Feb 18, 2022
How to Raise Startup Capital for Your Business?
The startup funding ecosystem in India has been growing exponentially since the last decade. Despite the COVID pandemic, India saw a massive boom in its startup ecosystem in 2021. India also emerged as the third-largest startup ecosystem in the world in 2021. This growth is only expected to rise.
Investopedia defines a startup as a company founded by one or more entrepreneurs who have a unique or distinctive idea for a product or service for which they believe there is demand in the country. These companies usually form with bootstrapping as their initial funding.
Then attempt to attract outside funding from investors for the business. External funding includesseed funding, series funding, crowdfunding, and IPOs. Startups focus more on innovations and creative ideas. So there is always that risk factor involved in them. The success or failure depends on whether its creation would work as it is expected or not.
Some startups fail at the initial stages without gaining much revenue or popularity. This can be due to a lack of funding, a poor business model, or other reasons. Some startups have achieved tremendous success in the industry. Examples of startups are CRED, Nykaa, Meesho, Udaan, PharmEasy, etc.
What is the Need for Startup Funding?
Startup companies built with a high cost and limited revenue. This is why they need investors to fund their money in these startups. Startups are companies that operate on a hyper-growth mindset. These startups need massive funding to run their business and achieve that high growth. This funding is required after they have built their business model.
Initially, the startups fund their business through bootstrapping. Bootstrapping means raising funds through internal sources. The founders or their family and friends invest their money into the startup.
Afterm bootstrapping, the startups turn to angel investors (or seed investors). They need to put the foundation of their business and need a decent amount of funding. This is also called Seed Funding for startups India. After this comes the main heavy funding rounds, called Series Funding. The startups move to series funding when they have developed a track record in their business. It can be an established user base, consistent revenue, or other key performance indicators.
Finally, the last funding stage is when the startups turn to IPO, i.e., an Initial Public Offer. This is when the startup becomes a public company and raises funds through shares to the public.
How to Invest in A Startup?
There is no set rule for how to invest in a startup. But there are a few things that an investor should keep in mind before investing his money in a startup. Those things are as follows:
- Understand the idea and the business of the startup
- Founders are at the helm of the startups. As an investor, you are investing in the idea and the people who are going to implement those ideas. So understanding the founders also becomes essential before making any investment.
- Startups usually operate on amassive scale. They target a broad market area to achieve more growth in thefuture. Hence understanding the market size also becomes essential.
- The last important thing is toknow about the competitors already existing in the market. This is to analyzewhether the company that you are investing in has potential growth options or not.
Investors for startups have various methods to make their investments. But the two main ways of investment are Direct and Indirect. A Direct Investment is when investors invest in startups without the help of any third party like venture capital firm or private equity firm. An angel investment or seed funding for startups is a direct form of investment.
Stages of Startups and Source of Funding
For a startup, there are a few defined stages that are used to refer to the current state of the startup including its scale, operations, scope and business. Some of the referred stages of a startup across the industry would be pre-seed stage, seed stage, early stage, growth stage, expansion stage and exit stage. As these names suggest, pre-seed and seed stage are the early stages where the idea is still being executed or built upon. Post the seeding funding rounds or getting angel investors, a startup moves to the growth stage where the newly acquired resources are used to build further and reach expansion. After a given period of time and scale, a startup reaches the exit stage where the company is no longer a startup but rather an established business.
Why Funding is Required by Startups
Funding for startups is crucial, especially for the ones that require serious resources or expertise to fully harness the true potential. The need of these resources is common as founders might not have all the skills, capacity or the finances to jump start their idea from scratch; although there are various exceptions to the same as well. Most bootstrapped businesses would have to experience exponential rise to be able to continue growing without the need of external resources.
Startup India Seed Fund Scheme 2022
Introduced by the government to provide a boost to the growth of nation’s economy and businesses, Startup India Seed Fund Scheme offers financial aid or assistance to startups for various purposes that includes proof-of-concept, commercialization, product development & trials, etc. The scheme’s primary motive is to find and reach new businesses or brands that need capital to flourish and are looking for angel investors or seed funding. There are several incubators for startups with their corresponding eligibility criterion. Being nation-wide the scheme may reach the farthest corners of the country and provide much needed support to startups. Launched in 2021, the scheme is expected to reach hundreds of startups in the coming years. An EAC (Expert Advisory Committee) has been appointed under the same to decide who would benefit most from the scheme and allot the resources accordingly. The committee not only includes government officials but also heads of various Indian startups which have gone on to become giants in their respective industries.
An Indirect Investment for startups is when investors invest in startups through third parties. Here an investor first invests in venture capital or a private equity firm. These firms, in turn, make further investment in a startup.
Get in touch with the Venture Capitalists
An individual can invest in venture capital, or a private equity firm provided he has the minimum amount of funds required to invest. An angel investment does not have a minimum investment requirement as it depends on the agreement with the startup.