What is a Startup?

A startup is a new business venture, usually created to solve a problem or meet a need in an
innovative way.

Startups are often fast-growing and focus on developing a new product, service, process, or
platform.

The goal is to build a business model that can grow and succeed on a large scale.

Key Features of Startups

Innovation: Startups often bring something new or disruptive to the market.

High Risk, High Reward: Many startups fail, but some become very successful and
influential.

Flexible Size: Startups can be small or large, but they usually start with a small team.

Building a Startup
Team: Founders build a team with the right mix of skills and resources.

Minimum Viable Product (MVP): Startups often create a simple version of their product to
test and improve their idea.

Research: Founders study the market, technology, and business potential of their idea.

Agreements in Startups
Founders’ Agreement: Sets out the roles, ownership, and contributions of each founder, and
how intellectual property will be handled.

Shareholders’ Agreement (SHA): Between founders and investors, this agreement covers
investment terms, rights, and exit options.

Business Models and Growth

Startups experiment with different business models to find what works (“bottom-up” or “top-
down” approaches).

A startup is no longer a startup once it:

Goes public (IPO)

Is acquired or merged with another company
Or, unfortunately, fails and closes down

Startup Ecosystem
Ecosystem: The network of people, organizations, and resources that support startups.

Who’s Involved? Universities, incubators, accelerators, co-working spaces, mentors, investors

(angel investors, venture capitalists), service providers, and more.

Resources: Skills, time, money, and connections are crucial for startup success.

Interactions: Events and meetings help startups find support, funding, and new opportunities.

1. What is a Startup? (As per DPIIT Notification dated 19th Feb 2019)
An entity is called a Startup if it satisfies all the following conditions:
Age: It must be less than 10 years old from the date of incorporation.

Legal structure: It must be:

A Private Limited Company under the Companies Act, 2013, or

A Registered Partnership under the Partnership Act, 1932, or

A Limited Liability Partnership (LLP) under the LLP Act, 2008.

Turnover: The annual turnover should not have crossed Rs. 100 crore in any financial year
since incorporation.

Innovation & Scalability: It should be working towards innovation, or improvement of

products/processes/services, or have a scalable model with high potential for job creation and
wealth generation.

Exclusion: If the entity is formed by breaking or restructuring an existing business, it will not
be considered a startup.

2. What is Startup India Initiative?

Launched on 16th January 2016 by the Government of India, the Startup India Initiative aims
to:

Encourage innovation

Promote investments

Build a strong ecosystem for startups

The Government's 19-Point Action Plan focuses on:

Simplification & Handholding

Funding support & incentives

Industry-academia partnerships & incubation

As of 31st December 2023, the Government has recognized 1,17,254 startups.

3. Three Major Government Schemes under Startup India

a) Startup India Seed Fund Scheme (SISFS)
Approved for 4 years from 2021-22 with a fund of Rs. 945 crore

Helps startups at early stages like proof of concept, prototype, product trials, market entry,
and commercialization.

Experts Advisory Committee (EAC) manages the scheme by selecting incubators who then
pick startups.

b) Fund of Funds for Startups (FFS)

Launched in June 2016 with Rs. 10,000 crore corpus

Managed by SIDBI
Doesn’t directly invest in startups; instead, it funds Alternative Investment Funds (AIFs),
which then invest in startups.

AIFs must invest twice the amount they receive from the government.

c) Credit Guarantee Scheme for Startups (CGSS)

Provides loan guarantees to startups through banks, NBFCs, and Venture Debt Funds.

Managed by National Credit Guarantee Trustee Company (NCGTC)

Supports startups in getting loans without collateral.

4. Additional Government Support for Startups

1. Startup India Action Plan
19 items focused on making it easier to start and grow a business.

2. Regulatory Reforms
Over 50 legal reforms to reduce paperwork and simplify business processes.

3. Ease of Procurement
Startups can sell directly to the government via GeM Startup Runway.

No need for past turnover/experience if they meet quality specs.

4. Intellectual Property (IP) Support

Fast-tracked patent examination

Startups Intellectual Property Protection (SIPP) scheme:

Free legal help for filing patents/trademarks

80% rebate on patent fees and 50% on trademarks

5. Self-Certification for Compliance

Startups can self-certify under 9 labour laws and 3 environmental laws for 3 to 5 years.

6. Income Tax Exemption

Startups incorporated after 1st April 2016 can apply for 3-year tax exemption (within the first
10 years).

7. International Market Access

Startup bridges with 17+ countries help Indian startups explore global markets.

8. Faster Exit for Startups

Winding up within 90 days, compared to 180 days for other companies.

9. Startup India Hub

Online platform launched on 19th June 2017

Helps startups connect with investors, mentors, institutions, and other stakeholders.

10. Exemption from Section 56(2)(viib)

DPIIT-recognized startups are exempt from angel tax provisions on share valuation.

11. Startup India Showcase

Online platform to feature India's top startups selected through competitions and schemes.

12. National Startup Advisory Council

Set up in January 2020

Advises government on building a robust startup ecosystem.

5. Other Government Programs for Startups

13. National Startup Awards
Rewards innovative startups with high potential for employment, wealth creation, and social
impact.

14. States’ Startup Ranking Framework (SRF)

Promotes competition among states to develop strong local startup ecosystems.

15. Startup Champions on Doordarshan

Weekly TV program to showcase successful Indian startups.

