An Empirical Study of Sources of Early Stage Startup
An Empirical Study of Sources of Early Stage Startup
Abstract
Over the past few years, startups have been seen as a taste of the season for India. This has resulted into the materialization of a
number of home grown new companies across the country. This development of a novel scenario has been due to the major
contributions that led to the mega funding ploughed into most of these new companies between 2007 and 2015. This paper
represented the growth of startup companies in India, their types, and possible sources of financing with special emphasis on
financing these ventures in the country. In this research, we examined the defining stages of development for startups as well as
their funding sources at each stage. The objective of this research paper was to investigate whether India made a shift from
conventional to the modern methods of financing. Therefore, this research can be helpful in superior understanding about the
funding strategies of entrepreneurial ventures. For conducting the research, a total of five states, that is, Odisha, Chhattisgarh,
Jharkhand, West Bengal, and Madhya Pradesh were taken into consideration. This paper is primarily based on survey
questionnaires, and the chi-square test was adopted to ascertain the results derived from the information gathered from the
respondents. The results revealed that there is an urgent need to provide financial literacy to startups and increase awareness on
the activities of angelNC fin,ancing through greater involvement with educational/research institutions and incubation centres.
Paper Submission Date : September 10, 2018 ; Paper sent back for Revision : July 25, 2019 ; Paper Acceptance Date :
August 10, 2019
T
he world has been experiencing an entrepreneurial revolution in the recent years. The growing economy
and the reality of an entrepreneurial ecosystem present a very supportive environment for materialization
of entrepreneurship than ever before. Still, the raising of a startup capital for a business venture has always
been a case of great concern and challenge, particularly for the knowledge based and innovative ventures. Since
these industries depend on a pure knowledge base and often start with just an idea or a prototype, the
asset/collateral - based instruments, adopted for the manufacturing industries, are not an option for such firms .
* Faculty Me mbe r, P.G . Department of Busines s Administration , Berhampur University, Bhanja Vihar,
Berahampur - 760 007, Odisha. (E-mail : [email protected])
** Faculty - Finance, Integrated MBA Department, B. J. B. Autonomous College, Bhubaneswar - 751 014, Odisha.
(E-mail: [email protected]); ORCID iD: 0000-0002-5023-1355
*** Professor, Faculty of Management Science , SRMSCET, Bareilly - 243 202, Uttar Pradesh .
(E-mail: [email protected])
DOI : 10.17010/ijf/2019/v13i9/147099
Literature Review
The significance of startup capital has been well established in entrepreneurship literature. Ho and Wong (2005)
empirically studied the new business enterprises those that were provided with size and sufficiency of initial
capital. Based on the information gathered, they pointed out that it improves the ability of these new firms to
survive and earn higher profits that help them to grow. The difficulty in raising capital is more evident for the
startups in the knowledge based sector as they frequently start with assets that are intangible, which restricts them
to avail collateral based financing that does not suit them. On the contrary, it becomes very costly, and at times
arguably difficult, to obtain capital from the external sources based on the high quality useful information on their
activities and prospects resulting into lower level of capitalization. Unusual circumstances that arise from the lack
of capital availability lead to stem moral hazard and the other problems that must be controlled by an investor, and
that cannot effectively be dealt with contracts that are of pure debt - type. There are about 27,000 medium
businesses and 1,50,000 small businesses in the country. Currently, 5% of manufacturing companies are SMEs,
which represent 5% of the labor force, 5% of the sector production, and 5% of the GDP. SMEs provide important
links to large companies, especially high - growth export sectors, and are part of core business activities in rural
and urban areas. In many developing countries, the SME sectors are generally neglected and discriminated against
by the government's attention, financing, management, and marketing experience and access to technology as
compared to large companies. SMEs in Bangladesh have a significant contribution to increase production and job
creation (Akterujjaman, 2010).
In general, to invest in a startup company, VCs can collect funds from multiple investors and sign contracts
with each of their investors, depending on the size of the fund . The type of investors in India is spread across
different categories which not only include Indian investors, but foreign investors also constitute a larger segment.
As a financial intermediary, venture capitalists raise their funds from limited partners (LPs) and invest in potential
ways where they have the opportunity to grow. For this, to avoid any disputes, they contract the association
between them to avoid the agency problem and information asymmetry problem between VC and LP or VC and
the entrepreneur firm (Mishra & Bag, 2016).
