is no room left for misinterpretation by any party. Contracts help mitigate disputes between parties
and enforce rights in case a party does not live up to its commitments.

Key Aspects of Contracts

Any type of contract contains certain set of covenants, rights and considerations. For any party, various
aspectst demand a closer observation before signing the contract. A few of them are listed below:
1. Term of Contract – It could either be long term/short term. For judging the period of contract, you need to
consider factors like level of dependency on the product, getting a price bargain, etc.
2. Termination – This aspect helps you understand the various circumstances under which you may end the
contract before the term ends. For example – breach of terms and conditions/mutual consent etc.
3. Exclusivity – An inclusion of exclusivity clause would bind you to service only that party, barring you to
transact with rest of the world for similar services.
4. Payment – Under this, you decide on the timing of payment; is it in advance or after services are
rendered, are there any credit periods involved or is payment to be made in tranches, etc.
5. Service Levels – It is important to elaborate the nature of services and the expected standards they are to
conform to so that there is no ambiguity on deliverables.
6. Indemnity – Under this clause, you have the right to claim money for the losses suffered due to a breach by
the other party of its commitments.

Founder & Employee Agreements

Now, you need to understand the different types of contracts.
A founder’s agreement is essential to documenting the understanding of the co-founders. It helps prevent
and/or resolve any form of dispute arising among the founders of the company. There are various aspects
which one needs to think through before making an agreement amongst the co-founders. For example, there
could be a difference of opinion on things like the need of funding. While preparing the agreement, please
consider whether any founder should have a casting vote, i.e., whether one founder can overrule

Vendor & Customer Contracts

Anyone on fundamental decisions depending on what he is bringing to the table so that there is no
deadlock among founders. The other things which you need to put are IP rights and ownership of IP
(which should solely vest in the name of the company); remuneration structure for the co-founders.
The next contract is the employee agreement, where you try to create a win-win situation for both
the employer and the employee.
1) Exclusivity - By making the employee agree on exclusivity clause, you ensure that his or her
service and time is not being shared by any other employer simultaneously.
2) Non-Compete - This is to make sure your employee does not join a competitor and divulge
critical information regarding your business. However, there are legal issues on the validity of non-
compete obligations post the termination of employment.
3) IP Ownership - You need to protect and ensure that all the intellectual property rights of the
work created by any employee is owned by the company.
4) Confidentiality - Finally, you need to have confidentiality clauses in place, to prevent employees
from sharing sensitive data with the any third party.

Vendor & Customer Contracts

These are contracts which are made with third-parties, which are external to the organisation. As
an entrepreneur, you need to look carefully at the terms and conditions which you include at the
time of signing a contract with them. Do read between the lines.
First, let’s look at vendor contracts. There are specific reasons for you to check here:
1) Refund Policy – You need to establish the grounds for a refund in case there is any defect in the
goods/service supplied to you.
2) Tax Clause – Have a clear cut understanding as to who bears taxes – especially service tax and
whether such taxes have been factored when agreeing to the quantum of fees.
3) Exclusivity – This is to ensure that the vendor supplies/manufactures goods only to you.
4) Termination – On what conditions can you exit the contract. You can add clauses like
representation and warranties etc.
Service contracts are essentially made whenever you outsource your work. There are a few aspects
which you need to protect. For example, if you engage someone to design your website:
1) Avoid any third-party IP Infringement and that the work created for you is original.
2) Ensure that the work created belongs to the company.
3) Set the timelines for payment, such as on the basis of percentage of work completion.
Customer contracts would depend on the types of services you are rendering and what’s your
business model. If you are an intermediary, ensure that you have a liability clause in place declaring
that you are not responsible for paying up if the supplier denies the refund on any ground. Make
the terms and conditions very clear on all the communication mediums with the customer. When
we talk about the complexity of contracts, in the case of a B2B business model, you may have a full-
length contract, however, for a B2C model, the terms and conditions are relatively simple.
You should be able to:
 Ponder on the key aspects of contracts before signing or preparing one

 Assess the key clauses that go into making the founder and employee agreements

 Understand what goes into the making of third party contacts with vendors and customers

Financial Statements, MIS and Financial KPIs

In this session, you learnt about Financial Statements, Management Information Systems, and Financial Key
Performance Indicators. Financial Statements are reports that every business organisation must prepare to be
able to indicate to its stakeholders and operators, the complete picture of the organisation’s health.
Management Information System (MIS) is a means to generate regular and timely reports that help
management take critical decisions that shape the business, and help it improvise on several aspects.
Financial Key Performance Indicators (KPIs) are clearly defined financial metrics that measure various aspects
of a company’s performance.

