Primary vs. Secondary Offerings in Startup Funding

Introduction:

Startup companies often need to raise capital to grow their businesses and achieve their goals. In startup funding, the nature of transactions is generally of two types: primary and secondary. In this article, we will see the differences between these transaction types. We’ll also see who typically participates in these transactions and how they play a vital role in the lifecycle of a startup.

Primary Offerings:

• In primary transactions, the company issues new shares, and investors purchase these shares directly from the startup.
• The primary offering aims to secure capital for fueling the company’s growth and development.
• Primary offerings typically attract investors such as venture capital firms, angel investors, and family and friends etc.

Example:

For example, Startup ABC currently has 10,000 shares outstanding, with a total valuation of $10,000, where each share is valued at $1. Now, a new investor is ready to invest $1,000 in the startup. In response, the company opts to issue 1,000 new shares to the investor. Consequently, let’s examine the ownership stakes of both the promoters and investors after the funding. Also, let’s assume there are two founders in the company with each of them having equal ownership of the company.

Secondary Sale Offering:

• In secondary transactions, shares are acquired from existing shareholders, including investors, employees, or former employees, as opposed to being directly obtained from the company itself.
• Consequently, no new shares are issued, and the funds involved in secondary transactions goes to individuals/firms selling their shares. The money does not come into the company.
• As a result, this method provides existing shareholders, such as founders or employees, with a means to access liquidity and generate cash for personal expenses.
• Secondary transactions generally happen at a discount to Primary transactions.

Benefits of Secondary Offerings for outgoing founders and Investors:

Liquidity:

Secondary sales offer early VC investors and founders, quick liquidity and returns, bypassing the need for long exit events.

Diversification:

VCs can diversify their portfolio, reducing risk and freeing up capital.

Alignment and Incentives:

These sales align shareholders’ interests, letting early backers’ cash out while new investors bring value.

Benefits of Secondary Offerings for incoming investors:

Access to a growing asset class:

Startups are becoming increasingly valuable, but they can be difficult for investors to access directly. Secondary sale offerings provide a way for incoming investors to gain exposure to this asset class without having to go through the traditional venture capital route.

Discount in Secondary Sale Offerings:

Incoming investors can also benefit from discounts in secondary sale offerings. The amount of the discount in a secondary sale offering can vary depending on several factors, including the company’s stage of development, its financial performance, and the overall market conditions. Discounts of 15-20% are generally seen in secondary sale offerings.

Bottomline:

Primary and secondary offerings are essential tools for startup companies and investors alike. By understanding the key differences between these two types of offerings, startups and investors can make informed decisions about how to best raise and exit capital.

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Cutting-Edge Drone Technology: The Future of Sustainable Farming Practices

In our fast-changing world, technology is changing industries. Drones, also known as unmanned aerial systems (UAS), are one of these innovations. Many companies work on drone technology, but one company stands out.

This company uses advanced technology like data analysis, the Internet of Things (IoT), artificial intelligence (AI), and machine learning (ML) to solve big global problems. They’ve pushed drones for farming to do amazing things in different areas. With many firsts, they use their technology to improve farming, infrastructure, and healthcare.

Problem:

India’s agriculture sector grapples with a host of challenges:

• According to the FAO, plant pests and diseases cause a significant reduction of between 20% and 40% in global crop yields annually.
• Moreover, adding to these challenges is the ageing Indian farmer population. In 2016, the average age was reported to be 50.1 years by MoA&FW.
• Furthermore, farm mechanization in India lags behind global standards by 60%, as per NITI Aayog. Consequently, this leads to inefficiencies in farming practices.
• Additionally, there are alarming residues of agrochemicals found on over 45% of food crops, further exacerbating environmental concerns.

Solution:

• In response to these pressing issues, a startup has introduced a comprehensive solution. – Drone for Farming, one drone, many applications.
• Their solution encompasses direct seeding, disease diagnosis, fertilizer spreading, pollination, and thermal fogging.
• The drones they offer are versatile and capable of various applications. They can operate during nighttime and effectively avoid obstacles.
• These drones are known for their rugged design and swappable payloads. Importantly, they are fully autonomous, and equipped with AI capabilities.
• In addition to the above, emergency fail-safes and terrain-following capabilities enhance their performance.

India Commercial Drone Market:

Smart Software Integration:

Their software platform complements their hardware offerings. It facilitates automated regulatory compliance, integrates crop-specific SOPs and calendars, and enables real-time drone health monitoring and maintenance. This software not only enhances farm efficiency but also fosters environmental sustainability.

