Over the past few years, entrepreneurship has witnessed a massive boom in India. With the advent of the Internet and overall economic awareness, the masses are no more restricted to the shackles of a 9-to-5 job. They are now willing to step out of their comfort zones and build a business from scratch, using their skills and knowledge.
Every business requires a certain amount of capital to function or kick start. And here’s when angel investors come to fund such entrepreneurs in the making. There comes the concept of startup funding. The money raised can be used by businesses in the nascent or developed stages of research, development, staffing, marketing, or other requirements. Angel investors help start-ups with earnings and growth. Let us understand what startup funding entails and how it works.
What is Startup Funding?
Regardless of the size or nature of work, every business requires funds to convert its vision into reality. Several entrepreneurial ideas do not see the light of the day due to a lack of sufficient funds. The concept of funding aims to tackle this problem by providing both the business owners and angel investors a platform for earnings and growth.
Essentially, startup funding or startup capital means the money required to kick start a business. It can be generated from various sources, such as self-funding, seed capital, venture funding, Initial Public Offering (IPO), crowdfunding, grants, and more.
How Does Startup Funding Work?
Funding can sound like a bit of rigmarole, but it isn’t as complicated as it looks. Typically, funding begins with ideation, followed by the pooling of personal funds and registration of the company. Later, depending on the size and stage of the startup, one can opt for seed funding, venture funding, or series funding. For established businesses looking to gain more traction, Series A, B, C funding and IPO are time-tested and solid methods of raising money.
Types of Startup Funding
While self-funding and seed capital funding are widely adopted in the preliminary stages, they may not suffice later. Once a company’s final products and services penetrate the market, it inevitably needs to go for venture capital funding to reach its projected growth figures. Most businesses opt for this type of funding at some point in their business. Let’s have a detailed look at it.
After establishing itself considerably, a business may opt for Series A funding. This level of funding only comes into place after a company demonstrates a viable business model with strong growth potential. The money raised in this round is used for expanding operations such as staffing, purchasing inventory, etc. Pertinently, while the seed capital pool is generally small, Series A funding may entail crores in investment.
After registering the business, the company can reach out to or get approached by a VC or private investors for financing. The funds raised here will mainly be diverted towards the expansion plans of the company. After conducting sufficient due diligence, the Series A investors will decide to invest in the business or otherwise. The financing of this type comes from well-established venture capital firms such as RTP Global, Sequoia Capital India, Nexus Venture Partners, and the likes.
Like Series A funding, Series B financing occurs only when a business has certain milestones to its credit and has proven itself in the market. It involves private equity investors and venture capitalists and entails a higher share price of investing than Series A funding.
Typically, with this type of funding, a business ensures that it markets its products/services and customers receive them well. It now requires more money to improve infrastructure, grow the team, and establish a global or more widespread presence. Angel investors or firms at this stage prefer to receive convertible preferred stock as against common stock to mitigate further dilution risks.
This is also known as the Series C round. This funding method is generally the last round of venture capital funding. However, in some instances, companies may opt for further rounds of financing, depending on the case and requirements of the business. Much like the previous rounds of funding, Series C financing raises capital via the sale of preferred shares. The shares, in this case, could be convertible shares, with the angel investors being given an option to exchange them for common stock in the company at a later stage.
Businesses that make it to Series C funding are already quite successful with an established market presence. Therefore, investors at this stage bid their money with the hope of receiving double their contribution as the company scales newer heights. In addition to VC firms and private investors, hedge funds, investment banks, private equity firms, and more extensive market groups also take part in Series C financing rounds. This type of investment means less risk and better profits.
IPO or Initial Public Offering is when a business decides to raise capital from individuals in public by selling its shares for the first time. Growing companies use this method to generate funds. In contrast, established organisations may use it to allow startup owners to exit part or whole of their ownership by selling the shares to the general public.
An IPO involves additional paperwork for a business and requires it to form an external public offering team, compile its financial results and performance, conduct an audit of its financial statements, file the prospectus, and so on. However, in return, the financing method offers several advantages as well. Being public allows businesses to recruit better talent, establish a more substantial presence, and even utilise their public shares to acquire another startup.
Benefits Of Startup Funding
As a business owner, it’s undeniable that funding is necessary to turn your ideas into tangible profit. To further develop your products or services and take your existing business to the next level, you’ll need to get more employees, expand your operations, allocate money for research and development, and so on. Having sufficient finances allows you to allocate these funds towards the necessary avenues to further your goals.
It’s been said that your network is your net worth! Entrepreneurs often seek out investor relations for mentorship and building necessary connections that can help them take their business in the right direction. Getting the right advice, mentorship, and ideal contacts will save you a tremendous amount of time, money, and struggle with expanding your business.
Awareness and Publicity
Businesses that get funded by investors and venture capitalists can help get your startup noticed by your customers on a larger scale, especially since you’ll have more resources to allocate towards marketing. It can assist you in positioning your product/service so your prospective customers can understand what sets you apart from your competitors. Also, companies that have been successful in raising venture capital are more likely to be noticed by other investors who may be interested in participating in your company’s future funding series.
The funding forms an essential part to help a business scale further in size and profits. Depending on the stage and requirements of the company, you can opt for the different types of funding to progress further in its entrepreneurial journey. To know more about startup funding and the multiple sources of funding.
The entrepreneurial journey is extremely arduous and often, very expensive. If you’ve got your sight set on building a massive empire or a thriving business, at some point in time, you’ll need a cache of financial resources that can fuel your growth in the direction you seek. Getting in touch with angel investors and venture capitalists can help achieve your business goals far easier and quicker than you may imagine. To learn more about the numerous avenues of funding and how it works.