Introduction to Financial Statements

Any business usually creates three statements at the end of a financial year, which are:
1. Profit and Loss Account (Income Statement): This is a statement that provides information on the
revenue of the business, as well as its direct and indirect costs. In this statement, direct and indirect
costs are subtracted from revenues, to arrive at the net profit or loss of the organisation, thus
indicating its profitability or the lack of it. An entrepreneur needs to be cautious about the profitability
of his/her start-up and take actions to be able to move in the right direction.

2. Balance Sheet: This is a statement of what a business owns and owes. Whatever a business owns is usually
classified as assets while any short or long term obligations is its liabilities. The balance sheet has four major
components. These are:
a. Fixed Assets
b. Shareholders’ Funds c. Borrowings
d. Net Working Capital

3. Cash Flow Statement: This statement provides complete information on the cash inflows and outflows of
the company over a period of time. This includes all incomings and all outgoings, irrespective of their purpose
and the heading under which they fall. This statement is also crucial for planning purposes, as it helps the
company plan its cash-needs, thus allowing it to remain in business. The statement is broadly divided into the
three broad components. They are:
a. Cash from Operating Activities b. Cash from Investing Activities c. Cash from Financing Activities
Management Information System
Management Information System (MIS) is a system that helps the management and founders of an
organisation take key decisions. These reports are designed to provide crucial information about the
revenues, costs and operations of the business, and also allow a comparison against budgeted or projected
numbers and figures. This information, if used well, can tangibly help increase the profitability of the business.
The key component of MIS, discussed in the session are as follows:
1. Budget v/s Actual
2. Unit Metrics
3. Key Performance Indicators
4. Summary of Financial Statements

Key Performance Indicators

Key Performance Indicators (KPIs) are indicators used to judge the performance of any venture. Most
ventures track them to stay in line with business objectives and take corrective action whenever there is a
difference in expectations. This session covered the most commonly tracked KPIs, which are:
1. Booking v/s Revenue
2. GMV v/s Revenue
3. Revenue Run Rate
4. Gross Profit
5. Life Time Value
6. Customer Acquisition Cost
7. Monthly Burn
8. Average Revenue Per User
9. Conversion Rate
10. Cohort Analysis

You should be able to:

At the end of this session, you should be able to:
1. Read and understand the financial statements of your business venture
2. Understand and implement management information systems for your startup
3. Determine key performance indicators for your venture to setup a s y s t em f o r continuous performance
evaluation

Working Capital Management

Managing current/short-term funds is critical for the long-term success of any venture. Working
Capital Management or in simple words ensuring adequate short-term liquidity is important in
order to meet current business obligations, and in the process ensuring survival of the business

Introduction to Working Capital

Every commercial organisation has day to day expenses like labour cost, the cost of buying inventories,
etc. Sufficient liquidity must be maintained in order to service these small yet significant liabilities. Such
funds are typically called “Working Capital” and are maintained as a Current Asset of the business.

Working Capital has two major components. They are:

1. Permanent Working Capital – that which remains stable over a period of time, and is predictable to
some extent. This has to be estimated basis the plans of the business.

2. Fluctuating Working Capital – that which allows fluctuations over the period depending upon the
needs and requirements of the business, and allows the business to take advantages of sudden
opportunities that might come its way.