Agri Intelligence & AI Platform:

his company serves as a drone aggregator, catering to farmers, corporations, and government bodies. Their platform offers a range of services, including fleet management, order matching, real-time tracking, data aggregation, and AI intelligence. As a result, it streamlines farm operations, from defining field boundaries to facilitating order delivery, and this benefits the entire agricultural ecosystem.

Global Impact:

This company’s drones go beyond one country. They use them in faraway places to help with things like giving aid, helping during disasters, and delivering medical supplies. These drones offer remarkable labour cost savings by automating tasks, reducing the reliance on a shrinking agricultural workforce, and making farming economically viable.

Along with this, these drones take care of direct pesticide usage which can lead to health issues, including cancer and life-threatening diseases. But these drones alleviate this concern by accurately targeting pests and diseases, they reduce the use of harmful chemicals, thereby promoting safer farming practices. Drones play a pivotal role in pest control also.

The impact of this company’s UAS technology reaches far beyond national borders. Their drones have been deployed in remote regions for humanitarian aid, disaster relief, and medical supply delivery. This global reach underscores their commitment to making a positive difference in the world. Their drones also have an application in healthcare by helping state governments control malaria and other mosquito-borne illnesses by terminating the larvae with the use of Drones over water bodies.

Traction

• 1.8 lakhs acres served till date
• $1.1 Mn Revenue –  FY 22-23
• 3.9x Revenue FY22-23
• $8Mn Revenue in Pipeline

Projections:

Key Growth Drivers for the company:

• This company actively fosters innovation through close collaboration with research institutions, startups, and industry partners. Consequently, this collaborative approach not only propels their own growth but also significantly enriches the broader UAS industry.
• Furthermore, several significant growth drivers are at play. These include labor shortages, evolving government policies, the expanding adoption of drones, increasing demand across various sectors, heightened demand for drone pilots, as well as post-sale services and consumable sales. Together with these factors, they contribute to their promising future.
• Moreover, as revenue continues its upward trajectory, the company is well-prepared to capitalize on economies of scale. This strategic move will lead to reduced manufacturing costs, increased profits, and, consequently, ensure sustainable growth in the future. In essence, their collaborative spirit, diverse growth drivers, and cost-efficient strategy position them for a prosperous future ahead.

Opportunity: Seeking $4.0M Startup Funding

Minimum Investment : $100K

Risk Level: High Risk

Potential Returns: Anticipated ROI of 5-8x

Investment Horizon:  3-4 Years

Investor Profile: Ideal for Angel Investors, Family Offices, and VCs Interested in Startup Investment

Author: Tanushree Pandey

You can Invest in India Startup Ecosystem.
For further details about the company and to know about other startups, please register your information below.

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Read more about:Elevating Micro-Entrepreneurs with Innovative Electric Two-Wheelers

The Challenge:

In India, many rely on two-wheelers every day. This includes small business owners, farmers, milkmen, and delivery workers. Yet, they often face rough terrains with unsuitable vehicles. Plus, the rise of online shopping in cities creates a need for versatile delivery vehicles. So, finding the right two-wheeler is key to meeting this demand.

The Solution:

To bridge this gap, a startup has crafted a solution. Aiming to positively impact 1 million lives by 2027, they plan to introduce 250,000 innovative two-wheelers. These bikes are more than transport—they are vital tools for micro-entrepreneurs. They offer customizable storage, cargo adaptability, and advanced tech features. This ensures users stay connected and efficient on the go.

Products and their features:

Product 1:

Use Cases: Ideal for farmers’ shop deliveries to juice centers.
Key Features: 200 kg payload, 140 km city range, 65 kmph top speed, versatile power outputs, swappable batteries, and connected telematics.
Price Range: Rs.80,000 to 85,000 (with subsidy)

Product 2:

Use Cases: Great for daily commuting, aiding small vendors, and helping farmers.
Key Features: 120 kg payload, 70 km city range, 25 kmph top speed, advanced security, swappable batteries, and connected telematics.
Starting Price: Rs 66,999

Proprietary Technology

Target Market:

In India, TVS Motor holds a strong 90% of the moped market. In the 2022-23 fiscal year, they sold an impressive 420,000 units. Yet, most are petrol-powered. Here, the startup sees a golden chance.

First, they plan to replace petrol mopeds with cleaner, electric options. But they won’t stop there. Next, they aim to elevate the moped experience, adding sleek features like customizable storage and flexible cargo options.

