How to Raise Funds for a Startup Business
Whether you are a start-up idea, a serial entrepreneur or a seasoned businessman, every venture needs an infusion of funds at the launch phase and during various operational stages. Even though many businesses are bootstrapped, to begin with, there is a constant need for funds to meet the needs of the venture.
Planning to launch your own start-up? Now is the time. India is in its best ever phase of startup ecosystem and the economic environment is favoring the aspiring minds. However, careful planning and futuristic approach are imperative to ensure your startup don’t end like the 94% that shut down their shutters within the first year of operation.
Funding is an extremely significant aspect in line with meeting the vision of a business. Funding and fundraising, both are fundamental modern business scenarios that support the growth of a startup. The first round of funding, popularly known as seed funding forms the basis of fundraising. It is followed by series A, B and C rounds of funding. While the seed funding typically refers to the basic, initial round of funding, series A, B, and C differ in the business maturity and the type of investors involved. The series funding helps in the evolvement of a startup to a full-fledged organization by helping it with calculated funds at crucial steps.
Start Up Funding Explained in this short video!
Why Should Startups Need Funds?
Generally, startups look for funding when their funds are low, running out, or when the business is just starting. This is an essential time for raising funds. It is also normally recommended by experts that even if a startup does not require funding, it is a good idea to stay in for it. This does many good things for the startup besides giving it visibility with people and in the market.
It helps the company quickly scale up before a competitor comes by and takes a considerable chunk of the market away from the startup. In the current business scenario, the conventional way of slowly growing and living within the financial means could mean several opportunities being missed by the startup.
Fundraising provides business credibility. If a source is willing to put funds into a startup, it just shows that the belief in its success is there. Such approval by a source creates immediate credibility for the startup with stakeholders. Most of the time, when venture capitalists provide funding, the media carries the news. So, the startup gets both funding and publicity via media coverage.
When getting funds for the startup, the business also gets business expertise, extensive resources, and rapid growth in its network due to the investor relationship.
Another advantage of raising funds for a startup is that when the investor has a considerable investment for gaining a return on the startup, the investor will be willing to become the startup’s advisor or come in and be hands-on with the startup.
If a startup raises funds from an investment firm, it has more time to return it, unlike taking it from a lender, such as a bank. With an investment firm, a monthly return does not need to be made, nor is an interest payment attached. Instead, there will be an extended term for repayment, which will free up capital and enable the startup to keep building.
With fundraising, the startup will not have to put personal assets into the business or in the form of collateral for the borrowed fund.
How To Raise Funds For Startups
A startup needs to choose its funding source based on its business, risks for investors, repayment terms, returns for investors, and the amount of involvement of the investors in the running of the company and its decision-making.
Here are the various sources from which a startup can raise funding for its business.
Boot-strapping
The term bootstrapping refers to fundraising via personal means and personal networks. This would comprise private capital and savings, contributions from family and friends, and/ or personal debt. This is an excellent way to go at a time when the initial business requirement is small.
With bootstrapping, a business can test the feasibility of the business idea, formulate a scale-up plan, keep account of all costs, and have full decision-making freedom. On the other hand, bootstrapping can lead to financial stress and a significant risk of a total loss of all savings. It requires long hours of work, and at times, conflicts can arise between equity shareholders.
When Bootstrapping companies have a sizable customer base, they redirect their revenue to meet expenses. To scale up, they would need to go in for borrowing or look at getting venture capital.
Angel Investors
An angel investor is an individual with a high net worth ready to fund entrepreneurship to get an equity stake. The principle of angel investment is ‘high risk, high return’. Angel investors will invest in such entrepreneurs who display high-growth potential so they can earn high returns.
They could provide a one-time investment when the business needs it. Angel investors want to be hands-on in the venture or hands-off or have specific involvement based on personal choice. At times, angel investors prefer to fund businesses in particular locations or fields. One can call upon rich friends and relatives to act as angel investors.
When a startup goes in for angel investor’s funding, it might have to let go of its managerial independence. The investor will claim its returns on the investment. Even though this is the agreement, ensure the contract is fair towards the startup.
Venture capital (VC) refers to private equity given to such startups that show long-term potential for growth. These funds are managed professionally, and they pool investors’ finances to form a portfolio containing shares of promising startups. This form of funding is sought by emerging businesses that expect future success and established companies that are looking to expand.
After a legal review of the startup business, a venture capitalist will offer a term sheet that poses the basis for agreeing to invest.
