ENTREPRENEURSHIP DEVELOPMENT INSTITUTE OF

INDIA

The Entrepreneurship Development Institute of India (EDI), an autonomous body

and not-for-profit institution, set up in 1983, is sponsored by apex financial
institutions, namely the IDBI Bank Ltd, IFCI Ltd. ICICI Ltd and State Bank of India
(SBI).

The EDI has been selected as a member of the Economic and Social Commission
for Asia and the Pacific (ESCAP) network of Centres of Excellence for HRD
Research and Training.

EDI’S mission is to become a catalyst in facilitating emergence of competent first

generation entrepreneurs and transition of existing SMEs into growth-oriented
enterprises through entrepreneurship education, training, research & institution
building.

EDI has been spearheading the entrepreneurship movement throughout the nation
with a belief that entrepreneurs need not necessarily be born, but can be developed
through well-conceived and well-directed activities.

In consonance with this belief, EDI aims at:

● - Creating a multiplier effect on opportunities for self-employment,

● - Augmenting the supply of competent entrepreneurs through training,
● - Augmenting the supply of entrepreneur trainer-motivators,
● - Participating in institution building efforts,
● - Inculcating the spirit of 'Entrepreneurship' in youth,
● - Promoting micro enterprises at rural level,
● - Developing and disseminating new knowledge and insights in
entrepreneurial theory and practice through research,
● - Facilitating corporate excellence through creating intrapreneurs
(entrepreneurial managers),
● - Improving managerial capabilities of small scale industries,
● - Sensitising the support system to facilitate potential and existing
entrepreneurs establish and manage their enterprises,
● - Collaborating with similar organisations in India and other developing
countries to accomplish the above objectives.
SOURCES OF FINANCE FOR ENTREPRENEURS

Financing entrepreneurial business from external sources is required either for the inception
of the business i.e. to prove the viability of the concept (seed capital- 80%), to get the venture
running (start-up capital- 60%) or for daily business operations, expansion of the business or
to go public (expansion stage capital- 30-50%). There are two options or sources of financing
business- equity and debt. Both serve as the sources of capital for a company. All financial
sources fall under either of these two options.

Debt: It is cheaper since long-term interest on loans is less than the investment return of stock
markets. It also offers a tax shield. However, debt requires regular repayment. Lenders are
mostly conservative and require collateral.

Equity: The various sources of finance for entrepreneurs under equity are-

 Inside Equity (founders, family, friends),

 Private Equity of Angels

 Venture Capital

 Public Offering.

1. The Founders-

Do you have some savings left yourself? Did you just receive a nice bonus? Why not invest it
in your own company! However, you don’t necessarily have to invest in terms of cash. If a
co-founder or partner invests his/her hours in helping you start your business while also
working his/her own job, that is also an investment. Or, what about a founder making an
office, machines or a technology license available? All of these are sources of investment.
Temporarily not paying yourself any wage is also an option.

When to choose this source of financing: Founders can obviously invest in their own
company at any time. However, you usually see this happening when the company has just
been founded. When a company is set up, in many cases, no revenues or external financing is
available, yet there are always some startup costs to cover.

In terms of investment size you can go all out (as far as your bank account allows you to).
What is the advantage of this form of investment? It can be perceived as positive by an
external financier that a founder has some “skin in the game” as well. Why would another
person take the risk of investing in your company if you have never been prepared to take the
risk yourself?

2. The 3Fs: Family, Friends and Fools

Explanation: Before you start approaching professional investors, it might be worthwhile to

try to raise some funding within your network of family, friends and fools. These are often
people from your family or social network who are close to you and mainly invest because
they have faith in your idea or in you as a person/entrepreneur. As they are usually not
professional investors, you should not expect a professional assessment of your company
strategy from such an investor.

When to choose this source of financing: This type of financing is often pursued to cover the
costs of setting up a new company or to bridge the gap to a first round of (pre-)seed funding.
The advantage of this funding type is that it is a quick and cheap way of collecting cash,
especially if you take into account the risk that the 3Fs take (which they are not always aware
of themselves: hence, “fools”).

Usually the amounts concerned with this type of investment are not too high and are typically
repaid as a loan (with or even without interest) or are invested in exchange for a small equity
share in the company. When the invested amounts, share percentages and level of
professionalism increase, then we speak of angel investing.

3. Angels/informals

Explanation: Angel or informal investors are experienced entrepreneurs who have some
funds available (often from previously exited ventures) and invest those in new companies to
help other entrepreneurs succeed in their business. Angel investments start around 50,000
dollars/euros and can amount up to (or more than) a million dollars/euros, as angels
sometimes invest together in groups.

