What is Blockchain Technology? A Comprehensive Guide For Beginners

When Satoshi Nakamoto first created the cryptocurrency Bitcoin in 2008, it was viewed with immense distrust, still is to a considerable extent, with Central Banks and Regulatory Agencies remaining sceptical and refusing to adopt it. However, the underlying technology, blockchain has become one of the most talked about topics Worldwide. Nearly every major player in every industry is exploring the use of blockchain technology. It is finding use cases in several areas including financial services, retail, trading, legal, healthcare, and pretty much any business that involves record keeping and is also expected to unleash a new wave of financial products and services generating new avenues for greater revenue for banks.

Blockchain, also known as “distributed ledger technology” was originally created as a tracking database for Bitcoin transactions. It was designed to process transactions without the need for a central bank or intermediary, using complex algorithms and consensus among its peer-to-peer network to verify transactions. In the past couple of years, banks and financial institutions have been betting on blockchain to provide a reliable alternative to systems that depend on intermediaries and third-party validation of transactions. Their goal is to leverage blockchain distributed ledger approach to create a system that decentralizes trust to significantly reduce all types of transaction fees along with shorter processing timelines. The disruptive potential of this technology is widely claimed to equal that of the early commercial Internet. A crucial difference, however, is that while the Internet enables the exchange of data, this technology could enable the exchange of value; that is, it could enable users to carry out trade and commerce across the globe without the need for payment processors, custodians and settlement and reconciliation entities.

According to Forbes, blockchain technology is being viewed as a platform which could bring about stupendous changes in financial transactions, due to:

  1. As a public ledger system, blockchain records and validate each transaction made, which makes it secure and reliable.
  2. All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.
  3. Blockchain technology discards the need for any third-party or central authority for peer-to-peer transactions.
  4. Decentralization of the technology.

Governments, world’s largest financial institutions, global banks and other financial organizations are investing in proof-of-concept projects internally, using trial and error deployments within limited parameters to create efficiencies. The full potential of blockchain can only unravel when institutions partner together to set industry standards and protocols that enable interoperability. The underlying principles of blockchain i.e. decentralization, consensus based system and use of unique digital signature will reinforce the financial system which was recently found to be increasingly vulnerable to online frauds. Startups, established financial institutions and fin-tech companies have found the below applications of blockchain technology and are investing in the development of application and products based on the same:

  1. Payments: Blockchain can transform the world of digital payments to near real-time transactions with real time settlements, without intermediaries. Development of new payments products, based on blockchain technology such as self-executing smart contracts are the next step.
  2. KYC/AML and Records Management: A decentralized, network-defined registry makes KYC processes streamlined and helps in AML checks and controls during client onboarding.
  3. Capital Markets: A distributed and consolidated data repository built on blockchain technology gives users a unified and real-time view of all trade-related information, thus reducing the scope for error or disagreement and accelerating the settlement process.
  4. Trade Finance: The complex network of players with manual processes and paper work is transformed into efficient and innovative trade finance services
  5. Syndicated Lending: Blockchain in syndicated lending envisages to reduce the settlement process on the sell-side and buy-side, thus saving time and cost worth millions.
  6. Regulatory reporting: Easy access to transaction reporting data for regulators will reduce cost of regulatory reporting of market participants.
Image Source: Mermelab

The use of blockchain, when applied to legacy processes of the banking and financial services firms, has potentially transformative effects in the space. However, it is essential to bolster the technology infrastructure even before banks start testing the waters. Blockchain has exceptionally high impact and it leads to:

  • Lower operational costs
  • Seamless global trade
  • Reduced risk in clearing
  • Increased trust
  • Distributed Identity

Moving Towards the Fintech Age

The Banking and Financial Services industry is witnessing a rapidly changing landscape, with the rise of fintech companies being the catalyst. Traditional banking products, services, and channels are losing relevance as customers, increasingly influenced by social media and technological advancements in other spheres. There is immense, and largely unfulfilled, demand for better customer experience and convergence in services. Mobile-internet based banking services are being rapidly adopted, resulting in bank queues shortening by the day. Service levels are no longer the differentiating factor. A customer experience that is efficient, convenient, personalized and streamlined at every touchpoint is what sets financial institutions apart. The changing regulatory environment and other macroeconomic indicators have also contributed to making this a never before opportunity for the rise of fintech start-ups and their disruptive digital banking solutions.