There are many factors that influence the working capital needs of an organisation. Some of these
factors are:

1. Nature of Business

2. Size of Business

3. Production Cycle

4. Type of Industry

5. Business Fluctuations

6. Access to Banking Facilities

7. Profit and Taxes

Operating Cycle
The understanding of working capital becomes easy when you look into a company’s operating
cycle. The cycle starts with the purchase of raw materials by paying cash. Then, the raw materials
are converted into work-in-progress (WIP) and then to finished goods through value addition. The
cycle moves on to the next
stage when finished goods are sold to customers. The cycle ends with cash when money is realised
from customers at the end of the credit period.
The concept is helpful in understanding, and accurately estimating the working capital needs of the

business.

Financing and Management of Working Capital

Once the short-term fund requirement of the business has been estimated, the organisation needs
to organise these funds. There are several routes by way of which this can be done. It can be
financed by the venture’s short term liabilities/obligations or in some cases; this can even be
financed through long-term sources like Debt or Equity.
It is necessary that these short-term funds are utilised in the most efficient manner, and if not done
well, this often becomes the root cause for the downfall of startups with good potential. Following
are the tips that will help you efficiently manage your working capital needs:
 Maintain current assets that liquidate into cash quickly, when needed

 Increase efficiency of the operating cycle, by reducing the time it takes from “Raw Material” to
"Cash."

 Manage your receivables/payables better, by limiting the credit period you offer to clients, and
trying to enhance the credit period you take from suppliers

 Manage your inventory, by liquidating more than you store

Vendor Contracts

It’s critical to have mutually agreeable vendor contracts in order to build a healthy and long term
relationship with them. The terms and conditions of these contracts need to be pre-decided so as to
avoid any conflicts in future. Following are the key aspects that need to be negotiated and included
in such contracts:
 Fees, Costs, and Expenses

Payment taxes
 Applicability of Taxes
 Scope of Services

 Termination

 Financial Covenants

You should be able to:

At the end of this session, you should be able to:

 Understand the importance of maintaining short-term liquidity in your venture

 Estimate the requirement of working capital for your business venture

 Manage working capital and how to get it financed

 Develop mutually agreeable vendor contracts for your business

Financial Management and Long-Term Investments

Managing the finances of a start-up requires an entrepreneur to actively perform two activities: one,
arranging funds to scale up the venture and, two, investing the same funds wisely, whether for the short term
or the long term. Short term management of funds is called Working Capital Management, while long-term
investments are usually evaluated with certain tools and the whole process is called Capital Budgeting.

Introduction to Financial Management

Financial Management is the process of efficiently managing the monetary resources of an organisation and
usually requires the management of two broad things. They are:
1. Firm’s Asset Structure
2. Firm’s Financial Structure
Short term expenditures of the business are called OPEX (Operating Expenditure) which is the money spent
on the purchase of supplies or inventory, providing credit facilities to customers, payment of wages, day to
day expenses, etc. Long-term investments are typically in the form of purchase of fixed assets like Equipment,
Building, Furniture, etc. and are called CAPEX (Capital Expenditure).

Planning & Evaluating Long-Term Investments

When it comes to long-term investments, it is necessary for any entrepreneur to be very careful. Long-term
investment decisions are important because of the following reasons:
1. They have long term impact
2. They involve large amounts of funds
3. They are irreversible
4. They involve huge risk and uncertainty
There is no set rule for raising a particular amount of capital, as it is based on the requirement. Tech startups
may require less capital in comparison to a brick and mortar retail store. Before capital is put to use as long-
term investment, a detailed evaluation becomes necessary. There are various tools and techniques that are
available for evaluating such long-term investment decisions which are called Capital Budgeting Techniques.
Few of them are:

 Payback Period Technique – Its calculates the period it takes to get back the initial investment
 Net Present Value Technique – It’s a tool that compares the present value of cash inflows with the
present value of cash outflows. Capital investment decisions will make sense only if the NPV of the
plan is positive.

You should be able to:

At the end of this session, you should be able to:
1. Manage the finances of your business venture well
2. Make long-term investment decisions wisely

Capital Structure and Taxation

Capital is needed for any startup. Raising the right amount of capital from the right sources is a crucial
element in ensuring the success of a startup. It is also important for the founders to find the right
balance between their own funds, equity they raise and the debt they raise from banks or financial
institutions. Moreover, a basic understanding of tax liabilities emerging from the business operations is
necessary for smooth operations of the business.