In short, this startup isn’t just entering the market. They’re preparing to reshape it completely.

Sales Channels:

B2B Sales: Company has piloted with mobility giants, delivery companies, and e-commerce firms, including Swiggy, Rebel Foods, and Domino’s.
B2C Sales: Available at studios and multi-brand showrooms.

Pipeline (FY 23-24)

Financial Projections:

Growth Drivers

• Company is seizing an opportunity in India’s vibrant grassroots economy. They offer flexible, eco-friendly solutions for micro-entrepreneurs. This strategy will expand their reach nationwide.
• The market potential? It’s massive. Moreover, a major shift is underway towards electric vehicles. Currently, TVS holds a dominant position in mopeds. However, these are predominantly petrol models.
• Company’s growth is also fueled by its partnership with PSU banks, which offers credit options at attractive rates, making company’s products more accessible to customers.
• Rural incomes in India are rising. Correspondingly, spending power is increasing. This trend will push more people towards electric two-wheelers.
• Beyond personal finance, external support is present. Specifically, the Indian government is lending a hand. It is offering incentives to encourage electric vehicle adoption.
• Lastly, technology is playing a part. Rapid advancements in batteries are occurring. As a result, electric two-wheelers are becoming more affordable and practical.

ASK: ₹50 crores startup funding (Commitments– ₹8.2 crores)

Minimum Investment: ₹80 lakhs

RISK: High Risk

ROI Potential: 6-8x Revenue

Time Horizon: 3-4 years

Investor Type: Angel Investors, Family Offices, VCs. (Startup Investment)

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Read more about:  Financing the Electric Revolution: Game-Changing EV Financing Startup

Introduction:

The Indian startup ecosystem is thriving, driven by innovative entrepreneurs and supported by investors, accelerators, and incubators. From the early groundwork of pre-seed to the high-stakes expansion in Series A and beyond, understanding the objectives at each stage is vital for sustainable growth and success.

Image Source: https://inc42.com/reports/indias-top-200-startups-financial-index-report-2023/

Seed Stage:

• At the pre-seed stage, startups focus on developing a solid business concept, working on partnership agreements, obtaining patents or copyrights, and creating a compelling pitch deck. The emphasis is on laying the groundwork for the business idea.
• Once the pre-seed stage is completed, the seed stage follows. Here, the startup moves forward with creating a product or prototype based on the established business concept. The objective is to raise initial funds and get the business up and running.
• Funding Sources in Seed Stage: Self, family and friends, Micro VCs.
• But unfortunately, only 1 out of 3 startups successfully pass on to the Series A funding stage.
• At this stage, startups may encounter failure due to financial constraints and an improper product-market fit among other reasons.

Data Source: Why Fewer Than 1 In 3 Seed-funded Indian Startups Get Series A Funding – Forbes India

Image Source: What Are The Odds Of Success For A US Seed Funded Startup? (crunchbase.com)

Series A:
This stage involves-

• Researching industry and markets to identify growth opportunities.
• Writing a comprehensive business plan to outline strategies for expansion.
• Launching marketing and advertising efforts to gain customer traction.
• Generating revenue and aiming for profitability.
• Planning to scale into new markets.
• Funding Sources: Accelerators, Super angel investors, Venture capitalists.

Series B:
In Series B, startups focus on-

• Expanding consumer interest and market presence.
• Establishing a commercially viable product or service for scalability.
• Scaling production, marketing, and sales to meet growing demand.
• Funding Sources: Venture capitalists, Late-stage venture capitalists.

Series C & beyond:
In this stage, the startups concentrate on-

• Continuously innovating by building new products and exploring new markets.
• Establishing a strong position in the industry.
• Attracting investments from venture capitalists and late-stage venture capitalists for substantial growth.
• Funding Sources: Late-stage venture capitalists, Private equity firms, Hedge funds, and Banks.

Exit:

• Making an initial public offering (IPO) to offer shares to the public and provide liquidity to investors becomes a potential exit strategy.
• An exit through a sale or via VCs or SPACs is another way for investors and founders to realize the value of their investments.

Conclusion:

Startups not only create jobs and spur technological advancements but also disrupt traditional industries, fostering competition and pushing boundaries. Startups play a pivotal role in shaping economies, driving prosperity, and shaping the future. From Pre-Seed to Exit, the lifecycle of a startup represents an exciting journey filled with challenges, breakthroughs, and transformative impact.