Digital banking has influenced world economy manifold. Alternative Lending is probably the greatest innovation by fintech companies if you were to ask millennials. The traditional banking system has extremely rigid norms and mandates a cut-off credit score to qualify for a loan of any kind. Young adults, the self-employed, and people who have moved cities/countries have little or no credit history if they have not taken a loan previously or do not have a credit card. Such people would have a zero FICO or CIBIL score. In emerging economies alone, individuals, as well as institutions, rely on cash nearly 90% of the time. This increases the cost of servicing customers for financial institutions while leaving little or no usable data to assess the creditworthiness of such businesses and individuals.

Fintech startups like the UK-based Aire; Kabbage and Lending Club in the US; Data signs, Capital Float, Rubique, Finomena, OptaCredit and the likes in India have recognized the need for democratizing the credit score. Consequently, they have leveraged the power of Big Data, machine learning and Artificial Intelligence (AI) to assess creditworthiness. App-based lending services have used these techniques to assess “intent to pay” rather than the conventional “ability to pay”. This has helped transform B2B and B2C lending for Micro, Small and Medium Enterprises (MSME) and individuals. Forbes estimates, the 1,000 fintech companies in the world have collectively raised US$105 billion in funding and are currently worth nearly US$870 billion. Investment in fintech firms has more than doubled between 2014 and 2015, with California and New York in the US, the UK and France being the global hubs. They are followed closely by India and China, primarily because of a large population and a fast-rising middle class. In India, experts predict, as people and jobs become more mobile, alternative lending – rather than staying on the fringes – will be the new ’normal’.

It wouldn’t be too far from the truth if one stated that Alternative Lending is the poster-boy of fintech industry. It is worth noting, however, that the young adults living in urban areas aren’t the only beneficiaries of digital banking. It has also started touching the lives of the rural population in emerging economies, which were, so far, unbanked. According to a McKinsey Global Institute study, 2 billion people globally do not have a bank account or access to credit., At least 200 million MSMEs in emerging economies have little or no access to credit, impeding their growth. This gap between demand for credit and its supply is estimated to be at US$2.2 trillion. For governments, the predominant use of cash leads to leakage (estimates peg it at one-third of cash payments), enabling corruption and affecting the efficiency of delivery of government aid and subsidy.

Access to a smartphone, connected to an ecosystem of thousands of mobile apps running securely over a cloud computing infrastructure, provides the much-needed basis for a suite of basic financial services. A digital wallet (linked to a traditional bank account) can be used for payments and remittances, wages and government subsidies, transacting at stores and paying utility bills and school fees. All this at a finger’s touch saves time, money and effort, that too at no risk and greater convenience. Fintech startups can partner with financial institutions to provide digital banking solutions, at costs 80% to 90% lower than the cost of building brick-and-mortar bank branches. Over time, based on the database created by transactions made through digital wallets, credit risk may be assessed for providing loans. As the use of digital payments and other digital products increases, the benefits to all users increase, creating network effects that can further accelerate adoption. According to studies, in Kenya, the use of M‑Pesa mobile money system grew from 0 to 40 percent in the first three years of its launch in 2007—and rose to 70 percent by 2015, much faster than traditional banking could ever hope to achieve.

Uniquely poised among the emerging economies is India with the third-largest smartphone market i.e. 314 million mobile web users as of 2017. Faced with the herculean task of delivering on its promise of financial inclusion and transparency, the Indian Government is relying on innovative digital solutions. Hundred million new mobile wallets have been created in India in the past one year by fintech start-ups that did not exist a decade ago. More than a billion citizens have been brought under the digital grid through India’s Unique Identification Program (UID) in five-and-a-half years, which is probably the fastest digital service growth in history. In a massive exercise, the government has also opened more than 200 million bank accounts linked to the UID to deliver government welfare funds including wages and pensions, aimed at reducing leakage.