At various stages, startups can look for funds from VCs:
- Seed funding – for testing if the idea is feasible
- Startup fundingfunding – this will be used to cover the costs of product development and marketing– this will be used to cover the costs of product development and marketing
- First-round – funds for production as well as sales
- Second round – funds to conduct operations for such companies which are not profitable
- Third round – for expansion of profitable companies
- Fourth round – for a company to go public
Crowd Funding
Crowdfunding raises money with contributions that come in small or significant amounts through a network of individuals. This serves as an effective means for pitching an idea to potential investors.
Generally, crowdfunding is conducted on online platforms that can be used in India for growing businesses and startups. It helps in greatly reduce the time required to grow a business, which is traditionally several months.
Mainly, the following types of campaigns are applied to crowdfunding:
- Crowdfunding based on donations
- Equity-based funding
- Funding based on reward.
Equity-based funding: the backers will gain a share in the business and be part-owners due to their contribution. This is the most popular type of crowdfunding.
Another form is funding based on reward, where contributors/backers are given services, products, tokens, or different advantages.
In the case of funding that is based on donations, backers are not looking for a profit or any form of return.
The process of crowdfunding is timely and smooth. But a premium campaign can be costly and time-consuming if it must be well-positioned and well marketed. The important take away is that crowdfunding will not benefit every business.
Equipments or Machinery Loan
If your business is into manufacturing, then equipment or machinery loan will be more attuned towards fulfilling your needs for raising funds. Machinery and Equipment loans are designed to provide quick and convenient access to finance to cater to the asset needs of small-scale enterprises in the country.machinery loan will be more attuned towards fulfilling your needs for raising funds. Machinery and Equipment loans are designed to provide quick and convenient access to finance to cater to the asset needs of small-scale enterprises in the country.
This type of loan is best suited to purchase business equipment to transform their production processes and make them more efficient. Manufacturing businesses also rely on these loan types to help fund their repair work for faulty equipment and even to purchase modern, upgraded machinery.
You can easily get a Machinery or Equipment loan from Fullerton India that ensures that you suffer no major roadblocks to your business growth. Applicants can simply use our business loan eligibility calculator to estimate the maximum amount they can get. They can also check our business loan eligibility criteria to know if they meet the basic required parameters.business loan eligibility criteria to know if they meet the basic required parameters.
Share Risk with your Employees
Instead of paying your employees a market salary (say $50,000 per year), share the risk and raise money for business at the same time by offering them $40,000 per year plus equity incentives of $10,000 to be paid later. You can then channel the money you saved into making your business profitable sooner.
Credit Cards
Although it’s not the ideal way to raise money for business, credit cards can be a quick and easy solution to your money woes when cash runs low. With a business credit card, you can charge the things you need and write a check for the minimum payment each month. Just remember to pay off these debts first when the business gets going or you’re going to get buried under sky-high interest payments.
Strategic Partners
If you have a relationship with a supplier, distributor, or even a customer who can benefit from your product or service, it doesn’t hurt to ask them to get involved. Help them see what they can gain by partnering with your startup, and they may be willing to cut costs, provide you with services, or invest directly in your budding business.
Personal Assets
One of the most accessible ways to raise money for business is to use your personal assets. Tap into your savings or cash in a bond. Sell some valuables. Downsize into a smaller living space. Walk to work instead of driving or spending money on public transportation. When you really start looking, you’ll find plenty of ways to use the assets you’ve got to build your business for the future.
Business Incubators
Another way to raise money for business is to get involved with an incubator. Business incubators provide money (small amounts), tools, training, and networking to startups and small businesses in their area. Most business incubators are located in major cities, but don’t dismiss this option if you live in a small town. Do a little investigating and you may be surprised what’s available.
Initial Public Offering
With IPO, share issuance is opened by a private company to the public. Anyone can purchase the shares of a startup directly from them, which is beneficial for the seller and the purchaser.
For a startup, an IPO will be the last step to getting funds for the venture. It is an excellent option for raising funds for the startup’s long-term goals by sharing its rewards with those who purchase its IPO offering.
While an IPO might not be for every startup, it dramatically benefits startups with high recorded profitability and an excellent reputation.
To traverse the procedures for an IPO for a startup is not easy but can be done with the help of IPO experts.
Conclusion
If a startup is looking for funding, it must be clear about the number of required funds, funding purpose, control that the startup wants after the funding concerning the investor, metrics, costs, expenses, and future growth projections, the support it requires, and its goals both long term and short term. Furthermore, it must check with experts and ensure that the funding it is looking at is appropriate for its business.
