Introduction

Source: https://springhouse.in/how-to-raise-funds-for-startup/

Hi guys, hope you enjoyed and understood my previous blog about the evolution of start-up in India.

In this let’s see about the start-up funding options in India and also the stages in the funding process.

Start-up

In simple terms, start-up is an initial phase of business founded by one or more entrepreneurs having a unique and innovative business model for a particular product or service that has significant demand in the market. 

Example: Amazon, Uber, Biju’s

To read more about start-up and its features please check on https://layersofmanagement.com/2022/01/21/a-basic-guide-on-evolution-of-start-up-in-india/ 

Funding options in India

1. Self-Funding option or Bootstrapping

Bootstrapping is using one’s own personal savings or income to start a start-up rather than seeking help from external investment sources. 

Features

1) The initial investment is minimum. 

2) Freedom of being your own boss and not answerable to other investors. 

3) To prove the feasibility of your idea and instill confidence to both internal and external investors for further funding.

4) Once you have stabilized your business with self-funding options, it opens the doors for external investors for further funding as the risk factor of your start-up will be low.

2. Angel Investors

Angel investors are affluent individuals who wish to invest in early start-ups in return of ownership equity of the company. Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels.

Features

1) Usually, the angel investors will be family or friends.

2) It’s a one-time investment made to support the start-up to take off or to cross the initial difficult phase of the start-up.

3) It’s risky as a failure in the business can cost them more and the percentage of angel investment will usually be not more than 10% of their investment portfolio.

4) They usually expect a higher rate of returns.

3. Crowdfunding

Crowdfunding is a process of raising funds from multiple investors through social networking or web-based platforms in exchange of equity, debt, rewards or nothing at all.

India’s leading Crowdfunding platforms include Kickstarter, Ketto, Catapooolt, FuelADream, Fundable, Indiegogo, Milaap, Wishberry.

Features

1) It helps in getting crucial fund at the initial stage

2) It helps in pooling funds from friends, family, and entrepreneurs who believe in your business concept and can pool together to fund for your aspiration.

The Securities and Exchange Board of India (SEBI) has banned Equity-Based Crowdfunding in India to protect the investors from losses and risks as all investors may not be skilled or experienced.

4. Venture Capitalists

A venture capitalist is a private equity investor who provides capital funding to companies who have high growth rate and better potential in exchange of their equity stake.

Features

1) It includes funding start-up ventures or supporting small companies that wish to expand but do not have access to equities markets. 

2) Most new start-ups raise their funds through venture capitalists to scale and commercialize their products.

Start-up funding process 

There are mainly two parties involved during the funding process;

1. Individuals who want to raise funds as their business grows increasingly at a mature level.

2. Potential Investors who wish to support the start-up by aiming at getting back something in return. Generally, the investors fund the start-ups in exchange for a substantial equity stake in return.

The phases of funding process are as follows;

1. Pre-seed funding stage

In this stage, much of the funding comes from either family or from friends or from the founders themselves. 

The estimated total value of a start-up in this stage can range anywhere from $10,000 to $100,000

2. Seed Stage

In this stage, the start-up companies get funding from the angel investors or small venture capitalists (investors) in exchange for a certain percentage of equity in return. 

Accelerator programs offer knowledge, expert opinion and contacts. 

The large corporations who are in need of innovative technologies will also like to fund capital for promising tech start-ups for using their technology.

Start-ups estimated valued from $1 million to $6 million are eligible for this phase of fundraising.

3. Series A Funding

In this stage, the Venture capitalists play a vital role. The analysts in investor’s company usually do the valuation of the start-up before funding based on these parameters:

• Management 
• Proven track record based on the facts and performances
• Market size
• Risk factor 

Series A funding refers to an investment in a privately-held, start-up company after it has shown progress in its business model and is mostly used for marketing and improving your brand credibility, tapping new markets and helping the business grow.

Series B Funding

Series B funding helps to take start-ups to the next level and expand their market growth.

Series B funds help to cover the cost incurred on business development, sales and advertisement, technology and support and recruiting more employees.

Most of the Series B companies have estimated valuations between around $30 million and $60 million, with an average of $58 million.

Series C Funding

In this type of funding, venture capitalists look out for financing a project which has proven its sustainability and success in the market. 

It may want to purchase or develop more products/services, (which may include buying a competitor).

In round C, a company increases its shares in the business and begins to make substantial profits. 

It is in this round that a company becomes profitable and capable of independent development without further support.

Initial Public Offering (IPO)

When a start-up decides to raise funds from the public by selling its shares, it is known as an IPO (Initial Public Offering). 

IPO involves the inclusion of the general public to invest in your company shares.

You can learn the current scenario in India regarding the funding process by visiting the government site https://www.startupindia.gov.in/content/sih/en/funding.html and also about the Startup India Seed Fund Scheme.

Conclusion

For any start-up, funding plays a major role for taking it to the next level, but you should have knowledge on at what stage the funding is required and the purpose of the same. Such decisions made at the right time can help your business grow significantly.

We will see more about start-up evolution in India in the next part.

Hope you guys enjo