16. Startup India Innovation Week

Held around 16th January each year to celebrate startups and promote entrepreneurship.

17. Startup India Investor Connect Portal

Connects startups with investors, especially early-stage companies from smaller cities.

18. National Mentorship Portal (MAARG)

Offers mentorship support through a centralized portal.

19. ASCEND Program

Focused on Northeast India, promoting entrepreneurship via workshops and training.

20. Startup20 Engagement Group

Part of India’s G20 Presidency, aimed at global collaboration between startups, corporates,
and governments

1. Issue of Sweat Equity Shares by Startup Companies

Legal Amendment:
The Companies (Share Capital and Debentures) Amendment Rules, 2020, notified on 5th
June 2020, introduced a key change for startups.

Key Provision:
A startup company as defined under DPIIT’s Notification No. G.S.R. 127(E) dated 19th
February 2019 can issue sweat equity shares up to 50% of its paid-up share capital.

This can be done within 10 years from the date of incorporation or registration.

Earlier Limit: Only up to 5 years from incorporation.

Purpose:
Sweat equity shares are typically issued to founders, employees, or directors as a non-cash
reward for their contribution—such as technical expertise, intellectual property, or value
addition.

📲 2. Recognition as a Startup
Recognition is granted by the Department for Promotion of Industry and Internal Trade
(DPIIT) under the Ministry of Commerce and Industry.
Process of Recognition:
A. Online Application:
Startups must apply through the DPIIT’s portal or mobile app.

B. Required Documents:
Certificate of Incorporation/Registration (depending on whether it's a company or LLP)

A write-up explaining:

How the entity’s business involves innovation, development, or improvement of

products/services/processes, or

How it has scalability in terms of employment generation or wealth creation.

C. DPIIT’s Discretion:
DPIIT may examine the documents and conduct inquiries.

Based on evaluation, DPIIT may:

Grant Recognition, or

Reject the application, providing reasons.

💼 3. Certification by Inter-Ministerial Board (IMB) for Tax Benefits under Section 80-IAC
Purpose:
To avail income tax exemption under Section 80-IAC of the Income Tax Act, 1961.

Eligibility:
The entity must be a Private Limited Company or an LLP.

Must fulfill the conditions laid out in sub-clause (i) and (ii) of the Explanation to Section 80-
IAC.

Should be a recognized Startup by DPIIT.

Should have been incorporated on or after 1st April 2016 and before 1st April 2022.

Application Process:
File Form-1 to the Inter-Ministerial Board of Certification.

Submit all supporting documents.

Board Composition:
Joint Secretary, DPIIT – Convener

Representative, Department of Biotechnology – Member

Representative, Department of Science and Technology – Member

Outcome:
The IMB, after reviewing the application, may:

Grant Certificate under Section 80-IAC, or

Reject the application, with reasons.

Benefits:
100% tax exemption on profits for 3 consecutive financial years out of the first 10 years since
incorporation.

Annual turnover must not exceed ₹100 crore during the year in which exemption is claimed.

4. Angel Tax Exemption under Section 56(2)(viib) of the Income Tax Act
Angel Tax refers to taxation of share premium received by companies from investors.

Purpose:
Section 56(2)(viib) aims to prevent the laundering of unaccounted money through excessively
high share premiums. However, this affected genuine startups raising capital.

Hence, exemption provisions were introduced for recognized startups.

Conditions for Exemption:

DPIIT Recognition: The startup must be recognized under Para 2(iii)(a) or earlier DPIIT
notifications.

Capital Threshold:

The aggregate paid-up share capital and share premium after issue of shares should not
exceed ₹25 crore.

Exclusions from this ₹25 crore limit:

Shares issued to non-residents
Shares issued to a venture capital company or fund
Shares issued to a specified company

Investment Restrictions:
Startups must not invest in the following assets for 7 years from the end of the financial year
in which shares were issued at a premium:

Residential property (unless rented or stock-in-trade)

Commercial land/buildings not used for business
Loans/advances not in ordinary business course
Capital contributions to other entities
Shares or securities
Luxury vehicles, yachts, aircraft (costing > ₹10 lakhs) unless for leasing or stock-in-trade
Jewellery (unless stock-in-trade)
Other assets under Explanation (d)(iv) to (ix) of Section 56(2)

Application Process:
File Form 2 with DPIIT, declaring that the startup meets all conditions.
DPIIT forwards the declaration to the CBDT (Central Board of Direct Taxes) for exemption
processing.

Definitions:
Specified Company: Listed company (SEBI-regulated) with:

Net worth > ₹100 crore or

Turnover > ₹250 crore in the preceding financial year.

Venture Capital Company/Fund: As defined in the explanation to Section 56(2)(viib).

🌐 Role of Indian States in the Startup Ecosystem

1. Initial Scenario: Fragmented Efforts
Before the Startup India initiative (launched in 2016), only four States had their own Startup
policies.

Startup development was fragmented, with isolated initiatives and little coordination or
knowledge sharing.

This posed challenges to national-level startup growth and investor confidence.

2. Transformation Post Startup India

The Startup India campaign catalyzed a national movement, encouraging States and Union
Territories (UTs) to:

Draft their own Startup policies

Set up incubators, accelerators, and innovation hubs

Organize boot camps, hackathons, and pitching sessions

3. Current Landscape (as of 2022)

31 States/UTs have active Startup policies.

Others are in the process of formulating their own operational guidelines and frameworks.

