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Building startups is a new trend in today’s world. However, the risks of setting up a business or the technicalities that follow are often not paid that much attention to, leading to the fall of the startup.
Union Finance Minister Nirmala Sitharaman, in her 2020 budget speech, announced the government’s support to emerging start-ups in the form of investment schemes and by setting up a body called the Investment Clearance Cell to provide end-to-end facilitation to them. The budget also proposed a seed fund to hold up and maintain the ideation and growth of early-stage start-ups. This is in line with the government’s recent initiative of ‘Aatmanirbhar Bharat’, which translates to ‘self-reliant India’. The initiative highly encourages Indian start-ups to innovate, earn, and contribute to the world holistically.
Business enthusiasts will relate to what Ranjay Gulati, Chairman of the Advanced Management Program at Harvard Business School, has to say about startups. He says that “
There is an essential, intangible something in start-ups—energy, a soul. Company founders sense its presence.”
That is the power startups hold in themselves; they can inspire people, and influence them to contribute in ways that even big and well-known companies cannot. Startups are those valuable assets for entrepreneurs that stimulate a higher degree of connection and affiliation towards business growth. It is vital to ensure compliance with all those essential elements that can bring impetus to the growth of a business startup and thereby keep the ‘energy or soul’ alive.
In the struggle for retaining and ensuring innovativeness and creativity, entrepreneurs often face trouble in understanding financing and investment options, building a team of passionate workers and consequently incorporating their company, and ensuring compliance to regulations.
By the end of this article, you will know the types of business startups, techniques of investment and finance, legal compliances needed, and simply how to set up a startup.
There are a number of issues that a startup has to deal with before it can go legit in the industry. There is a range of laws, policies, and tax regimes that a person has to understand and comply with to set up his business. But is that the end? No! It is just the halfway to the milestone in the journey of owning a business venture.
What is a startup and how do I register it?
A startup is different from a company due to its quality of bringing ‘innovative’ services and solutions to the people. It works on the ideals of novelty and innovation and endeavors to generate revenue through its amateur hold in the marketplace. A company is considered to be a startup for seven years after the date of its incorporation. Some good examples are, Swiggy, Unacademy, OYO, Zomato, PayTM, which have become multibillion-dollar startups in just a few years. There are some steps that such founding members should keep in mind before setting up a business. These steps have been enlisted below:
Business model and type of startup
A business model is essentially a blueprint of the company which guides it towards the path of achieving desired goals. The most basic thing that the entrepreneur has to decide is the kind of business that he wants to set up. The types of companies that an entrepreneur can look up to are listed down below:
Limited Liability Partnerships: An LLP is “an alternative corporate business firm that gives the benefits of limited liability of a company and the flexibility of a partnership.” One of the perks of incorporating as a LLP is that there is complete control of how the internal structuring of the company has to be, as a LLP is not affected even if the partners change.
Private Companies: A private company is a firm held under private ownership. There are four basic steps of incorporating a private company. Firstly, a Digital Signature Certificate (DSC) has to be sought. Once a DSC has been granted, the Director of the company has to obtain a Director Identification Number. Thirdly, such a director has to file a name for the company to the regulating authority, and lastly, when the name is approved, the director has to submit certain documents to gain the Certificate of Incorporation.
Public Companies: A public company is one in which the ownership of the company is given to the general public shareholders through the free trading of its stocks in public exchanges. To form a public company, a minimum of 7 shareholders are required, and among them, 3 have to be named Directors. A minimum capital share of Rs. 5,00,000/- is required to set up a public company.
One Person Company: A One Person Company is one which is formed by only one single person as a member. An OPC is considered to be a kind of private company, and therefore, the same rules of incorporation as that of a private company is applied to an OPC.
The kind of product or service that a company wishes to sell has to be determined and a market survey has to be conducted based on that choice to understand the trend in the market regarding that product or service. Companies should compare the trends around the market, and the place with the most demand and least supply should be chosen if an entrepreneur wants to make their business successful in the initial stages.
Regulations and Tax considerations
It is requisite for a startup to understand the nuances of tax obligations before venturing to expand the business. Tax deductions, keeping records of tax transactions, and legal regulations related to it are important to be ensured and paid attention to, especially for a budding business company.
Gaining investment and related schemes
Without proper capital, the thought of setting up a startup is just that, a thought. However, why would someone invest in your business? While approaching an angel investor for requesting funds, a very strong move is to already devise a revenue generation plan and present it properly.
The good news is that it is not altogether impossible for startups to raise funding for their ideas, as there are certain angel funds in India which are already registered. While approaching them for funds, one has to keep in mind the rules and regulations that apply. SEBI has put certain restrictions/limitations on angel funds investing in certain ventures, wherein, an investee company has to be within three years of its incorporation and should have a turnover of lesser than 250 million rupees.
The Government of India had taken up a flagship initiative by developing a website under the name ‘Startup India’, in which all required information on the basics of setting up a new startup is provided. The initiative also mentions all the kinds of schemes available for the entrepreneurs to avail in the event of setting up their business. This initiative has raised many points that can help entrepreneurs to understand what types of funding is available and how to gain access to them.
With the concept of startups becoming more and more popular nowadays, the Government of India has started many schemes to support the startups. Such schemes include, but are not limited to, the following:
Multiplier Grant Schemes;
Single Point Registration Scheme;
Extra Mural Research Funding.
Risk analysis and management
Globalization and technological innovation have largely been responsible for the need of risk management. Problems and risks like the collapse of the partnership, geopolitical crises, compliance to regulations and reforms, cyber threats, online theft, oppressive economic changes, and market volatility are among the risks that a startup is prone to during its initial days of services. Other risks involve:
In this modern era, risks like data theft, infringing of data protection rights of people, and such cyber crimes are increasing at a rampaging rate. An entrepreneur needs to know the latest laws and policies regarding cyber crime, its rules of prosecution, and ways to avoid it.
A company can also face legal risks. This is a kind of risk that can affect the sustainability of a startup right from its initial stage. An entrepreneur needs to keep in mind the latest governing laws and government policies which can affect his business.
Thirdly, the intellectual property of a company is a vital part of its business and should be protected at all costs. Would Thums Up have been successful if its trade secrets somehow were leaked? No! It is advised that an entrepreneur should invest in copyrights, trademarks, patents, and trade secrets beforehand.
Therefore, it is significant to evaluate risk analysis and look for risk managers who can aptly navigate your startup towards its desired goals.
The success of a startup is largely dependent on the nature of decisions that its founder/founders take, and therefore, it becomes unavoidable for the founder to take note of the steps in building a start-p and ensuring its growth. Owning a business startup and being committed to its growth is only the first step in the ladder of becoming a renowned company.
We are witnessing an era where startups are emerging and growing at a very fast pace. One must be more aware of the wellness of big business firms and industries, but there is no denying the fact that startups nowadays are growing with the likelihood of the slowdown in the growth of established industries. Risks in businesses, especially startups, are inevitable. However, instead of backing up against the wall, entrepreneurs should break down the walls of doubt and move forward with pragmatic ideas to mitigate the risks and progress in their journey towards excellence.
The author is an Advocate practicing at the Supreme Court of India and Founder-Partner at Chambers of Himanjali Gautam.