When to choose this source of financing: Go for an angel if you are looking for seed funding
within the abovementioned range. Angels typically offer “smart capital”: not just money, but
also networking opportunities and knowledge within specific sectors. Try to find an angel
that fits with your company in terms of experience and sector knowledge. Angels spot new
investment opportunities through their network, but (for instance) also through platforms
such as AngelList, Crunchbase and f6s.

4. Crowdfunding

Nowadays, it is hard to imagine that crowdfunding once didn’t exist. With crowdfunding, the
“crowd” finances the funding need of a company. Usually, crowdfunding is performed via an
online platform where entrepreneurs offer investment opportunities on one side of the
platform and on the other side of the platform, a large group of people invest small amounts
to meet the entrepreneur’s investment need.

When to choose this source of financing: In general, there are three types of crowdfunding:
loans, pre-orders/donations and convertible loans. Are you looking for a loan, but having
trouble securing one from the bank because your risk profile is too high? Then try loan
crowdfunding. Do you have a prototype available, and do you want to test the product/market
fit, but you cannot finance the production/delivery of the first batch of actual products? Then
go for pre-orders/donations. Well-known examples of platforms offering these types of
crowdfunding are Kickstarter and Indiegogo. They are mainly suitable for products, projects
or gadgets aimed at the consumer market and have a strong design element to them.

Convertible loans have the following advantages:

1) No shares are being issued,

2) Valuation discussions are postponed until the moment the value of a company can be
better determined and

3) It is an easier, faster and cheaper process than an actual share transfer.

Since the people that invest via crowdfunding platforms are not always professional
investors, crowdfunding is better suited for propositions that are not too complex or technical
and that are easily understood by the general public (that’s why it’s called “crowd” funding).
Think, for example, of consumer products.

There are also crowdfunding platforms with a specific focus, so take that into account when
making your choice. As an example, Dutch crowdfunding platform Oneplanetcrowd focuses
specifically on sustainable projects with a positive impact.

5. Subsidies

A huge number of tax/financial schemes and subsidies exist. The aim of subsidies/schemes is
typically to stimulate entrepreneurship, innovation/R&D or economic growth within a certain
geographical area. That is why every region, every country and even, for instance, the entire
European Union has its own subsidies.

When to choose this source of financing: ALWAYS, and we can be very brief about this.
Subsidies are relevant during almost every company stage, from startup to corporate, from
freelancer to publicly traded company.
As mentioned before, many subsidies only focus on a certain geographical area and, often,
there is also a specific sector focus. Therefore, it is important to look for a subsidy that fits
with your company.

Keep in mind that administrative and reporting requirements often apply to subsidy
applications and grants. You need to be able to justify the costs for which you request a
subsidy and, sometimes, it is mandatory to have this justification audited as well.

6. Venture Capital/Private Equity

Explanation: Private equity is the collective name for professional investment firms that
invest in companies that are not publicly listed. Venture capital (VC) is a type of private
equity that focuses specifically on (from the investor’s perspective) risky investments in early
stage companies.

People often speak of private equity when investing in larger organizations that have existed
for some time already. Venture capital, on the other hand, involves investing in growth
capital of young companies. In general, VC firms have a fund available of a specific size
(e.g., 100 million dollars/euros) that has to be invested within a certain period of time (e.g.,
10 years) in a number of companies with different risk profiles to spread the risk across the
portfolio. The aim is to sell the shares after a couple of years for a certain return/profit.

When to choose this source of financing: Venture capital is mainly suitable for companies
that have already passed the “seed stage” and are looking for series A or series B funding.
This type of funding is therefore meant to help companies grow faster than they would if
growing organically, for instance if a firm wants to internationalize.

VC firms typically invest in the range of about 500,000 to 20 million dollars/euros. To raise
funding from a VC, a company’s product/market fit has to be already proven, and steadily
growing revenue streams have to exist for several years. However, there are also venture
capitalists with seed funds (starting with rounds of about 200,000 dollars/euros) that offer
seed capital to companies that have not met the abovementioned criteria yet.

The advantage of VC firms is that they can fund multiple rounds for the same company,
where an angel or other seed investor is not always capable of doing so. Venture capitalists
often also have a specific sector focus and good knowledge/network within this sector.

7. Debt Financing: The Bank

Explanation: Even though there are banks around that have started venture capital funds, they
are generally more risk averse than, for example, angels, seed investors and normal VC
investors. This does not mean that banks do not finance entrepreneurs – on the contrary!
However, they are more likely to invest in small to medium businesses, in companies with
lower risk profiles (than startups, for instance) and when companies can offer collateral. For
an early-stage startup that does not fit in the focus of the VC funds, it can thus be difficult to
secure funding from a bank.