The aim is to create enabling ecosystems rooted in strong policy frameworks and local
innovation support.

🧱 Core Functions of State-Level Support

A. Policy Framework
Acts as the foundation for any startup ecosystem.

Includes incentives, subsidies, regulatory relaxation, and strategic support for innovation.

B. Implementation
Effective execution is as crucial as policy drafting.

State departments must build dedicated teams, streamline processes, and foster public-private
partnerships.

C. Cross-State Learning
India’s diversity allows for cross-learning among States—States are encouraged to adopt each
other’s best practices.

🔧 States’ Role in Reducing Regulatory Burden

States can empower startups by easing local regulatory requirements:

Labour Laws: Flexible employment norms, self-certification under certain acts

Taxation: Incentives such as SGST rebates, exemptions

Land Use: Simplified allocation and affordable leasing in industrial zones

Single Window Clearances: For licenses and compliance

States' Startup Ranking Framework (Initiated in 2018)

Objective:
To encourage cooperative federalism and promote competition among States/UTs to build
vibrant startup ecosystems.

Structure:
A ranking system based on performance and reforms undertaken by each State/UT.

Covers both quantitative and qualitative metrics of startup support.

🔄 Evolution of the Framework

Additions in the 2021 Edition:
Capacity Building of Enablers:

Training & awareness programs for government officials, incubator staff, and support teams.

Mentorship Support:

Building mentor pools across sectors and ensuring startups have easy access to guidance.

Fostering Innovation and Entrepreneurship:

Emphasizes student-led entrepreneurship, grassroots innovations, and disruptive policy

experiments.

States' Startup Ranking 2021 – Results

Best Performing States:
Gujarat
Karnataka
Meghalaya (a small state showing exceptional progress)

Outcomes:
Most States/UTs now have dedicated Startup Portals in local languages.

Many have launched targeted schemes for:

Women entrepreneurs
Technology startups
Rural innovators

Compendium of Best Practices

The government compiled 30+ best practices from across Indian States to promote:
Replication of successful initiatives
Innovation in policy design and execution

🇮🇳 EXEMPTIONS AND INCENTIVES FOR STARTUPS IN INDIA

To foster entrepreneurship, boost economic growth, and make India a global hub for
innovation, the Government has introduced various policy benefits, tax exemptions, and
procedural simplifications for startups.

1. ✅ Simple Registration Process

Digital-First Approach: The government has launched a dedicated Startup India portal and
mobile app.
Completely Online: Founders can register their startup by filling a simple online form and
uploading basic documents (like incorporation certificate, business description, etc.).

No manual paperwork or physical verification required initially.

Purpose: To eliminate bureaucratic hurdles and encourage more entrepreneurs to formalize

their businesses.

2. 💰 Reduction in IPR Costs

Startups receive professional help from a government panel of facilitators for filing patents
and trademarks.

80% cost reduction in patent filing fees.

Facilitator fees are fully borne by the Government of India.

Startups pay only the statutory fees.

Impact: Encourages startups to protect their innovations and build IP assets affordably.

3. 📈 Easy Access to Funds

A ₹10,000 crore ‘Fund of Funds’ has been set up by the Government, managed by SIDBI
(Small Industries Development Bank of India).

Startups get venture capital via SEBI-registered venture funds.

Credit guarantee is provided to banks to encourage them to lend to startups.

Result: Helps reduce the dependency on informal sources of capital and improves financial
access.

4. 🧾 Tax Holiday for 3 Years

Startups are eligible for 100% Income Tax exemption for 3 consecutive years out of their first
10 years.

This is subject to certification by the Inter-Ministerial Board (IMB).

Eligibility Conditions:

Must be a DPIIT-recognized startup

Must not have annual turnover exceeding ₹100 crore

Objective: To allow startups to reinvest profits into scaling the business.

5. 📄 Exemption from Prior Experience in Tenders

Startups are exempt from criteria like "prior experience" or "minimum turnover" when
applying for government tenders.

This levels the playing field for new businesses.

Effect: Enables startups to compete in government procurement opportunities.

6. 🔬 Access to R&D Facilities

The government plans to build 7 new Research Parks at IITs and other premier institutions.

These facilities provide access to:

Laboratories

Equipment

Expertise

Purpose: To promote innovation and product development at early stages.

7. ⏳ Simplified Compliance
Startups can self-certify compliance with:

9 labour laws (e.g., EPF, ESI)

3 environmental laws (for white and green category industries)

Done via the Startup India mobile app.

Advantage: Reduces compliance burden, minimizes inspections, and saves time and money.

8. 💸 Tax Exemption for Investors

Investors investing their capital gains in government-notified startup funds are exempt from
capital gains tax.

Result: More incentives for angel investors, HNIs, and venture capitalists to invest in startups.

9. 🤝 Freedom to Choose Investors

Startups can freely negotiate terms and choose their own venture capitalists or angel
investors.

Impact: Empowers founders to align with investors who share their vision and values.

10. 🏁 Easy Exit Process

Startups can wind up operations within 90 days under the Insolvency and Bankruptcy Code
(IBC).

A professional liquidator is appointed to assist with the process.

Benefit: Reduces stigma and procedural delays related to business failure.