The widespread use of digital finance can uplift the GDP of emerging economies by as much as 6%, or US$3.7 trillion, by 2025. Close to 1.6 billion unbanked people can gain access to formal financial services if the India example can be replicated by fintech start-ups in other countries. An additional US$2.1 trillion of loans can be provided to individuals and businesses. Governments can potentially save US$110 billion each year from leakage. Together, the resulting growth in aggregate demand could create 95 million new jobs.

The global economy witnessed a lackluster 2016. With uncertainties surrounding the policy stance of the new administrations in countries like US, UK, and France, 2017 is expected to be a year of moderate growth too. The huge opportunity created by fintech start-ups has the potential to jumpstart the global economy, creating a win-win situation for financial services businesses as well as emerging countries. The demand created by emerging markets, in turn, would be enough to fuel businesses worldwide. Traditional Banking and Financial Services firms are now beginning to take note of this. Investment Banking behemoth Goldman Sachs, for the first time in its 147-year history, has entered into the world of retail lending by building a technology infrastructure called Marcus by Goldman Sachs, a new online personal lending platform, where credit-worthy borrowers can apply for fixed rate, no fee personal loans up to US$ 30,000 for periods of two to six years.

While this is an unprecedented chance for the fintech start-up community to impact every life across the globe, there is also the risk of handling exponential amounts of sensitive personal and financial data pertaining to individuals and businesses. Especially when financial institutions and/or governments are involved, this may well turn out to be a double-edged sword. While competition may be tough, making margins wafer thin, investing in top-notch security infrastructure may eventually turn out to be a greater differentiator than innovativeness alone. Following established industry practices such as performing KYC, due diligence and AML checks along with fair interest rates will ensure healthy growth for this sector. Fintech startups must remain wary of going down the microfinance route, which started with great promise but faced issues due to lack of transparency, poor governance, coercive recovery practices and high lending rates. This opportunity can only turn into a remarkable success story if fintech startups stay close to their core competence: accessibility, ease of use, low cost and innovation.

Founder’s Huddle – Funding challenges

The world of startups is powered by creative ideas. The only other factor as compelling, is the capital. Almost 90% of startups fail in the initial stages or just do not grow beyond an idea for lack of funding. A business  must be fuelled by funding at various stages of growth along with reaching targeted milestones.

And when it comes to funding your ideas, one size does not fit all. Therefore, raising funds can be confusing, often overwhelming. You may take years to come up with an idea, make a prototype and perfect your pitch to investors at the end all it takes is nod in the right direction to make a business out of it.

           How much to raise and how to utilize the funds are the next most crucial questions an entrepreneur faces. For most start-ups, Seed funding and Series A are the most difficult phases since their pitch does not factor-in financial planning.

A Harvard Study attributes raising too much funds too soon as one of the Top 10 reasons why most startups fail. In addition to this, every business has its own cash-burn rate and entrepreneurs need to be wary of accelerating too fast and too soon. Judicious utilization of funds not only ensures you don’t run out of cash but also that your venture has robust fundamentals to be able to seek the next round of funding.

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Understand Startup Finance and Fund-Raising

Spark10’s Founders’ Huddle aims to address all such problems that founders face. Our cases driven program is  conceptualized and designed to help entrepreneurs solve their problems based on similar issues that other startups and businesses faced in the past.

FOUNDERS' HUDDLE is a program that brings some key experiences of past startups (alive or dead) in form of cases that you will analyze and discuss during the session. By the end of the session, our aim is to give you the tools and method to determine for yourself the right way to approach your problems in your startup.

To begin with, we have created a program to help you understand startup finance and funding.


Fund-Raising Hacks (2-day case-based workshop)

Here are the few things we cover during these two days:

* Determining the viability of your idea/startup (Should I really start or continue this business?)