When to choose this source of financing: As mentioned, banks generally take less risk than,
for example, VC investors and angels. However, if you can provide collateral, then a bank is
a very good option. Or if you are looking for working capital financing, stock financing or
financing to cover investments in buildings/machines, then a bank is a very good option to
consider as well.

Companies generating stable income streams and that have been growing organically for a
number of years (and are thus less risky) can certainly also turn to a bank. A big advantage of
debt financing is that you do not have to give away a part of your company in terms of equity,
which means that in the long term, it can turn out to be a much cheaper way of financing
than, for example, securing funding from an angel investor or VC investor.

8. Factoring

Explanation: In short, factoring is a way of financing working capital by lowering the size of
accounts receivable. Example: if you send an invoice to a customer, but it takes the client 60
days to pay, then you can decide to “sell” this invoice to a factoring company (against a
certain payment, of course).

The factoring company will pay for the invoice (or provides you with a loan) so that you do
not have to wait 60 days before the invoice is paid by the client. A factoring company can
also take over the risk that the client does not pay at all.

When to choose this source of financing: First of all, it goes without saying that you must
have clients in order to be eligible for factoring. If you do not have any paying customers,
factoring is not an option. If you do have customers, factoring can be very useful if you have
to deal with long payment terms.

Do you have large corporates as your customers? If so, it can take a while for invoices to be
paid, and there is often not much you can do about it. In order to keep your working capital
position healthy, factoring can be a good solution. Is accounts receivable management costing
you a lot of time and effort? Do you often suffer from bad debtors? Then factoring could also
be an outcome.

9. Leasing
Explanation: Do you have to make large investments in assets such as computers and/or
machines? Why don’t you lease instead of purchasing them? By leasing assets companies can
spread payments over a longer period of time instead of having to fulfill the full payment of
an investment the moment they decide to purchase an asset.

When to choose this source of financing: When a company is capital-intensive, meaning it is

dependent on the use of (sometimes expensive) assets, such as machinery, leasing may be the
way to go.

10. Suppliers

Explanation: is your business heavily reliant on its supply chain? Then try to negotiate
favorable payment terms with suppliers. If your customers have long payment terms, for
instance, you can try to agree to longer payment terms with your suppliers as well so that you
do not run into any problems concerning your working capital. On the other hand, you could
also try to discuss discounts in the event you pay your suppliers very quickly.

When to choose this source of financing: Choose this form of financing if you have good
relationships with your suppliers or if you have a good negotiating position with them (for
example, if you are a large/important customer).

11. Initial Coin Offering

Explanation: For an Initial Coin Offering (ICO), a company typically writes a whitepaper to
pitch a certain business idea and asks the general public to finance the idea using bitcoin
and/or altcoins (other cryptocurrencies than bitcoin). In return, the investor receives an
altcoin newly generated by the company during the ICO.

Usually, this newly generated altcoin is at the center of the company’s business activities and
thus leveraged in a way that increases its value. As soon as this altcoin becomes tradable,
investors can resell it (and hopefully make a profit). An ICO is therefore very similar to an
IPO (see section 12 below), but uses cryptocurrency instead of shares that can be converted
into “normal cash”.

When to choose this source of financing: It is possible to do an ICO as a non-crypto

company, but currently, the majority of the companies that do an ICO are
blockchain/cryptocurrency companies. This is due to the fact that the new altcoin generated
by an ICO often has a function within the company which increases its value. The speculation
on the fact that the value of the new altcoin will indeed increase is what attracts investors.

12. Initial Public Offering

Explanation: The holy grail of financing: the initial public offering (IPO)! An IPO is the
public listing of a company, which means that it is the first time a company offers its shares
to the general public (instead of to private individuals, investors or companies). This means
that practically anyone in the world (individuals or institutional investors) can invest in the
company by buying shares at a certain value.

Before an IPO, a company is private, which means that it often only has a limited number of
investors that have invested early stage or growth capital. Think of the founders, angels and
VC firms for instance.

When to choose this source of financing: For an initial public offering to be successful, a
company must be able to demonstrate years of strong growth, and its proposition typically
includes a certain network effect/scalability. Growth can be defined in several ways. This can
be turnover or profit but also, for example, the number of customers or active users. For
example, Spotify has been a loss-making company for years, but has been growing
enormously in terms of turnover and users.