11. 🌍 Networking and Visibility via Startup Fests

The government hosts two Startup Fests annually:

One in India and

One international

Involves investors, mentors, entrepreneurs, corporate leaders, and policymakers.

Objective: Facilitate networking, investment deals, and international exposure

Benefit Details
Online Registration Simple, digital process through app/portal
IPR Facilitation 80% cost reduction + free facilitators
Access to Funds ₹10,000 crore fund + credit guarantees
Tax Holiday 3-year income tax exemption
Tender Relaxation No prior experience/turnover required
R&D Access 7 research parks at IITs and other institutions

Simplified Compliance Self-certification for 12 laws

Capital Gains Exemption Tax relief for investors investing in startup funds

Investor Flexibility Freedom to choose investors

Easy Exit Winding up within 90 days under IBC

Networking Events Bi-annual startup fests for visibility and global exposure

1. Choose the Right Legal Structure for Your Startup

Selecting the appropriate legal structure is one of the most crucial decisions for any startup.
This decision should be based on several factors, such as:

The nature and sector of business operations,

Projected business growth,

Regulatory and tax considerations,

Costs of formation and ongoing administration,

The need for external capital and the type of funding sought,

The extent of legal liability protection required,

The number of stakeholders,

The balance required between ownership and management,

The proposed mechanism for profit sharing or distribution among stakeholders.

Preferred entity structures in India for startups are:

Limited Liability Partnership (LLP): Offers limited liability and is easier to manage with
fewer compliance requirements.

Private Limited Company: Preferred for its credibility, ability to raise funds, and limited
liability protection.

2. Registrations and Business Licenses

After incorporating a business entity in India, certain registrations are legally mandatory. For
companies, the SPICe+ web form (INC-35) simplifies this process. Through this form, you
can apply for:
GSTIN (Goods and Services Tax Identification Number),

Establishment code as issued by EPFO (Employees’ Provident Fund Organisation),

Employer Code as issued by ESIC (Employees’ State Insurance Corporation),

Professional Tax Registration,

Opening of Bank Account,

Shops and Establishment Registration.

This is done alongside the E-MOA (INC-33) and E-AOA (INC-34) forms for company
incorporation.

Note: This process applies only to companies incorporated via the Ministry of Corporate
Affairs (MCA) through the SPICe+ application. Other types of establishments (like factories)
or categories (such as tax deductors, tax collectors, etc.) must follow the existing process for
registration through the respective common portals.

Business licenses are permits issued by a government authority that allow startups to lawfully
operate within a certain jurisdiction. The required licenses depend on:

The nature of business activity,

The number of employees,

The business location,

The form of business ownership.

Examples include: Food safety license, Health/Trade license, Shops & Establishment License,
etc.

3. Intellectual Property Protection

Intellectual Property Rights (IPR) are a very important asset class for startups. Developing
and protecting intellectual property through proper registration can provide a competitive
advantage.

Trademark Registration: Essential for the business name/trade name under the Trademarks
Act. Registering a company or business does not automatically protect the name from being
used by others.

Trademark Search: Conduct a search before deciding on business or trade names to avoid
infringement issues.

Ownership: All intellectual property (trademarks, copyrights, designs, trade secrets,

inventions, patents, etc.) should be registered in the name of the entity, not in the name of the
promoters or founders.

4. Founder Equity – Split and Vesting

Founder equity should be distributed based on the role, time, effort, and capital contribution
of each founder. Avoid splitting equity equally by default; have thorough discussions about
expectations and contributions to avoid future tensions.
Vesting: Founder shares should be subject to a vesting schedule, typically over three to four
years. If a founder leaves or is terminated before full vesting, the unvested shares can be
repurchased or transferred at a nominal value. This ensures the long-term viability of the
business.

5. Founder Agreements
A founder’s agreement is a critical tool to establish the relationship between the founders. It
should clearly outline:

The roles and responsibilities of each founder,

The decision-making and operating structure,

The equity split with vesting,

Assignment of all intellectual property to the startup,

Terms for the termination of a promoter and the exit process.

This agreement helps prevent misunderstandings and disputes as the business grows.

6. Employment Contracts
Startups must have clear employment contracts that detail the terms and conditions of
employment. These contracts are valuable for employees and protect the interests of the
startup by including clauses such as:

Non-compete: Prevents employees from setting up competing businesses.

Non-solicitation: Prevents poaching of other employees, clients, or customers.

IP Assignment: Ensures that any intellectual property developed during employment belongs
to the startup.

7. Employee Stock Option Pool (ESOP)

ESOPs are incentives given to employees and directors to attract and retain talent by
rewarding them. They create a sense of ownership among employees.

How ESOPs Work: They are options to buy shares at a discounted price, exercisable only
after a certain vesting period decided by the company.

Note: ESOPs are not shares themselves but options to acquire shares in the future.

8. Third Party Agreements

When entering into agreements with vendors, consultants, or other third parties:

Always execute a Non-Disclosure Agreement (NDA) to protect confidential information.

If intellectual property is developed, the agreement must clearly state that all rights to the IP
will vest in the startup, and the third party will not claim any ownership.

Include well-negotiated clauses for breach, termination, and dispute resolution.

9. Investment Structuring
Raising capital is one of the most challenging and time-consuming aspects for startups.
Investors (HNIs, Angels, Funds) invest at various stages and on different terms.
Legal Advice: It is crucial to seek proper legal advice when negotiating investment terms and
the rights of investors.

