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In this era
of digitization, technological inventions, artificial intelligence, almost everyday
we hear about things which had we heard a few years ago we’d laugh it off. But
now nothing seems impossible.
And the word which is gaining prominence is “Start-up”.
What does it mean? How does Start-up work? Where do they get money from and how
do they survive even when 99 percent of them fail?
Let us try
to answer the questions one by one.
Start-up – What Is It and What Are
Its Major Types?
As the term
start up is not officially defined term anywhere in the world, we can define
term keeping in mind the purpose of the organization or business. But the most
practical definition of start-ups goes as follows:
“As start-up
is a model of business that evolves out of an idea to solve a particular
problem.” We all know companies like Delhivery, Ola, Oyo, QuickRide. They all
solve the problem of easy delivery, effective conveyance, and quality living at
the tap of your smartphones.
Also, a start-up
is not a smaller version of big companies. It is the “Organization formed to
search for a repeatable and salable business model” in the process of creation
and growth. Let us look at the 2 major types of startups –
1. Unicorn:
Just to remind, before readers imagine some fairy-tale, it's just the terminology.
It’s a type of privately held start-up company that achieves a current
valuation of $1 Billion. If you have noticed the word “Unicorn” consists of
“UNI” indicating “1”.
India is
the home for 31 Unicorns which includes popular names like Delhivery, OYO, OLA,
OLA Electric, Bigbasket, Policybazaar, Flipkart, Snapdeal, etc.
2. Cockroach: Before knowing cockroach as a type
of start-up, first focus on what quality cockroach possess –
a) It can
be alive for a week even after losing its head.
b) It can survive long without food.
c) Explosive growth.
Now back to start up. A cockroach start up is one
which despite struggles and changes in the market keeps moving in one direction
like a cockroach. This category doesn’t believe in spending too much and considered
a less risky investment.
How
Start-ups Get Their Funding?
Vitamin-M is Money which is the bloodline of any
business. The journey from generating ideas to generating revenue needs fuel
named “Capital”. At every stage of the business,entrepreneurs
find themselves asking, “How do I Finance
my start-up?”
Here are some comprehensive ways to fund a start-up
which includes –
1. Venture capital financing: This
is where you make the big bets. Venture capitals are
professionally managed funds who invest in companies that have huge
potential. They usually invest in business against equity and exit when
there is an IPO or an acquisition.
2. Angel Investing: Angel investors are individuals with
surplus cash and a keen interest to invest in upcoming start-ups. They
also work in groups of networks to collectively screen the
proposals before investing. They can also offer mentoring or advice
alongside capital.
3. Money through Bank Loans: this is the first place
entrepreneurs go for financing. Bank offers two types of loans- working capital
and other is funding. WC loan is for day to day operations requirements and can
be received by the hypothetical of debtors or stock.
Funding from a bank would involve the usual process of
sharing the business plan and the valuation details, along with the project
report, based on which the loan is sanctioned.
4. Government Programs
That Offer Start-up Capital:The
Government of India has launched 10,000
Crore Start-up Fund in Union budget 2014-15 to
improve the start-up ecosystem in India. To boost innovative product companies,
the Government has launched ‘Bank Of Ideas and Innovations’ program.
How Start-up
Survives Despite Losses?
Just to mention OYO hotels reported the loss of $335 Million
for the year ended March 2019, as compared to an earlier year loss of $50.5
Million. Have you ever wondered why investors make funding in start-ups despite
knowing their losses? There is a concept called “Greater Fool Theory”
The greater fool theory is a bedrock principle of investing.
It’s the belief that one can make money by speculating on future prices
because there will always be a “greater fool” who will be willing to pay more
than what you paid, even if you paid too much.
Those who subscribe to the greater fool
theory will often make questionable investments, not because they believe
that the current price is attractive, but rather because they believe that they
will be able to sell to someone else at an even higher price.
This is the case with the start-up as well. Any investor thinks
that they will take their money as soon as the company receives any other
funding and this story continues.
Be Cautious before investing in IPOs!
Why
Do Startups Fail?
In a survey, 99% of the start-ups fail and the root cause is
the funding. But despite being financially stable, there are some other notable
reasons for the failure of start-ups which are as follows:
1. Not able to provide what customer demands
2. Lack of innovation
3. Running out of cash (working capital) for day to day
operations.
4. Product problems
5. Poor Management personnel.
Conclusion
Any idea which leads to a successful Business model with
proper execution, planning, and management can do wonders for the co-founders
and the organization as a whole. Ideas are not definite or written in the form
of law, but is generated from observing the situation and adding value to it or
providing the solution.
India is becoming a growing platform for new companies, which
is now a big vision after the emergence of the Self Reliant India Movement
(Atmanirbhar Bharat) by our Prime Minister.
Written by
– Utkarsh Samaiya.
Edited by - Adrija Saha
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