Debt v/s Equity

Debt and Equity are two major sources of raising finance. In relation to entrepreneurship, there are
several sources for equity funds, which include own funds, funds from venture capitalists and funds
from angel investors. Equity capital has the following features:

 It is permanent in nature

 There is no obligation for payment of dividend

 It involves allotting part of management control

 It involves no tax benefits

 It leads to dilution of ownership

Debt refers to funds taken as loan from individuals and financial institutions during the starting phase of
the venture. Family, friends and banks are typical sources for such financing. Debt instruments have the
following features:

 It is cheaper than equity

 It allows tax saving on interest

 It does not involve dilution of control

 It has to be serviced regularly with interest payments

 The event of default leads to bankruptcy and loss of assets

Financial Leverage and Capital Planning

Finding the right balance between equity and debt components in a venture’s capital structure becomes
important in order to minimize the cost of raising funds. The choice and proportion between equity and
debt is basis the individual scenario in the business and is a factor of several elements. For instance,
when you have unstable earnings and are low on cash, and are already loaded with debt, the use of
equity is Summary Capital Structure and Taxation Debt v/s Equity Financial Leverage and Capital
Planning

Summary Capital Structure and Taxation, Financial Leverage and Capital Planning, Debt v/s Equity
recommended. However, in the case of a business with liquid assets and unwillingness to dilute control,
debt is recommended.

In short, proper capital planning is needed in order to assess the right amount and source of raising
capital.

Following are some of the sources that an entrepreneur can look at for raising funds:

 Bootstrapping

 Angel Investors

 Incubator

 Venture Capitalist /PE Funds

 Financial Institutions and Banks

 Government

Measuring Performances
An entrepreneur must equip himself/herself to analyse the financial statements of the business, in order

to extract useful conclusions. This is a critical activity from time to time and should not be ignored. A

technique called ratio analysis is often employed for this purpose, and involves the use of the following

categories of ratios:

Liquidity Ratios: Liquidity Ratios help organizations measure the short-term liquidity of their business.

These are:

ᴏ Current Ratio

ᴏ Acid Test Ratio

Leverage Ratios: Leverage Ratios help evaluate the extent of use of debt component in capital. These

are:

ᴏ Debt-Equity Ratio

ᴏ Interest Coverage Ratio

Turnover Ratio: Turnover Ratios measure how efficiently assets have been used in the firm. These are:

ᴏ Inventory Turnover Ratio

ᴏ Receivables Turnover Ratios

Profitability Ratios: Profitability Ratios reflect the final result of business operations. These are:

ᴏ Gross Profit Ratio

ᴏ Net Profit Ratio

ᴏ Return on Equity

Measuring Performances

Taxation
Taxation is an important aspect that many entrepreneurs ignore or do not have the expertise for. There
Measuring Performances Taxation are two major categories of taxes, which are:

1. Direct Tax

ᴏ Income Tax: To be paid on the company’s net profits over a period of time.

ᴏ TDS: A mechanism by which the government collects income tax payable by a person, at the source of
generation of income.

2. Indirect Tax

ᴏ Sales Tax or VAT: Applicable and to be paid on a transaction or sale.

ᴏ Service Tax: Applicable when there is a service provided for a consideration.

Financing and Management of Working Capital

At the end of this session, you should be able to:

 Understand the importance, benefits and disadvantages of two major sources of finance, i.e. debt and
equity

 Understand how to raise balanced capital from best available sources

 Have a sense of the taxation aspects involved in funding your business

Break Even Analysis
Most entrepreneurs, rightly so, are focused towards the goal of achieving profitability. One important step
before one achieves a profitable business, is the point when the business achieves Break-Even. This is the
point, when on a running basis, the business can make enough revenues to cover all costs. In simple terms,
this is a stage when the business is at no-profit-no-loss.