Process:

Term Sheet: An initial document outlining the structure of the transaction.

Due Diligence: Investors review the startup’s legal and financial health.

Definitive Agreements: Legal contracts that finalize the investment.

10. Compliance Management

Compliance is often overlooked but is critical for sustainable business growth. Multiple laws
apply to different entity structures, requiring separate event-based and annual compliance.

Areas of Compliance: Legal, secretarial, accounting, taxation, employee-related, and other

statutory compliances.

Consequences of Non-Compliance: Can result in heavy fines or penalties for the startup.

Seed Capital
Seed capital refers to the initial financial support provided to a startup to help it begin
operations. This early-stage funding is used for activities such as product development,
market research, team building, and other foundational efforts necessary to turn an idea into a
viable business.

This capital usually comes from founders, friends, or family members, and is used before the
business can attract larger institutional investors. The main purpose of seed capital is to help
the business test the feasibility of its idea and develop a Minimum Viable Product (MVP) that
can be showcased to potential investors.

Startups should utilise seed capital wisely to ensure smooth progress to advanced stages of
business. Mismanagement at this stage can lead to premature dilution of equity and reduced
control over the venture.

Features of Seed Capital:

Used in early stages for research, testing, and development.

Usually equity-based or in the form of convertible instruments.

Investors are typically close connections of the founder or angel investors.

Lower legal formalities and legal costs compared to later-stage funding.

Risky for investors, as the business has not yet proven market potential.

Can result in early dilution of ownership for the founders.

Types of Startup Financing

Startups usually raise funds in two broad categories:

(A) Equity Financing

In equity financing, investors provide capital in exchange for ownership (equity) in the
startup. This form of financing is common among startups looking for non-repayable capital
in exchange for giving up a percentage of ownership.

(i) Venture Capitalists / Private Equity (VC/PE)

VCs and PEs are institutional investors that fund startups with high growth potential. These
investments often come after the seed stage and are typically made through convertible
instruments such as:

Compulsory Convertible Preference Shares (CCPS)

Compulsory Convertible Debentures (CCDs)

Procedure for VC/PE Funding:

Term Sheet / Letter of Intent (LOI) / MoU:

Outlines basic commercial terms.

Acts as a non-binding document before due diligence.

Due Diligence:

Financial, legal, and technical scrutiny of the startup.

Helps investors assess risk and decide on investment terms.

Share Subscription Agreement (SSA) / Debenture Subscription Agreement (DSA):

Defines share/debenture issue, valuation, and conditions precedent/subsequent.

Includes representations, warranties, and indemnities.

Shareholders’ Agreement (SHA):

Covers:

Board representation.

Information and reporting rights.

Exit and redemption rights.

Pre-emption, Right of First Refusal (ROFR), Tag-along/Drag-along rights.

Lock-in periods, anti-dilution protection, put/call options.

Reserved matters requiring affirmative investor votes.

Private Placement Process:

Issuance of securities to investors as per Companies Act.

Filing of e-Forms with RoC:

Mandatory regulatory filings for allotment and issue of securities.

Amendment of AoA:

To incorporate provisions of the SHA.

Completion of Conditions Subsequent:

Final steps to operationalize the investment agreement.

(ii) Angel Investors

Angel investors are individuals or professionals who invest personal capital in exchange for
equity. They typically invest at the seed or early growth stages.

SEBI Guidelines under AIF Regulations:

Angel Funds must invest only in startups that:

Are not promoted by industrial groups with turnover > ₹300 crores.

Do not have family connections with investing angels.

Investment range: Minimum ₹25 lakhs to maximum ₹10 crores.

Lock-in period: 1 year from the date of investment.

(iii) Bridge Round

Bridge funding is an interim financing round raised between two major funding rounds to:

Maintain business operations.

Fund rapid growth.

Prepare for the next round or IPO.

Typically structured as convertible debt, bridge rounds:

Are often raised from existing investors first.

Act as a short-term loan or capital infusion.

Example: If a startup is sanctioned a ₹5 crore loan to be disbursed in 6 months, it may raise a

bridge round to sustain operations until the disbursement begins.

(iv) Series Funding (Series A, B, C, ...)

After seed, angel, and bridge rounds, a startup may raise series funding, which includes
multiple rounds like Series A to Z.

Series A is the first round where institutional investors invest significant capital.

Investors receive series preferred stock, which can be converted to common stock during IPO
or sale.

Typical Features:

Investment range: $2 million to $10 million.

Equity stake: 10% to 30%.

Purpose: To fund product scaling, hiring, marketing, and growth operations.

Covers working capital needs for 6 months to 2 years.

(B) Debt Financing

Though not detailed in your material, for completeness:

In debt financing, the startup borrows money that must be repaid with interest, without giving
up equity. This can include bank loans, venture debt, or convertible notes. Startups opt for
debt when they wish to:

Avoid dilution.

Have predictable revenue to meet repayment schedules.

Conclusion
Understanding the nuances of seed capital and subsequent funding options is crucial for any
startup founder. Each funding stage—whether seed, angel, bridge, or series—has its own
purpose, legal procedures, benefits, and risks. Strategic planning, sound legal advice, and
clarity in structuring these investments are essential for long-term sustainability and growth of
the startup.

