In India, the startup environment is rapidly expanding. A startup is a business, Limited Liability Partnership (LLP), or enterprise that has been operating for less than ten years and has an annual revenue of less than Rs. 100 crore. It ought to strive to create or enhance a system, item, or service. To expand their businesses, startups require funds. We are going to discuss ways to get fund for startup.
Need of Funds for Startup
Startup funding is crucial for supporting and establishing a business, covering marketing and operating expenses and established startups need funding to increase their capital for initiating the development of their ideas and formulating plans for the expansion and growth of their business. It also helps startup founders to build a network. Hence startup funding is vital to run the startup at every stage.
Type of funding for startup
Startups can raise capital in a variety of methods depending on their stage. The following list includes the forms of finance that startups have attained at various stages:
Equity fund for startup
Equity fundraising is the process of raising money by giving investors a portion of a company’s equity. Startups forfeit a portion of their ownership interest to investors, and equity investors frequently participate in the decision-making process. The various forms of equity financing include:
- Bootstrapping
- Family and Friends
- Venture Capitalist
- Angel Investors
- Crowdfunding
- Incubators
Debt funding for Startup
Debt financing entails borrowing money and reimbursing it over time with interest. The borrowed funds must be repaid with interest within a predetermined time frame. A startup may be required to put up a piece of property as collateral. Less decision-making is involved with the debt fund. These are some examples of debt financing:
- Banks
- Non-Banking Financial Companies (NBFCs)
- Schemes launched by Government
Grants for Startup
A startup may receive a grant from an organization to help it achieve its objectives or to reward good work. According to the achievement of key milestones, grants are given out in numerous instalments. Therefore, in order to receive the funding, the business must continuously strive toward reaching the milestones. The many grant categories include the following
- Central Government Grants
- State Government Grants
- Corporate Challenge grants
- Programs of private entities
Phases for startup funding
Startups are created from a company concept that goes through several stages before becoming a successful business. The foundation of its expansion is startup investment. The following are the various fundraising and startup phases:
Pre-seed Phase
Entrepreneurs in the pre-seed stage develop a business idea, seek limited funding through informal channels, and establish startups.
Bootstrapping
Bootstrapping involves starting a business with limited capital, relying on savings without external investment or debt.
Grants
Entrepreneurs can secure funding through grants, financial benefits from pitching events, and business plan challenges during the idea stage.
Family and Friends
Entrepreneurs often seek funding from family and friends for early stages, fostering trust and support.
Seed Phase
Startups enter the seed stage with a prototype, undergoing Proof of Concept (POC) to test their idea in real life. After POC, they launch their product or service, seeking funding. In this phase startup take funding from the followings:
Government launched schemes
The government has introduced a number of lending programs, such as the SIDBI Fund of Funds, Startup India Seed Fund plan, Pradhan Mantri Mudra Yojana, Stand Up India, ASPIRE plan, etc., to offer collateral-free loans to prospective entrepreneurs and assist them in obtaining low-cost financing.
Incubators
Incubators are businesses created with the express purpose of helping business owners begin and grow their firms. Incubators provide a wide range of value-added services, including utilities, office space, legal counsel, management, etc. They frequently invest in debt and equity.
Angel Investors
Angel investors are those who make financial investments in high-potential enterprises or provide funding in exchange for stock. They evaluate a startup’s potential, make an investment, and profit from its success since they receive shares in the business. Many websites, such Mumbai Angels, Angellist, Lead Angels, etc., give prospective companies the chance to locate angel investors.
Crowdfunding
Crowdfunding is a method of obtaining money from a large number of people who each give a relatively small sum. Typically, a platform for online crowdsourcing is used for this.
Series A Phase
Startups in series A funding stage launch services or products, focusing on performance indicators like revenue, customer base, and app downloads to raise funds for product development, customer expansion, or branch expansion.
Venture Capital fund
VC funds invest in high-growth startups, with specific investment requirements, including stage, sectors, and funding amount. VCs mentor startups and receive equity in return.
Bank and Non-Banking Financial Companies (NBFCs)
Startups are able to obtain formal financing, such as loans from banks and NBFCs, if they can demonstrate their products or services’ potential to generate revenue and gain traction in the market. This primarily serves as a source of working capital. Some business owners prefer debt financing to equity because it doesn’t require them to give up or dilute their ownership position.
Venture Debt Fund
Venture Debt Funds known as Investment funds lend money to start-up businesses. Debt funds typically invest alongside an angel or venture capitalist.
