How Startup Funding Works

Today, startups are on a boom. There are ideas and there are people who want to convert such ideas into flourishing businesses prospects. What is required to evolve a startup is “Funding”. The question is that from where do you get this investment for your business. The easiest option, either you put money from your own savings or you borrow from your friends and relatives.

As your requirement increases, you either approach lending institutions (for which you need to have a repaying capacity) or approach people, who having faith in the future prospects of your business are ready to put their money into it. However, nothing comes for free. In exchange of the investment, you need to share a pie of your stake in the business which means a pie of your profits (as well as losses) or more technically, a share of your equity.

Finally, when you feel its time that private investments are less and your business needs to expand more, you reach out to the public at large to raise funds from what you call Ïnitial Public Offering” (IPO).

Having explained the journey from savings to public offering, let us have a sneak into the most common funding options for early stage startups. Funding is the lifeline of any business and availing the right sources at the right time of your business journey is the key to success.

  • Bootstrap

    The opposite of Fund Raising is Boot Strapping. This takes place at the foremost stage of business when you and your co-founder invest money out of your own savings. You are the sole owner of your business at this point of time, working on your idea to create real time value. In other words, there is no outsider but only in house investment out of the proprietor’s own pocket.

  • Seed Funding

    External financing for your business starts with Seed Funding. This takes place when the business owners realize the requirement of little more money to cover expenses until they can start earning revenue. As the name implies, Seed funding is relatively small amount of money obtained from friends, family or small angel/seed investors. This is a high risk investment as the potential of the product or service offered is yet to be discovered. Seed financing opens the doors for dilution of the stake of your business. However, getting funds from smaller investors at the initial stage also opens channels for bigger future funding. Check out SeedFund, Unitus Seed Fund to explore seed funding for your startup.

  • Angel Funding

    As the business starts growing, the requirement of manpower, publicity and better administration increases, thereby necessitating the need for more funds which cannot be accomplished through seed funding. Hence, comes the time for second round of funding from “Angel Investors”.

    Angel investors invest in companies only after considering the valuation and future prospects of the business and taking a share of equity. There are also incubators and accelerators who provide working space, cash as well as advice for your business to grow.

    Angel Investments can set the tone for many investments to come and provide you with the credibility and advice you desperately need. Check out Indian Angel Network to explore angel investment for your startup.

  • VC Funding

    Venture Capitalists (VC) are specialized financing businesses which invest in upcoming ventures. Alongwith funds, they also provide legal and marketing expertise which a high potential venture with a good team and a brilliant idea may be lacking. VC investors analyze the startup on the basis of progress made till now from the use of Seed capital/Angel funding, quality of the founder team, market size, quality of the concept in comparison to its competitors and risk involved. Some of the well known VC’s funding indian startups are Accel Partners, Sequoia Capital, Sherpalo Ventures, Kalaari Capital

    There are various types of funds which VC’s provide at different levels of your business:

    • Series A Financing

      Series A refers to the first round of investment during the Startup stage of your business. It is required for promoting the product or service across geographical locations and getting a business model. Series A funding is a critical stage for investment as the company has not yet fully established its presence in the market and is striving to make a difference. However, it should be noted that Series A funding is not for running the operations of the company but to scale up its business to the first level.

    • Series B Financing

      Series B is the second-stage of investment which usually happens after the company’s product has been accepted and sold in the market and thus proven its potential viability. The purpose of this stage is to use the investment for facing competitors and have a market share. Factors like sustained performance of the company in comparison to the industry and its strength vis-à-vis its competitors are usually considered. It is at this stage that experienced VCs can offer the kind of networking opportunities and mentorship that unconnected smaller investors may not.

    • Series C Financing

      This is the latest stage of funding, when the company has captured substantial portion of the market and is now looking for diversified products, market acquisitions and greater market share. VCs and private equity investors support these financing rounds as well as future funding rounds that are required by established companies to reach future milestones. However, this is the last round of funding before a company goes into an “Intial Public Offer”(IPO).

Today, every startup is looking for funding options to convert its venture into a successfully running business model. However, it should be understood that investors are not looking for a perfect business idea but for teams that have the potential to think out of the box, is flexible and adaptable to changing market preferences. The bottomline remains that keep pitching for your business, find potential investors beyond your personal network, engage with the investors beyond money and add value to your business.

 

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Nikita Bhatia
Nikita Bhatia
Nikita Bhatia is the Co-Founder of VenturEasy, an online platform for Company Registration, Tax Consultancy, Trademark Registration, Annual Filings, Accounting and Business Compliances in India. A Chartered Accountant by profession, she has wide experience in the field of Audit, Accountancy, Taxation and Corporate Governance. Her exposure across a wide portion of economy gives her the edge to help startups scale up and guide them effectively in legal, compliances and tax related matters.

1 Comment

  1. Niharika Jain says:

    Very useful article.