Startup funding: Picture this… You have a great idea for a startup, you create your product, you come up with a business model for the product, and then you think of launching your product. But you realize that you do not have an investment to manufacture the product. What do you do? Seek for funders! If your idea is viable and gives a good bigger picture many people will be willing to invest in it. Want to know more about startup funding? You are in the right place.
What is Startup funding?
Let’s begin with a few “Wh” questions. The first being “what is startup funding?” According to the oxford dictionary it is “money provided, especially by an organization or government, for a particular purpose.” The definition in itself is pretty self-explanatory in the entrepreneurial realm. Funding is the money provided by a person or an organization to give a kickstart to your startup. Startup funding is also known as financing your startup can be either short-term or long-term. Funding is a way for companies or investors to expand their horizons and increase business. They invest in ideas that they see potential in.
Where do these investors get the money for funding? Well, there are quite some sources for funding which include Retained earnings, Debt Capital and Equity capital. So this should give you a basic idea of what exactly is funding.
When do startups need funding?
While it is possible to self-finance a startup in the initial stages, however you will still require some sort of external funding at some point of time. This funding is necessary if you want to expand your venture further. Funding is a great way to grow larger and at a faster rate. A few of the reasons that a startup may need funding are:
● To hire employees
● Have a legal team for the startup
● Purchase raw materials in bulk
● Hire better marketing and sales services
● Rent an office space and hire administration services
● Get licensed and certified
These are just some of the applicable reasons. Funding is an important step of giving your startup a thriving chance on a larger scale.
Take or Pass?
While asking for money does seem a little intimidating and even embarrassing you might question yourself if you as a founder should raise funds or not. While the answer to should you take the funding or not is yes absolutely you will need funding so take it, here are a few reasons why you should take funding.
- Starting Strong
Investors only invest in your idea if they see the benefit for the startup in the future. If you receive the funding you can hire a larger team which will give you more perspective, spend more in value and quality resources and also get specialists to consult and provide you with a larger spectrum to work with. All this will require bigger money and getting the funds will just do the trick
- Make the most of the time
Getting funding will let you get a place in the market as soon as possible. Through better sales and marketing services you can capture a larger audience earlier in your startup journey. However, better sales and marketing means big bucks so funding will be very useful.
- Better Deals
What many people do not know is that some investors can provide just a little more than funding. Is it their expertise? Well, kind of but it is much more valuable. Investors often have connections with many potentially big companies and they can get you great deals with these companies in addition to funding. After all your growth is also what they are investing in for it is highly possible they will provide you with many possible ways to achieve this success.
- Increased Visibility
We must have mentioned quite a bit by far that investors invest in your startup only if they see any potential for it in the future. Which means getting funding puts you on the spectrum of potential successful startups. This opens opportunities for getting better investors and a solid customer base. It gives your business some additional value.
- Greater the start faster the growth
When you have a larger start you have space to leeway and experiment. This, however, is only applicable for those who look to have a larger aim for their startup as opposed to having a compact self-owned company. There is nothing wrong with having a small scale idea for your startup; it has its benefits as well. But if you want to start big and experiment on the way then you should get the funding.
What is the eligibility criteria for startup funding?
Earlier we said that startups should raise funds in the later stages of the business. That is because the more time you spend on your startup by yourself the more you get to know about your idea. It gives you more time to analyze your idea and improve. This will show you how much potential you have to survive the market on your own.
According to Alexander Crutchfield founder of American Water Development Inc. and a financier, the best time to start fundraising is when you know for sure what your idea is and how much money you want. This will set a high aim for your company which will drive you to achieve great value. You should start with a network of friends and family which will give you higher experience to deal with investors.
Sources of receiving startup funding
There are three sources of receiving funds for a startup:
● Equity Financing
● Debt Financing
- Equity Financing
Equity financing means you will not need to repay the investors any money they invest in your business. However, in this kind of funding the risk for the investor is higher as there is no concrete assurance that the startup will be successful or not. Although the benefit for the investor is that they get a share from the capital growth and they also prefer to be involved in any of the decisions made by the startup.
Sources for equity financing are Angel Investors, Self-financing, Family and Friends, Venture Capitalists, Crowdfunding, Incubators or accelerators.
- Debt Financing
The name in itself is self-explanatory in this type of funding the funds are provided on debt and must be repaid within the given time and also with the interest. In this, the Investor gets returns through interest. These types of investors usually only provide the funds and do not expect anything more than repayment.