* Determining your operation strategy using financial statements (What should I do next - expand or stabilize?)

* Determining how to value your idea or startup (How much is my company worth?)

* Deciding what terms and which investors are good for you

* Understanding the fundamentals of investor pitches (What numbers should I show?)

Decoding the Term Sheet – Types of Funding


For many founders, one of the most important stages in the life-cycle of a startup is to produce and validate a commercially viable product or service – a much advanced stage than just an idea. The next and probably the toughest stage is - how to arrange initial capital to support the development of the company further. Lack of early stage financing is why 94% of startups fail in India. If you have a great startup idea or even if you have progressed further, in this blog, we will walk you through the diverse types of funding available for the startups. 

Moneybags is an Indian startup founded by Aditya Bansal, an engineer who is looking to build a credit scoring model. Through his startup, he envisions, he will be able to provide loans to those who are not found eligible by banks and other formal lending institutions. Moneybags will determine creditworthiness based on Aadhar based authentication and credit history of customer along with a few other predictive variables.

Aditya quit his job and is now looking to fund his idea. It is imperative that he chooses the right form of funding based on the type of his business and his future goals. Let’s consider the types of funding available to him:


Personal finance or bootstrapping is not funding in the strictest sense, but a means to survive before receiving Seed Funding – often considered as the first round of funding in the start-up world. Aditya can utilize his personal savings to build a working model or prototype (commonly known as a MVP- Minimum Viable Product) of his solution. He can utilize earnings from this to streamline his business plan and develop the full-fledged features of his product. For Aditya, this can be a basis to prepare for more formal funding sources.

Crowdfunding is another way of funding which is raising a storm online. If Aditya believes his business idea is rock solid and is ready to campaign online for funds, competing with other businesses and grabbing the attention of consumers who could give him money, he can garner funds through this route. Successful crowdfunding campaigns have been very few in recent history and most businesses remain unfunded despite campaigning aggressively. It has different models – incentive based or equity based.

Companies like Kickstarter and Indiegogo provide a platform to creative startups to raise money from the crowd in lieu of incentives or recognitions. For many companies, such campaigns also play out to be a great early sales route and/ or Public Relations (PR) stories. Smart watch company Pebble is one such example where it started a campaign to raise $100,000 and ended up raising $10 million in the first campaign and $20 million in second campaign. It was the third highest funded project on Kickstarter.

Companies like CrowdCube in the UK provide platform to raise money from crowd in exchange for equity (shares) of the companies. There are many companies including CrowdCube itself which have raised money through this model; the biggest success story being BrewDog which raised £10,000,000 via a bond issue. Equity based crowdfunding is not permitted in India yet, but government is looking into this matter actively.


In common parlance, equity represents ownership or stake in a venture. Aditya can receive funding in exchange for issuing shares of his stock. The only difference is that Aditya would own common stock while his investors may receive a different class of stock with or without some preferred rights, these stocks/ shares are commonly known as preferred stock. Preferred stockholders have preferential rights in terms of protection of their investment, higher returns and control. ¬¬¬¬¬¬In the event of liquidation of a company, preferred shareholders may be paid before the latter based upon the preferences associated to their class of shares. Equity funding may consist of several rounds:


Since his business is still in the concept stage, Aditya could raise a small amount of capital required to cover his expenses till he starts earning revenue. This is called the Seed funding stage where funds are raised from 3Fs or Angel Investors. 3Fs are Friends, Family or Fools – as they will invest in Aditya and may not necessarily understand his idea, product or business – but would like to support him. Next seed round comes from Angel investors who are successful entrepreneurs, high net-worth individuals or HNIs who are willing to invest in many companies to build a decent portfolio for future returns. They are motivated by joining initial rounds of the companies so they can get a better value for the money they invest.