SOURCES OF FUNDS
Since private companies do not have their securities listed on public exchanges, they meet
venture capital (VC) firms and private equity investors through various means. These include:

Warm referrals from trusted sources of investors and business contacts.

Investor conferences and demo days, where companies pitch directly to groups of investors.

As equity crowdfunding becomes more established, startups are increasingly raising part of
their Series funding rounds online using various platforms such as:

Onevest or Seed Invest in the USA,

Seeds in the UK,

VC-Circle, Private Circle, Lets Vanture, and Tracxn Labs in India.

These fundraising rounds often blend different investors, including angel investors, strategic
investors, customers, and offline venture capitalists.

A. Structure of Funding Rounds

Smaller investment amounts are often not viable due to high legal and financial expenses, the
complexity of adjusting the company's capital structure, and the rigorous due diligence
required by institutional investors.

Companies needing funds but not ready for venture capital typically seek angel capital.

Large investments are common in sectors like pharmaceuticals, semiconductors, and real
estate development, with Series A rounds sometimes exceeding $10 million.

In industries such as software, telecommunications, and data services, high amounts are
usually unnecessary.
Things to Know When Raising a ‘Series A Round’
Be Series A Ready:
Understand what venture funds look for to confirm readiness for Series A. Key factors
include:

Promising unit economics

Revenue generation

Proof of business model

Systems for efficient scaling

Product-market fit

Customer acquisition strategy and success

Quality of the founding team

Start Early:
Fundraising is time-consuming; begin the process at least 7-8 months before the intended
raise. The deal process has two phases: pre-term sheet and post-term sheet. Underestimating
this timeline can lead to desperation and the need for bridge funding.

Leverage Your Network:

Seed funding is easier to raise than Series A. Use your network and second-degree
connections to secure meetings with investors. PR and marketing can help spread awareness
of your startup.

Practice Your Pitch:

Take as many meetings as possible. Gather feedback from founders who successfully raised
Series A. Pitch to lower priority investors first to refine your presentation before meeting key
investors. Treat your pitch as a product that you continuously improve.

Create Fundraise Momentum:

Approach multiple VC funds simultaneously to create competitive dynamics. Maintain
similar progress with interested investors to increase bargaining power, improve valuation,
and deal terms. Landing one term sheet often attracts others.

Know the Standard Market Practice:

Stay updated on common deal terms. Initial term sheets may be less founder-friendly.
Negotiation is best justified by referencing standard market practices.

Get the Deal Terms Right:

Series A deal terms form the foundation for future rounds (Series B, Series C). Getting terms
right early is crucial as many conditions carry forward.

Engage a Professional:
Use experts specializing in venture capital financing to understand deal structures, market
standards, and negotiation tactics. This speeds up document closure and improves efficiency.

Paperwork in Place:
Prepare all legal documents and compliance records for due diligence, including employee
records, past financing details, corporate structure, contracts, intellectual property, and
capitalization table.

Raise 10-15% More than Budgeted:

Raise slightly more than planned to cover unforeseen business expenses and operations.
Subsequent rounds post-Series A are tougher, time-consuming, and distracting, with
transaction costs each time.

B. Debt Financing
i. Loans from Banks & NBFCs:
These loans support inventory and equipment purchases, working capital, and business
expansion. Banks and NBFCs do not take equity but charge interest and require repayment
regardless of business performance. Collateral and good credit history are mandatory, along
with documentation such as:

Loan application and sanction letter

Loan agreement

Security documents (Deeds of mortgage, hypothecation, guarantee, share pledge, etc.)

ii. External Commercial Borrowings (ECB):

ECBs include bank loans, buyer’s credit, supplier’s credit, and securitized instruments (non-
convertible preference shares, bonds, etc.) from non-resident lenders. ECBs can be accessed
via:

Automatic Route or

Approval Route, based on borrower category, lender eligibility, amount, maturity period, etc.

Restrictions apply to ECB use; it cannot fund on-lending, capital market investments,
acquisition of companies in India, or real estate. ECB borrowing requires creating charges on
assets and issuing guarantees to secure the loans, following RBI guidelines and
documentation similar to bank loans.

iii. CGTMSE Loans:

The Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme by the
Ministry of MSME provides loans up to ₹1 crore without collateral or surety. It is available
through scheduled commercial banks and specified financial institutions partnered with
CGTMSE.

C. Initial Public Offering (IPO)

An IPO allows companies to raise capital by issuing equity shares to the public, tapping into a
wide investor pool. Existing shareholders’ ownership gets diluted but often increases in
absolute value due to capital infusion.

Companies may also issue American Depository Receipts (ADRs) or Global Depository
Receipts (GDRs) to attract international investors.

Promoter obligations in IPOs include:

Meeting minimum contribution requirements

Generally a 3-year lock-in period after IPO completion

Several parties participate in the IPO process, including investment bankers, underwriters,
and lawyers.

D. Unconventional Modes of Financing (Increasingly Popular in India)

i. Crowd Funding:
Crowdfunding is a relatively recent method, where startups raise seed capital by collecting
small amounts from many people, usually online. Entrepreneurs showcase their business ideas
on portals with detailed profiles including:

Business idea

Impact

Investor rewards and returns

Supporting images/videos

In 2014, SEBI issued a consultation paper proposing a regulatory framework for

crowdfunding in India. Although regulations are not finalized, the concept is gaining traction.

ii. Incubators:
Incubators assist entrepreneurs before seed funding by helping develop ideas or prototypes in
exchange for 2-10% equity. They provide office space, legal compliance support, training,
mentoring, and connections to investors. These setups often last 2-3 years with rigorous
admission processes.