In order to tackle the above point of concerns in the context that suits India, creation of some institutional set
ups have been observed and innovative financing instruments have been introduced. The effect of deliberations by
various stakeholders on risk capital for MSMEs in India also caused a stress upon various risk capital choices
available internationally and in India, it is the angel investors, venture capitalists, public listing, micro finance,
loan funds, guarantee associations, etc. Actually, the difference is observed during the different growth phases as
there would be different requirements for different SMEs. For SMEs characterized by intellectual property and
high - tech information, during the startup stage, angel or venture capital finance classically meet their funding
Research Objectives
Broadly, the idea for undertaking this research is to investigate the funding preferences ofnew age entrepreneurs
oflndia in specific to Odisha, West Bengal, Chhattisgarh, Jbarkhand, and Madhya Pradesh and to highlight their
familiarity with respect to various early stage financing options. The specific objectives can be described as:
~ HOl: There is no significant difference in the support of fami ly members to entrepreneurs with and without a
family business background.
~ Hal: Support of family members differs significantly among entrepreneurs with and without a family business
background.
~ H02 : Entrepreneurs do not find any variation as their familiarity with angel capital and venture capital is
significant.
~ Ha2 : Entrepreneurs find variation as their familiarity with angel capital and venture capital is significant.
Research Methodology
This study is based on the descriptive research design. Only primary sources of information have been used in the
research. Primary data for this study were collected from the entrepreneurs of the knowledge based ventures in
states like Odisha, Chhattisgarh, Jharkhand, West Bengal, and Madhya Pradesh through a structured
questionnaire. As most of the technology based startups use the knowledge pool where technology plays a
prominent role, it was observed that the respondents were more keen and comfortable in responding to the survey
electronically rather the physically. In few of the cases, the interviews were conducted over phone and we met few
entrepreneurs personally in Bhubaneswar, Cuttack, Balasore, Ranchi, Kolkata, Indore, Gwalior, Bhopal, and
Jamshedpur for the survey purpose.
To select the representative sample of the population, various relevant sources such as the student database of
premier education institutes like IIMS in Kolkata, Indore, and Ranchi ; Xavier University, Bhubaneswar ; and
Entrepreneurship Development Institute oflndia (EDI) located in these five states that are running various courses
on entrepreneurship have been used. Further, incubation centres at Centre for Entrepreneurship and Innovation of
IIM Kolkata ; Clique - the innovation and incubation centre for entrepreneurs ofllM Indore ; Entrepreneurship
Cell ofXLRI, Jamshedpur; and Startup Incubation centre of ABV - IDTM, Gwalior were also contacted. For this
purpose, incubates who were availing the facilities of the incubation cells and those who had left these incubation
centers were also contacted.
The placement cells of management institutes were also approached for enlarging the list of entrepreneurs.
Particularly, placement data belonging to the above - mentioned institutes have been considered as these have
From the Table 3, it is observed that the two - tailed asymptotic significance value is 0.029, which is less than the
significance value of0.05, that is, 0.029 < 0.05. Hence, HO 1 is rejected. Therefore, it may be inferred that there are
significant differences between the family support to these two kinds of entrepreneurs. The higher mean ranks of
the entrepreneurs with family business suggest that their family members were quite supportive as compared to
their counterparts, whose families were never in business.
(1) Reasons for Being an Entrepreneur: There are multiple motivating triggers for being an entrepreneur. As seen
from the Figure 1, which is the pictorial depiction of Table 4, the contribution of internal factors such as need for
achievement and being independent in working conditions are 34% and 32%, respectively and these two factors
account substantially among other factors such as wanted to become an employer rather than an employee, whose
contribution is 9% and higher monetary benefit as the cause accounts for 8%. In this case, the reasons for being an
entrepreneur are tested in which the total 67 respondents were asked questions based on seven heads, which were
considered to be the causes for the respondents to choose becoming entrepreneurs, and the information is provided
in the Table 4.