This is the first stage of financing where stock is offered to investors and usually intended to aid a company build its business from product development to building a team. Investors could be Angel investors or Venture Capitalists(VCs). VCs are professional investors or investment companies that offer investment and become part of the Board of Directors. Subsequent rounds after this are designated incrementally with the letters B, C etc. and so on. Series A, B, C etc. differ from each other in terms of the life-stage of the business and the purpose for which funds are being raised. Later stage funding involves more sophisticated investors like VCs. A, B or C also differ in the value of the investment but interestingly, in every region, these numbers differ as well – so what is considered as an A round in India may be the equivalent of a seed round in the UK.


Aditya is wondering if he could just borrow some cash i.e. take a loan. A loan is, to put it simply, a transfer of funds with the obligation to repay in equated instalments and periodic intervals. Typically, there is a rate of interest and some collateral associated with the loan. In the startup world, debt funding from banks or lending institutions is not very common due to obvious uncertainty and lack of collateral. In countries like the United Kingdom, the government offers loans that are given to the startups on the guarantees of the founders – In India such schemes are either non-existent or not popular.

Convertible debt is a widely-used instrument in early stage rounds which Aditya may find useful. It simply means that the debt can be exchanged for equity upon the lenders’ decision or the borrower’s offer. The lender may receive a discount on the price of the future round. The primary reason, why many investors go for convertible debt is because at an early stage, it is difficult to determine the value of a company based on just an idea, product or prototype. Deferring the valuation for a later round when it has grown further and more investors are involved, is more likely to result in a fair valuation. Founders can take this route to save time, money and a lot of heartburn of arriving at a valuation number with investors at an early stage. So by the way of convertible note – investors and founders agree that a decent and realistic equity will be allocated to the investor (often on a discount) when a big equity round will take place in future.

Consider this example:

Moneybags receives seed funding from an Angel investor (Angel) worth Rs. 4,00,000 for 20% discount on future round with 2 years’ timeline and 20,00,000 valuation cap – this means any conversion on 20% discount should not have a valuation more than Rs. 20,00,000. Now in Series A, he raises Rs. 10,00,000 at post money valuation of Rs.20,00,000 – where the new investor will get 50% of the company for his 10,00,000 investment at 20,00,000 valuation – Angel investors investment will be converted to the equity of 20% discount i.e. 16,00,000. So, the Angel will get 25% of the company for his investment of the company for his 4,00,000 investment at 16,00,000 (20% discounted from 20,00,000) post money valuation.

Convertible debentures are a type of debt which are mostly unsecured by collateral or physical assets. In the event of liquidation, they are paid before anyone as a creditor (based on their priority ranking), before common stockholders and are a hybrid of equity and debt. Investors are usually willing to accept a lower rate of interest in exchange for the liberty to convert to equity.

Debt funding is exceedingly becoming the instrument of choice for investors since it is cheaper than equity, especially in India. Indian investors are often found to be inclined towards debt funding where they see short term return via interest payments than waiting for long for a higher return, albeit risky, through equity financing. With a lower risk appetite, Indian markets therefore, act very different from their global counterparts.

Now that Aditya is aware of the many ways he can fund his business, he starts identifying the developmental milestones for his company. Based on the nature of his business and the requisite milestones, Aditya is now able to calculate the amount of money he would need and the most suitable funding type. Armed with this knowledge and his Business Plan, he sets out to solicit funding for Moneybags.


Atal Malviya

Atal Malviya is the Chief Executive Officer of Spark10.com – India’s first European Accelerator. Atal is a successful entrepreneur and an angel investor based out of London. He has founded and exited VC funded technology startups and invested in handful of technology startups in Europe and India. He writes and speaks about Tech Startups, Startups investment, Accelerators and Incubators, Tech innovations and Big data analytics.

Swati Suramya

She is Content Manager at Spark10.com. Swati has joined Spark10 Blore last month from Goldman Sachs.

PS: This article is for information purposes only and meant for tech startup founders or aspiring entrepreneurs. Examples used are fictitious. Please take professional advice when you make your funding decisions and Spark10 will not be responsible for any decision that you take or conclusion you draw from, based on this article.


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