Elements of Cost and Break Even Point

Any business involves several expenses on an ongoing basis, each of which behaves differently. Based on this,
costs can be categorised under the following three headings:
1. Variable Cost: These are costs that vary directly with production output. They increase with increases in the
volume of production and vice versa, e.g. raw material cost.
2. Fixed Cost: These are costs that remain stable and do not change as the production level changes,
e.g. Rent.
3. Semi-variable Cost: These are costs that have both fixed and variable component in it, e.g. electricity bill.
The point where total cost equals total revenue is called Break Even Point (BEP). Proper analysis of this stage
is required to draw valuable findings. Every startup aspires to reach BEP at the earliest so that they can then
reach the next stage of profitability faster. Revenues and costs can also be drawn out on a graph to
understand and analyse the Break Even Point.

Change in Costs and Margin of Safety

Contribution represents that portion of sales which is not consumed by variable cost and thus contributes to
the cover fixed cost. Contribution is calculated by deducting variable costs from sales.
The break-even of a business is a function of its revenues and its costs. Thus, a change in the costs of the
business greatly impacts the time and manner in which the business achieves break-even. For example, when
Fixed Cost goes up, you need to improve your Contribution Margin. Similarly, the Break Even Point can be
achieved sooner by increasing the per unit selling price or reducing variable cost per unit.
Another related and important concept is Margin of Safety. The Revenue earned over and above the Break
Even Point is called Margin of Safety. This is the cushion that generates profit for the entity. Though Break
Even Point is a No Profit-No Loss situation, Margin of Safety (MOS) is desirable.

You should be able to:

At the end of this session, you should be able to:
1. Identify and understand the various cost elements for your business venture
2. Analyse the break-even point for your venture, even under changing circumstances

Components of a Business Plan

Before getting into the details and workings of the business plan for your venture, it is important for
you to understand its importance by looking at the big picture, and understanding its invaluable
contribution to your journey as an entrepreneur. Basis your unique situation, decide who would be
the possible audience of your plan and to what level of depth you should go. Research the market
and make assumptions basis reliable data to make your projections and plans more realistic.

Elements of a Business Plan

.
While all businesses are unique in nature and have their own specific set of challenges and
opportunities, there are a few functions and headings that one must think through regardless of the
uniqueness of the proposition or the stage of the business. Here is a list of elements that must be
included in the Business Plan, besides of course any specific headings which uniquely apply to your
venture:
 Vision & Goal – Your aspirations; short-term and long-term goals

 Company Description - Original business idea, competitive advantage, brief company history,
milestones and timelines

 Industry Analysis – Industry attractiveness, growth prospects and the possible threats to the
industry

 Competitor Analysis – Competitor’s strength and weakness, strategies, barriers to entry,

identification of avoidable weaknesses

 Management Team – strengths of the entrepreneur, team skill-sets, organizational chart,

expected skill requirements

 Operation Plan – Task delegation structure, capital requirement

 Marketing Plan – Packaging techniques, modes of communication, pricing method

 Financial Plan – Projected balance sheet, profit & loss statement, break even analysis, business
structure, unit metrics, sales forecast

 Risk & Contingencies – What-if analysis, provisions

 Appendices – Documents, supplementary proofs, other marketing materials, media appearances,

letters of support
Format of a Business Plan
There are multiple ways of documenting your business plan, it can either be a word file; excel sheet;
presentation or just scribbles on a sheet of paper, but it may not be suitable for everyone to read
and evaluate the same in that format. In the current times, a simple and effective PowerPoint
Presentation is most accepted and easy to make, and thus is recommended. There are certain do’s
and don’ts for preparing a professional business plan, these are:
 Keep the language simple, concise and clear
 Avoid acronyms and jargon; everyone might not be familiar with them
 Use tables, charts and graphics to put across the point easily
 Maintain consistent font styling and size (more than 12 size font) & line spacing; the slides should
be legible from the back of a medium sized room
 Make it an easy read by creating various segments and use separate slides for separate segments
 Use bullet points instead of paragraphs, and write phrases, not sentences
 Do a complete spell, grammar and punctuation check in the end
Financing and Management of Working Capital
You should be able to:
 Understand the importance and myths of need for writing a business plan

 Enumerate the elements of a business plan for your venture

 Prepare your business plan as per a professional format

Creating an Effective B-Plan: Part 1

The objective of making a clear business plan is to have a well-charted and clearly defined path for
the business. This is incomplete without detailed workings of the financials, and clear projections of
how the business would work, break even and thus make profit. For this, elements such as
revenues, fixed costs, variable costs, distribution and marketing costs, overhead costs, manpower
costs etc. need to be detailed out. Such an activity would also help the team monitor diversions and
take corrective actions.