(2) Reasons for Starting Ventures in the Five States Considered : As a significant number of entrepreneurs of
Odisha, Chhattisgarh, Jharkhand, West Bengal, and Madhya Pradesh had set up their ventures in their native
35
30
25
20
15
10
5
0
• Nu m b e r • Pe rc e n t age
states, the reasons for setting up the ventures have been analyzed. As per the findings, the entrepreneurs who set up
their ventures in these five states preferred these states as they have the availability of raw materials (26% )
followed by familiarity with the state (20%). Out of the total 67 respondents, a total of 17 respondents who had
their businesses in their respective areas were not from the same state, that is, they hailed from other states. When
these respondents were asked about the cost associated with starting up a business, it is observed that they believed
that these states are less costly to start a business as compared to their own states (17%) ; there is presence of target
customers (1 4%) ; a strategic location (9%) ; friendly regulations (8%) ; and less government interference (6%).
{3) Familiarity of the Entrepreneurs for Angel and VCs : As mentioned in the research methodology, for
conducting this study, ventures with specific innovations in the knowledge based sectors were selected. All these
ventures qualified for equity funding by the investors, that is, angels or VCs. As many of these ventures are at the
initial stages and expressed their willingness to raise external funding in future, there is a considerable potential
for equity investors to invest their funds in Odisha, Chhattisgarh, Jharkhand, West Bengal, and Madhya Pradesh.
Therefore, the study checks the familiarity of the entrepreneurs with respect to the angels and VCs. In order to
study the differences in their familiarity for such equity funding, the Wilcoxon igned rank test is performed.
As per the test statistics provided in the Table 7, the 2-tailed significance value is 0.000, which is less than the
significance value of 0.05 , that is, 0.000 < 0.05. Hence, H02 is rejected. Higher mean ranks for the positive
differences indicate that the entrepreneurs knew a fair amount regarding VCs.
Research Implications
The following are some of the points that we suggest the policy makers to implement so that the startup
entrepreneurs can successfully attract the attention of venture capitalists.
(i) The government should help the startups by giving training to them at EDI centers about the venture funding
process.
(ii) The MSME department should act proactively in giving the entrepreneurs every information about venture
funding and the process to obtain the funding too.
(iii) The respective state governments should direct their commerce departments to arrange venture funding
events every year so that the startups can participate in the events and the startups those attract the venture
capitalists in the events can be further provided funding facility.
Conclusion
,
Based upon the survey results of entrepreneurs in Odisha, Chhattisgarh, Jbarkhand, West Bengal, and Madhya
Pradesh, the following findings emerge. Personal demographics of the new age entrepreneurs suggest that
majority of them were men in the age groups of below 30 years and 30 - 40 years. They all had a good professional
educational background with relevant work experience. Even though nearly half of the entrepreneurs had the
backup of family businesses, many of them preferred starting their own businesses with novel ideas in the
knowledge - based areas. The family members were also quite supportive and accepted their decision of becoming
an entrepreneur whole heartedly. The higher acceptance of entrepreneurship again shows the changing nature of
the social structure, where risk-taking is not suppressed due to the fear of failure.
Thus, there is an urgent need to provide financial literacy to startups and increase awareness on the activities of
angelNC financing through greater involvement with educational/research institutions and incubation centres.
Venture funds of different kinds, other financing institutions, and incubation centres should encourage
entrepreneurship promotion and education schemes designed to find, assist, and train new technology
entrepreneurs. There is a need to significantly increase the number of business incubation opportunities for
entrepreneurship by comprehensively exploring various policy options.
The following areas can be considered to extend this study by future researchers :
~ Further research can be carried out to test why entrepreneurs strive for independence in working conditions.
~ Why there is a need for achievement for every entrepreneur can be an area of research.
~ Do higher monetary benefits drive the entrepreneurs to stay with the business activity is another area that can be
explored.
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Dr. Suman Kalyan Chaudhury has published 115 research papers in different refereed national and
international journals. His areas of interest are entrepreneurship, micro finance, and corporate
governance.
Anupam Panigrahi has published more than 20 research papers in different refereed national and
international journals and magazines ; he is the editor and author of two books and one book,
respectively. His areas of interest are entrepreneurship, micro finance, and corporate finance.
Dr. Mamta Gaur has published more than 30 research papers in different refereed national and
international journals and magazines and she is the author of many books. Her research interests are
entrepreneurship, corporate restructuring, and corporate policy adoption.