Read more about Indian Startups: The Fast Track to Funding Your Startup: Convertible Notes, CCD, CCPS, SAFE

The Fast Track to Funding Your Startup: Convertible Notes, CCD, CCPS, SAFE

Introduction:

Fundraising for startups involves investors providing funds in exchange for shares or preference shares of the company. The traditional method, known as a priced round, involves negotiating an equity percentage with investors. However, early-stage companies often opt for an alternative method called a convertible instrument.

Convertible instruments offer advantages such as simplicity and speed in closing deals, allowing startups to secure funding quickly. Another benefit is that founders can maintain control and decision-making power over their company during the crucial early stages of development.

Parameters of Typical Convertible Instruments:

Convertible Notes, CCD, CCPS, SAFEs are some of the most common convertible instruments in the startup ecosystem.
These instruments come with certain parameters which are as follows:

• Valuation cap: This is the maximum price that an investor is willing to pay for a share of a startup.
• Discount: This is the percentage discount that investors receive on the valuation cap. The discount is used to incentivize investors to invest in a startup.
• Liquidation preference: This is the priority that investors have to get their money back if a startup fails. Investors with a liquidation preference will get their money back before other investors, such as founders and employees.
• Conversion period: This is the time period during which a convertible instrument can be converted into shares.
• Anti-dilution protection: This is a provision that protects investors from being diluted if the startup issues more shares at a lower price in the future. E.g. Full ratchet.

Valuation Cap:

• It is a very important concept to understand while raising funds.
• It is the maximum price at which you will convert an investor’s contribution into equity.
• Example: Elon invests $2 million into “Firm Z” at a valuation cap of 10 million. In the priced round, Mark invested $2 million in “Firm Z” at a valuation of $20 million.
• Now the ownership of Elon and Mark will be calculated as follows.

• Elon and Mark both invested $2 million. But because of the valuation Cap, Elon has more ownership than Mark.
• Companies either provide a valuation cap or a direct discount.

Convertible Notes:

• A loan that will be repaid with shares of the company instead of money.
• Interest rate and maturity date are typically included.
• The investors are provided with a valuation cap or discount.
• Example: Investor provides $100 as a convertible note, and with a 12% yearly interest rate, the founder will owe $112 worth of shares when the next financing round occurs.

CCPS (Compulsorily Convertible Preference Shares)

• These are preference shares that must convert to equity after a set period or achieving predefined milestones.
• These shareholders are provided with dividends that are paid out annually or accumulated to be paid at a later stage.
• CCPS converts either at a 1:1 ratio or a higher rate based on liquidation preference and participation.
• Investors have preference over equity shareholders in a liquidation event and may participate in surplus profits.
• Founders may prefer CCPS for a guaranteed conversion and potential control in liquidation events.

CCD (Compulsorily convertible debenture)

• Bond-like instruments that convert to preference or equity shares upon maturity depending on the terms set at the time of issuance.
• Employed as debt with regular interest payments initially, converts to shares on maturity of debenture.
• No specific minimum investment varies depending on the startup and investor agreement.

SAFEs (Simple Agreement for Future Equity)

• No interest rate or maturity date involved.
• Investor provides funding that converts to shares in the future funding round.
• Convertible notes offer more flexibility, allowing founders to set a specific conversion trigger, such as a total funding amount, before converting the investment into shares.
• SAFEs typically require immediate conversion during the next priced round.

Types of SAFEs:

Pre-money SAFE:

• Example: 1 million at 9 million pre-money valuation would result in valuation of 10 million after funding.
• Investors have uncertainty about their ownership percentage in the company until the first priced round when all SAFEs convert to shares.
• Complex calculations required to account for multiple SAFEs and dilution.
• Pre-money SAFE has potential for less dilution in the long run.

Post-money SAFE:

• Example: 1 million at 9 million post-money valuation would result in valuation of 9 million even after funding.
• Investors lock in their ownership percentage at the time of investment, providing clarity and certainty about their stake when the Series A begins.
• Post-money SAFEs can lead to founder’s ownership percentage being diluted in the future, as fixed ownership percentages are established for each investor.
• Simplifies negotiations and transparency for both parties.
• Post-money SAFE gives more clarity and certainty for both founders and investors.

Conclusion:

Startups with minimal revenue can use convertible instruments to raise capital without having to set a valuation. Convertible instruments allow startups to delay setting a valuation until a later date when they have more data and are in a stronger position to negotiate a fair valuation. This can be a major advantage for startups, as it gives them more time to grow and develop their business before they have to give up equity.

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