Key Elements of a Business Plan

.
As an entrepreneur, you need to to identify the critical factors responsible for the growth and
progress of the firm and put that into quantifiable figures by creating a financial model
incorporating all of them. Let’s look at a few important elements:
 Goal Setting and Timeline: A focused entrepreneur will typically have a clear and defined vision
for his or her venture in mind. It is, however, critical for the success of the business, to translate
each of these goals as well as the vision in general, into a set of numbers, which is understood by all
concerned stakeholders.
 Cost Estimation: Making cost projections for start-ups is difficult because of the obvious resource
constraints. It’s good for entrepreneurs to be as conservative as possible, and yet detailing of these
costs, as much as is possible in the beginning itself is crucial. Some of the costs are:
(a) Manpower Cost: Manpower cost is one of the biggest fixed costs for any firm, and the average
manpower cost might be higher in the beginning, as the core team is likely to be filled with more
expensive resources, as compared to later when you add more team members, at lower individual
costs.
(b) Distribution Cost: Once you select your distribution channel (inventory model/aggregate
supplier/marketplace model), you would be able to estimate the cost of warehouse (if required),
courier service cost, working capital requirement, and other associated distribution costs.
(c) Capital Expenditure: It is crucial for you to correctly estimate the capital expense requirement
for your venture at the time of putting together your business plan. This is important, as basis this
number you will be organizing funds from your chosen sources.
 Revenue Projection: There are three key elements of revenue projections:
(a) Demand: As a part of estimating the demand for your product or service, you must take into
account the number of people to whom your offering is applicable, from that who all would be
targeted and made aware of the offering, and from this what proportion of people would convert
and purchase the product.
(b) Price: The demand of the product or service, is also a function of the price it is being offered at.
This, in turn, can be a function of the quantity of product being offered or the features being
provided within the offering. A multiplication of the demand of the product with the price will give
you a projected revenue number for the first year of launch.
(c) Growth: There are several key macro-economic growth drivers of your industry, which must be
estimated to arrive at the impact or the growth/degrowth expected in the Demand and the Price of
your offering. For example - growth of 3G Connections; increase in mobile penetration; change in
consumer behaviour etc. This, when applied to first year Revenue projections, helps estimate
subsequent year estimations of Demand, Price and thus, Revenues.
Financing and Management of Working Capital

You should be able to:

 Put your goals into quantifiable set of realistic numbers in the business plan.

 Monitor and take corrective steps as you progress with the execution.

 Optimally allocate cost as per your business requirements.

Creating an Effective B-Plan: Part 2

The most amazing product or service have often not done well, because they were not appropriately
presented to the target audience. That’s where marketing comes in. While there are endless strategies
and ideas, it’s easy to get confused by all the things that you should be doing to help your company
grow. Ultimately, it all comes down to planning the marketing activities for your offering, and budgeting
for your marketing strategy to be executed well. The crucial question to answer after this is - What is
your marketing budget?

Marketing Strategy for a Business Plan

Marketing Plan plays a crucial role in making your business successful. Not having a marketing plan
would lead to unnecessary time consumption and errors. So, what is marketing cost? What does it
include? Marketing cost typically covers costs for anything that helps you bring your product or service
in front of the potential consumer – this can be in the form of promotion, advertising, and public
relations. The expense on marketing varies based on the size of the business, its annual sales and also
takes your competitors advertising into consideration. Marketing cost includes both digital marketing
and offline marketing.

It is good in this case to get a clear understanding from where your costumers are coming in –an
understanding of percentage of leads from offline as well as online marketing helps in this regard.