In India, prominent incubators include:

IIM Bangalore NSRCEL

Microsoft Accelerator

IIT Kanpur SIIC

Shri Ram College of Commerce (SRCC)

What is Entrepreneurship?
Entrepreneurship is the process of starting and running a business with the aim of making
money, earning profits, and increasing wealth.

It involves taking risks, showing leadership, managing resources, and being innovative.

The term can mean different things in different contexts:

At one end, it refers to highly skilled individuals who pioneer change and innovation.

At the other end, it can simply mean anyone who starts and runs their own business.

Economists’ Views
Some see entrepreneurs as risk-takers who start new ventures for profit.

Others focus on entrepreneurs as innovators who bring new products or processes to market.
Another view is that entrepreneurs supply goods or services that the market needs but aren’t
currently available.

Four Key Elements of Entrepreneurship

Innovation:
Bringing new ideas, products, or methods to the market.

Risk Taking:
Willingness to face uncertainty and potential losses in pursuit of success.

Vision:
Having a clear idea of what the business wants to achieve in the future.

Organising Skills:
Ability to manage resources, people, and processes to achieve business goals.

Traits of an Entrepreneur
Develops and owns their own business.

Takes moderate risks and works under uncertainty to achieve goals.

Is innovative and always looks for better ways to do things.

Has a strong urge to be independent and self-reliant.

Is persistent and determined, even in tough times.

Shows leadership and competitiveness.

Takes personal responsibility for outcomes.

Is future-oriented and looks for opportunities in every situation.

Characteristics of an Entrepreneur
Mental Ability:
Creative thinking, problem-solving, and ability to anticipate changes.

Business Secrecy:
Protecting business secrets from competitors.

Clear Objectives:
Having well-defined business goals and knowing what the business aims to achieve.

Human Relations:
Maintaining good relationships with customers, employees, and others; showing emotional
stability and tact.

Communication Ability:
Being able to clearly exchange information so that everyone understands.

Entrepreneurship vs. Startup

Entrepreneurship is a broad term that covers all types of business ventures—new or old, small
or large, based on new or existing ideas. It includes:

Small businesses
Partnerships

Firms

Sole proprietorships

Corporations

Startup is a specific type of entrepreneurship. A startup is:

A newly formed business, usually by individual founders.

Focused on solving a specific market problem or gap.

Based on a unique or innovative idea.

In short:
All startups are entrepreneurial ventures, but not all entrepreneurs run startups.
Entrepreneurship is about the spirit and process of creating and running a business, while a
startup is a special kind of new business with a focus on innovation and rapid growth.

Summary Table

Aspect Entrepreneurship Startup

Scope All business ventures (new/old, big/small) New, innovative business solving a
market gap
Focus Profit, wealth creation, management, innovation Innovation, scalability, rapid growth
Examples Shops, factories, firms, corporations, startups Tech companies, app
developers, new platforms

Introduction to Unicorn Startups

Definition and Significance
A unicorn startup refers to a privately held company with a valuation exceeding $1 billion.
The term symbolizes rarity and exceptional success. Unicorns are typically companies that
disrupt traditional markets by innovating solutions that address unmet or poorly served needs
with new technology or business models.

Growth Journey of Unicorns

Unicorn startups often enter the market at the growth stage, having demonstrated scalable
product-market fit. Their rapid valuation growth stems from:

Disruptive innovation

Large addressable markets

Strong venture capital support

Effective scaling strategies

Evolution of Indian Unicorn Ecosystem

Two decades ago: Limited active investors and minimal infrastructure such as incubators or
accelerators.
Past decade: Exponential growth driven by:

Increase in angel investors, venture capital, and private equity firms.

Government initiatives like Startup India, ease of doing business reforms.

Robust support networks including accelerators and incubators.

This ecosystem led to an acceleration in the number of Indian unicorns, from roughly one
unicorn per year till FY 2016-17 to a 66% year-on-year growth rate in new unicorns
thereafter.

Statistical Highlights (As of October 3, 2023)

Total Indian unicorns: 111 with combined valuation of $349.67 billion.

Unicorns added in 2021: 45 (valued at $102.3 billion)

Unicorns added in 2022: 22 (valued at $29.2 billion)

Key hubs: Bengaluru (unicorn capital), Delhi NCR, Mumbai.

Dominant sectors: E-commerce, Fintech, Supply Chain & Logistics, Internet Software &
Services.

Emerging sectors: Content, Gaming, Hospitality, Data Management & Analytics.

Fastest unicorn in India: Mensa Brands (6 months to reach unicorn status).

India has also birthed 5 decacorns (valuation > $10 billion) including Flipkart, BYJU’s,
Nykaa, and Swiggy.

CASE STUDY 1: ZOMATO – India’s First Listed Unicorn

Company Overview & Timeline
Incorporation: January 18, 2010 as DC Foodiebay Online Services Pvt Ltd.

Renamed: Zomato Media Pvt Ltd in 2012.

Further name change: Zomato Pvt Ltd in April 2020.

Converted to Public Limited Company: Zomato Ltd in April 2021.

Headquarters: Gurugram, India.

No identifiable promoters, professionally managed with a diverse Board.