Sources for Debt Funding are Banks, non-banking financial institutions, Government Loan Schemes.
In this type of funding, there is no risk involved for either of the parties. The funding party gets no return as well. The investor doesn’t want to be involved in the company’s affairs. These grants are usually provided by the government and other private recognized organizations.
Sources for grants include Central Government, State Governments, Corporate Challenges, Grant Programs of Private Entities.
Who are these fund providers?
If you have ever wanted to be an entrepreneur and did some research you might have heard of terms like Angel Investors, VCs and more in terms of startup funding. Let us see what are these terms and what do people under these categories do:
- Angel Investors
An angel investor is an individual who has a high net worth and provides funding to small businesses and entrepreneurs. They usually ask for a small part in the ownership of the company. They gain returns from the capital growth of the company. However, being an angel investor comes with the risk of not getting any profits at all. These investors provide financial support in the initial phases of a startup as a solid company will not provide funds during this time. They provide these funds to form their own pockets and no external sources are involved.
Angel investors usually take 20 to 25 per cent return from the growth of the company. Getting funds from an angel investor is the safest option as they are usually experienced, entrepreneurs who know their way around this realm already. They will help you in every way possible for your growth is also their advantage.
- Venture Capitalists (VC)
A venture capitalist is someone or a company that invests in small businesses and entrepreneurs through investment companies, pension funds and large corporations. This means that unlike angel investors they do not use their income for funding. VCs invest only in companies that have a strong foundation to reduce the risk of suffering a loss.
VCs make more than angel investors and they take 40% share of the company. But they also invest more money than angel investors as they have resources to do so.
Crowdfunding as the name suggests is raising money to fund a project from a large group of people which is commonly done through the Interweb. Crowdfunding doesn’t put anyone under any kind of obligation. You usually set the target amount and circulate it among a group of people and ask them to fund how much ever they possibly can. It is low risk compared to any other form of non-equity funding. There are types of crowdfunding where you will have to provide some returns from your startup.
- Incubators and Accelerators
An incubator is someone who helps entrepreneurs to better their start-up ideas. They help you as long as you need them until you are ready to pitch your idea to the investors or consumers. Usually, incubators select their clients through an application process. Some incubators work with companies who pass on entrepreneurs through a network.
Accelerators are the ones who give a start to the growth of existing startups. Some of the top accelerators would be Y Combinator and Techstars. These companies are highly competitive and accept only less than two per cent of the applicants that approach their programs for startup funding.
Stages of Startup Funding
There are five stages of startup funding:
- Pre-Seed Stage
- Seed Stage
- Series A Stage
- Series B Stage and so on
- Initial Public Offering
- Pre-Seed Stage
The pre-seed stage or the ideation stage is the first step for startup funding where an entrepreneur comes up with an idea and is working on it. In this stage, the funding required is little to none. Also, there are not many investors that will provide funds at this stage. Although there are a few funding sources that can be useful during this stage as well:
● Bootstrapping or self-financing
● Friends and Family
● Business plan and pitch events
- Seed Stage
The seed-stage or validation stage is where a working model or prototype of the startup is ready. In this stage, you will need to validate the demands of your startup. This is called Proof of Concept (PoC). Some of the funding sources at this stage are:
● Government Loan Schemes
● Angel Investors
- Series A Stage
In this stage, the startup’s products and services are already out in the market for customers to use. In this stage, you will need to work to gain traction for your startup. Funding in this stage is very important as the product has already launched and this is the point where the startup shows growth potential. Here are some of the funding sources you can approach at this stage of startup funding.
● Venture Capitalists
● Venture Debt Funds
- Series B Stage
In this stage, your startup is skyrocketing and experiencing real quick growth in the market. Here are the funding resources during this stage of startup funding:
● Venture Capitalists
● Investment Firms
● Private Equity
- Initial Public Offering
Initial public offering (IPO) is when a founder lists their company in the stock market. Startups with a high growth rate should usually list for IPO. This will boost the growth of the startup and allow more stakeholders to invest. Any investor who had previously invested in your company can buy the stocks and get their equity share. So if you are questioning whether startups should apply for IPO or not it depends on how your startup is doing at the moment. The process of public listing is tedious but it also pays well once you get the required leverage.