Series B
Startups enter Series B funding stages after raising Series A, seeking stable revenue, improving marketing strategies, and attracting employees. Investors will assist the startup in developing teams, a market penetration plan, and hiring additional staff members. The main Options under this phase are as follow:
Venture Capital funds
Startups with a track record of steady growth might contact VC funds that offer capital for late-stage companies. These VC funds, however, do not make investments until the startup has attracted significant market traction. The startup may potentially be financed by a group of VCs.
Private equity/ Investment Firm
Startups are typically not funded by private equity or investment firms. But recently, a few private investment and equity firms have started funding late-stage, rapidly expanding entrepreneurs with a track record of steady development.
Series C, D and beyond
These funding rounds continue the trend of larger investments.
Companies in these later stages are well-established and are looking to achieve more significant market share or explore new growth opportunities.
Investors may include larger VCs, private equity firms, and sometimes even hedge funds or corporate investors.
When seeking fund, keep these tips in mind
To raise fund, entrepreneurs must approach investors and present their ideas to them. Numerous things affect financing. The odds of receiving funding from investors can be increased by doing the following:
- Calculate the amount need to start or grow
Before approaching investors or submitting a loan application, entrepreneurs must calculate the amount of money needed to realize their aims. Small enterprises should use business loans or grants, but large businesses should use angel investors and venture capital. Investors can choose the best course of action by being aware of their funding needs.
- Create a solid business plan
A business plan or startup pitch aids entrepreneurs in gaining the trust of decision-makers, financiers, and family members who can contribute to startup funding. The business’s vision should be described in the business plan. The target market, opportunity, targeted industry, timetables, marketing strategies, and competition analyses should all be highlighted.
- Build a strong network
Networking with other entrepreneurs, investors, and industry experts can lead to valuable connections and funding opportunities.
- Pitch effectively
Prepare a compelling pitch that explains your business, market opportunity, competitive advantage, and how you plan to use the funding.
- Prepare financial reports
Entrepreneurs that are aware of their existing financial situation can determine the type of finance they need. The relevant records must be gathered, including business and individual tax returns, cash flow, bank statements, and estimated expenditures. A profit and loss statement and revenue forecasts should also be prepared. Investors can learn from these documents how much funding the startup currently has and how much more is required.
- Research for funding options
As there are numerous funding alternatives available for startups at various stages. Entrepreneurs can conduct comprehensive research to determine whether a potential investment option is the best source of capital for their firm before making a decision.
- Set with repayment plan
Entrepreneurs can create a plan for how they will repay the investors for the borrowed funds. They must make a budget and predict payments. The repayment strategy aids business owners and investors in estimating how much revenue the startup has to generate to pay back the loan.
- Due diligence
Investors will conduct due diligence on your business. Be prepared to answer questions about your market, competition, financial projections, and more.
Conclusion
One must make a decision based on the requirements of their startup while taking all elements’ scalability and practicality into account. Making the right decision when choosing startup funding sources becomes crucial.
This choice needs to be carefully considered in order to choose the best source and facilitate the business.
FAQs
Q. What is the difference between seed funding and Series A funding?
A. Seed funding typically occurs at the early stages when a startup is developing its concept or prototype. It’s often used to validate the idea. Series A funding, on the other hand, comes after seed funding and is used to scale the business, expand operations, and focus on key performance metrics like revenue and user base.
Q. How can early-stage startups approach angel investors effectively?
A. To approach angel investors successfully, early-stage startups should focus on networking within entrepreneurial communities and startup events. Craft a compelling pitch that clearly articulates the problem your startup solves, your unique value proposition, and your growth potential. Building relationships and showcasing a strong team can also enhance your chances of attracting angel investors.
Q. How important is due diligence when seeking funding for a startup?
A. Due diligence is a critical step for both startups and investors. It involves a thorough examination of the startup’s financials, business model, market potential, competition, and more. Startups should be prepared to provide detailed information and answer questions to build trust and secure funding. Likewise, investors rely on due diligence to make informed investment decisions.
Q.Are there any specific eligibility criteria for startups to access government grants in India?
A. Yes, eligibility criteria for government grants can vary depending on the specific scheme or program. Generally, startups must be recognized and registered under the Startup India initiative to be eligible for government grants. They may also need to meet certain criteria related to innovation, scalability, and impact.
Q. Are there any tax incentives or benefits available to startups in India to encourage investment?
A. Yes, India has introduced tax incentives and benefits to encourage investment in startups. The Startup India initiative offers tax benefits such as a three-year income tax holiday and exemptions from the “angel tax” for eligible startups. These incentives are aimed at reducing the financial burden on startups and attracting more investments into the ecosystem.
Leave a Reply