Business Model Evolution

Initially launched as a restaurant discovery platform allowing users to browse menus and
reviews.

Evolved into a multi-service food-tech platform with:

Food delivery services.

Dining-out table booking.

Hyperpure: B2B supply of ingredients and kitchen products to restaurants.

Zomato Pro: Subscription model offering dining and delivery benefits.

Financial Growth
Fiscal Year Revenue from Operations (INR million) Key Notes
FY 2019 13,125.86 Growth driven by expansion in food delivery and dining
services.
FY 2020 (Data not provided in source) Impact of COVID-19 lockdowns, decline in
dining out, rise in food delivery.
FY 2021 19,937.89 Recovery post lockdown; Q4 recorded highest gross order
value (GOV).

Technology and Market Strategy

Zomato’s technology platform connects three major stakeholders:

Customers: Restaurant search, reviews, online orders, payments.

Restaurants: Marketing tools, customer acquisition, last-mile delivery.

Delivery Partners: Flexible earning opportunities, real-time tracking.

The company also operates Hyperpure, ensuring quality control and supply chain efficiency
in B2B food procurement.

IPO Details
Opened: July 14, 2021; Closed: July 16, 2021.

Amount raised: $1.3 billion.

Major investors: Morgan Stanley, Tiger Global, Fidelity Investments.

Subscription stats:

Retail investors: 7.45 times oversubscribed.

Qualified Institutional Buyers (QIBs): 51.79 times oversubscribed.

Non-Institutional Investors (NIIs): 32.96 times oversubscribed.

Employee category: 0.62 times subscription.

Market debut made Zomato India’s first listed unicorn.

Role During COVID-19 Pandemic

Implemented contactless delivery and payment systems to reduce health risks.

Trained delivery executives on hygiene and safety protocols.

Launched free medical consultations and financial support schemes for delivery partners.

Demonstrated agility in addressing pandemic challenges while continuing business growth.

Critical Success Factors

Robust technology platform integrating diverse user needs.
Strong brand recognition and consumer trust.

Strategic investor partnerships.

Agile pandemic response enhancing brand loyalty.

Innovative marketing and social media engagement.

Efficient last-mile delivery network.

Challenges
Highly competitive food delivery market with players like Swiggy.

Thin margins typical to food delivery startups.

Need for continuous innovation to sustain growth.

CASE STUDY 2: DELHIVERY – E-Commerce Logistics Leader

Company Profile & Timeline
Founded: June 22, 2011 as SSN Logistics Pvt Ltd.

Renamed: Delhivery Pvt Ltd in December 2015.

Converted to Public Limited Company: Delhivery Ltd in October 2021.

Headquarters: Gurugram, India.

Board: 11 directors (executive, nominee, independent), including a woman director.

Business Objectives (As per Memorandum of Association)

Provide comprehensive logistics and delivery solutions to businesses and consumers.

Offer internet/web services (e.g., web hosting, content development).

Unicorn Status & Funding

Achieved unicorn status in 2019 after a $413 million Series F round.

Led by investors such as SoftBank Vision Fund, Carlyle Group, Fosun International.

Valuation rose to $4.77 billion by May 2022.

Financial Performance
Fiscal Year Revenue from Contracts (INR million) Restated Losses (INR million)
Notes
FY 2019 16,538.97 17,833.04 Heavy investment phase, losses due to fair
value losses and expansion costs.
FY 2020 (Not fully specified) 2,689.26 Pandemic impact and operational
scaling.
FY 2021 36,465.27 4,157.43 Revenue doubled but losses continued due to
aggressive growth.
9 months ended Dec 2021 48,105.30 8,911.39 Increased scale with losses
narrowing in proportion.

Core Services & Offerings

Warehousing: Flexible warehousing services in 40+ cities.

Transportation: Extensive pan-India network covering over 19,000 pin codes and 2,500 cities.

E-Commerce Integrations: Ready connections with platforms such as Shopify,

WooCommerce, Magento.

Scale & Reach

Fulfilled over 1.4 billion orders since inception.

Network includes:

21 automated sort centers

96 gateways

93 fulfillment centers

2,948 direct delivery centers

Workforce of over 58,000 employees.

Services 18,000+ pin codes across all states.

Customers and Sectors Served

29,200+ active customers including:

E-commerce marketplaces

Direct-to-consumer retailers

Enterprises and SMEs

Vertical sectors: FMCG, consumer durables, electronics, lifestyle, retail, automotive,

manufacturing.

Innovation & Competitive Edge

Focus on automation and network engineering to optimize supply chain.

Economical shipping with no setup or subscription fees.

Continuous innovation in logistics tech and infrastructure.

Role During COVID-19

Key partner in importing and distributing oxygen concentrators (8,419 units) during the
second COVID wave in 2021.

Collaborated with NGOs and government bodies (e.g., ACT Grants) to import and distribute
medical supplies.

Demonstrated social responsibility alongside business growth.

Strategic Challenges
Competing with global and local logistics providers.
Balancing rapid growth with profitability.

Managing logistics in a geographically diverse and infrastructurally varied country.

Conclusion
Delhivery successfully transformed from a local logistics provider to a pan-India supply chain
leader.

Its investments in technology and network expansion enabled it to capture the booming e-
commerce logistics market.

Despite losses, the company’s revenue growth and investor confidence underpin its unicorn
status and market leadership