A company also has to demonstrate transparency and confidence that growth will continue in
future years because it has to win the trust of the general public that the value of the shares
(which are bought by the public during the IPO) will rise in the future so that they can make a
profit on their investment.

For the investors that owned a share in the company already before the IPO, a public listing
can turn out to be very attractive (financially). An IPO should not be underestimated though:
it is a very costly process and results in many reporting requirements toward the public,
imposed by strict government regulations.

13. Revenue based financing

Explanation: Revenue based financing is a funding mechanism in which an investor provides

financing to a startup and in return the investor will receive a percentage (e.g. between 2% -
5%) of the (future) revenues generated by the startup. The future revenue-based interest
payments are typically capped at two to three times the size of the initial funding amount.

When to choose this source of financing: This type of funding is typically offered at (pre-)
seed stage. The benefits of this type of funding for startups are the following:

• The founders do not have to give away any equity meaning they will not dilute their
equity shares.

• As opposed to a normal bank loan the interest payments for revenue based financing
are linked to the generated revenues, which means that if revenues decline required
payments also decline. This reduces the chance of cash flow issues and potential
illiquidity.
MSME POLICY OF GOI

MSME Schemes – Ministry of Micro, Small and Medium Enterprises

MSME stands for Micro, Small and Medium Enterprises. These industries or enterprises form
the backbone of our economy and need assistance and protection from other big companies as
they lack resources and technology. To do this the government provides some schemes,
rebates or counselling to these enterprises.

Threshold for Enterprises to be Called as Micro, Small or Medium

The existing MSME classification was based on the criteria of investment in plant and
machinery or equipment. So, to enjoy the MSME benefits, they have to limit their investment
to a lower limit, as mentioned below:

Existing MSME Classification

Sector Criteria Micro Small Medium

ManufacturingInvestment < Rs.25 lakh < Rs.5 crore < Rs.10 crore

Services Investment < Rs.10 lakh < Rs.2 crore < Rs.5 crore

These lower limits are killing the urge to grow as they are unable to scale their businesses
further. Also, there has been a long-pending demand for the revision of MSME classification
so that they can further expand their operations while continuing to avail the MSME benefits.
Now, under the Atmanirbhar Bharat Abhiyan, the government revised the MSME
classification by inserting composite criteria of both investment and annual turnover.

Also, the distinction between the manufacturing and the services sectors under the MSME
definition has been removed. This removal will create parity between the sectors. The
following is the revised MSME classification, where the investment and annual turnover are
to be considered for deciding an MSME.

Revised MSME Classification

Criteria Micro Small Medium*

Investment

&

Annual Turnover < Rs.1 crore

&

< Rs.5 crore < Rs.10 crore

&

< Rs.50 crore < Rs.50 crore

&

< Rs.250 crore

 Further upward revision made by the government

The revision of MSME classification allows for further scaling of business and also increases
healthy competition among businesses.

MSME Schemes Launched by the Government-

1. Udyog Aadhaar Memorandum- Aadhaar card is a 12 digit number given to all

individuals by the government. In this, the Aadhaar card is a mandatory requirement.
The benefit of registering in this scheme is the ease in availing credit, loans, and
subsidies from the government. Registration can be done both ways in the online
mode or the offline mode.

2. Zero Defect Zero Effect- In this model, goods that are manufactured for export have
to adhere to a certain standard so that they are not rejected or sent back to India. To
achieve this the government has launched this scheme. In this, if the goods are
exported these are eligible for some rebates and concessions.

3. Quality Management Standards & Quality Technology Tools- Registering in this

scheme will help the micro, small and medium enterprises to understand and
implement the quality standards that are required to be maintained along with the new
technology. In this scheme, activities are conducted to sensitise the businesses about
the new technology available through various seminars, campaigns, activities etc.
4. Grievance Monitoring System- Registering under this scheme is beneficial in terms of
getting the complaints of the business owners addressed. In this, the business owners
can check the status of their complaints, open them if they are not satisfied with the
outcome.

5. Incubation-This scheme helps innovators with the implementation of their new

design, ideas or products. Under this from 75% to 80% of the project cost can be
financed by the government. This scheme promotes new ideas, designs, products etc.

6. Credit Linked Capital Subsidy Scheme- Under this scheme, new technology is
provided to the business owners to replace their old and obsolete technology. The
capital subsidy is given to the business to upgrade and have better means to do their
business. These small, micro and medium enterprises can directly approach the banks
for these subsidies.

7. Women Entrepreneurship- This scheme is especially started for women who want to
start their own business. The government provides capital, counselling, training and
delivery techniques to these women so that they manage their business and expand it.