 This helps understand how much traffic you are getting from each medium.

 This would even help you discard some unproductive channels to improve efficiency.

You will have to select the right marketing channel(s) for your product or service so that it covers your
target segments. If you select the same channel(s) as your competitor it would cost you more. But if
your product is different from that of your competitor and you know your proprietary channel, then that
would help you save unnecessary marketing expenses.

At the end of this session, you should be able to apply your learnings to:

 Select the right marketing channel for your startup

 Create a good mix of offline and digital marketing

 Calculate the marketing cost for your startup effectively

 Create a clear and distinct marketing plan to make your business plan complete

Creating an Effective B-Plan: Part 3

When you are about to launch a new product, it is important for you to be able to forecast how much it
would cost to produce and stock and how much it would cost to just run the company. Besides this,
thinking about shipping or logistics costs becomes critical, as that is a cost that has to be borne to be
able to get the product to the costumer. A business plan should be able to give details on all such costs,
no matter which part of the business they apply to.

Building Business Plan Projections

All start-ups have unique financial needs. Some businesses can be started with little money while others
require large investments in equipment, logistics and other start-up costs. Operations is concerned with
how you buy, build and prepare your product or service. This covers:

 „h Cost of goods sold

 Raw material cost
 Labor cost
 „h Cost of facilities and equipment used
 „h Cost of shipping finished goods
 „h Manpower cost
 „h Other Expenses
 Office Premise Rent
 Warehouse Rent
 Electricity
 Other Office Expenses
 Travelling
 Communication

At the end of this session, you should be able to apply your learnings to:

„h Create a Business Plan for your startup

„h Chart out the projections for your venture idea which should include revenues and costs

Summary
Funding Overview
For many Entrepreneurs who are about to start their journey – one of the most important areas to consider is
the fundraising stage. While there are multiple ways to fund your venture – including debt – equity funding
has become one of the most important measures for startups to scale their operations. This session was all
about having a broad view on the funding process starting from understanding when funds are required to
approaching investors for getting these funds.

Seeking External Funding

It is important to understand the status of your business and its growth to figure out when you would require
funding. Ideally you should start thinking about funding 6 months before the need arises. Now these funds
could be used for various purposes such as generating working capital, growing your business etc. Also the
nature and objective of your business determines the type of investor you should approach.

Stages of Funding
As your Startup grows it can raise more and more funding through multiple rounds of equity funding. It
becomes important for entrepreneurs to understand the business stage at which one can go for specific
rounds and the amounts that can be generated at these rounds. All this is summarized in the table below:

Qualities to Look for in Investors

Funding isn’t just important for the capital that is invested in your business. The investors who fund a
business can also play an active board role to guide the business in the right direction by lending their
expertise and intelligence. Entrepreneurs should look for certain qualities in investors such as:
1. Agreement on vision
2. Capacity for future investments
3. Ease of working

Approaching Investors
There are certain channels which entrepreneurs can use to get in touch with investors and
secure funding.
These include:
1. Introduction through portfolio company
2. Introduction through someone trusted
3. Through Press Releases

You should be able to:

At the end of this session, you should be able to:
 Answer ‘’when’’ and ‘’why’’ you would need funding
 Understand the stage of your business corresponding to funding round
 Know how to approach investors

Valuation
Any funding decision within a startup journey is always tied to the valuation of the startup at the point of
investment. This session was all about understanding how a company is valued and some key terms from a
valuation and fundraising perspective.

Decoding Valuation
It is important to understand what investors look at when deciding whether or not to invest in a company.
These factors differ from the stage of the funding and are summarized in the table below:

Valuation and Dilution

Here are a few terms that you should know to understand the fundraising and the valuation process:
1. Pre Money Valuation – Valuation of your company before funding
2. Post Money Valuation – Valuation of your company after funding
3. Dilution – Equity/Ownership of your company exchanged with investor for funding
You should be able to:
At the end of this session, you should be able to:
1. Understand the basis on which your company will be valued
2. Understand Dilution from funding received
3. Generate Cap Tables and think about using ESOPs