If you are planning to launch your startup in India there couldn’t be a better time in the country’s history. The startup ecosystem is thriving like never before, and the environment is ripe for entrepreneurs to succeed. The key to success for any startup is a combination of planning, foresight, and finding the right set of investors. Firstly, startups that succeed begin with a business idea that can sustain itself for the long term. Entrepreneurship requires capital to grow, and different types of business funding can be used to achieve different objectives. If you are an entrepreneur, and you want to know how to get funding for your startup, how to attract investors, and which funding sources to tap into, then read on to find answers.
Before trying to get investors, it’s crucial that you have a detailed understanding of your financial needs. You need to figure out the kind of investment that will help your business thrive. The funding source needs to be chosen as per the nature of your business, risks involved for the investors, the pressure of repayment, returns to investors, and their involvement in the decision-making process. We have elaborated on some financing methods that can help you find the most effective source for you.
Bootstrapping means raising funds through personal means and networks: your own savings and capital, support from friends and family, or personal debt. Self-funding is suitable when the initial business requirement is small.
It empowers you to test the feasibility of your idea, chart the plan to scale up, account for all costs, and retain 100% freedom in decision-making. However, bootstrapping a business can be a cause of financial stress, involve unhealthily long working hours, conflicts amongst equity shareholders, and has a high risk of losing all your savings.
Self-funded companies initially start out using personal savings and funding from loved ones. Once there are a sizable number of customers, revenue is redirected to meet expenses. Eventually, when it comes to scaling up the business, you may look to borrowing or venture capital.
Well-known companies such as eBay and Facebook started with self-funding
Angel investors are high net worth individuals who fund entrepreneurship for an equity stake in the businesses. Angel investment works on the principle of high-risk, high return. Investors wish to fund startups with high-growth potential, so they can pocket high returns.
That being said, the concept of ‘angel investor’ is quite broad. Funding could be offered as a one-time investment or as and when required. Investors may get involved with the startup’s operations or be completely hands-off. Some specialize in businesses from a certain location or working within a certain field. An angel investor could even be a particularly wealthy friend or relative!
How do you get investors involved in your business? Seed investors, while not as stringent as venture capitalists, require sufficient information before funding any business. They usually need knowledge regarding:
- The team, its background, history, capabilities, and plans to expand
- The market opportunity – whether the idea is scalable or not
- Any early traction that’s been made, like product prototypes, customer testimonials, or well-known clients
- Data points such as – anticipated revenue growth, expected costs and expenses, time till profitability, and requirements for future capital. It’s important to be thorough with the metrics that support your business idea and the market
- The various types of risks the business may face
- The business’ USPs
- Plans involving the investor’s funding
While all this is necessary, you should keep an eye out for funders that meet your needs. Those who have helped boost companies in a similar space, have enough funding, and have realistic expectations!
Angel investors are the right people if you’re looking for risk-takers. They’re willing to value potential (backed by data of course) easier than other sources of finance. The funding itself need not be repaid. Angel funders are in it for the equity-level rewards. They often double up as mentors, invested not just financially, but strategically in business outcomes. Expertise and experience make investors an asset in themselves.
On the other hand, funders’ expectations can pressurize you immensely. After all, the future funding of your business is in their hands! Investors want to see success, and they won’t be afraid to demand the rationale behind certain decisions or get involved with decision-making themselves. Onboarding angel investors could mean giving up quite a bit of managerial independence. Finally, they’re going to take their claim of returns. While this is the basis of the entire agreement, you should make sure that you are signing a fair contract. Otherwise, you could end up with far less than you expected.
Venture Capital Funds
Venture capital (VC) is a form of private equity provided to startups with long-term growth potential. These are professionally managed funds that pool investors’ finances and create a portfolio of promising startups’ shares. It is becoming the go-to source for emerging businesses anticipating future success or established companies seeking expansion.
To secure venture capital investments, you must lay out a detailed business plan with information similar to what angel investors seek. After an introductory meeting with venture capitalists explaining the business proposal, the due diligence process is carried out. Venture capitalists ask a series of questions to evaluate whether the business is fit for investment. Once a legal review has been completed, venture capitalists offer a term sheet, which is the basis for the investment agreement.
Startups can seek venture capital funds at different stages, namely:
- Seed funding – to test the feasibility of an idea
- Startup funding – to cover marketing and product development costs
- First round – for production and sales needs
- Second round – capital for operational requirements, for companies that are yet to become profitable
- Third round – to help a profitable company expand
- Fourth round – for when a company wants to go public
Acquiring venture capital means gaining large amounts of funding you need not return. Venture capitalists are also known for their extensive networks. Chances are high that they’ll connect you to other investors and founders, leading to mutually beneficial business relationships. Venture capital financing can also accelerate your growth process. Not to mention, these investors are often seasoned business veterans themselves. So you are likely to have a mature team guiding your decision-making process and minimizing risks.
However, it could mean giving up a majority stake in equity, and thus decision-making. The process of seeking venture capital is a long and tedious one. The investors may also put pressure on you to expand your business more rapidly than you expected.
Crowdfunding is a method used to help raise money to fund startups, projects, or any other ventures with contributions trickling in from a vast network of people. It is an effective way to help you pitch your ideas to potential investors.
This model is not limited to only business people and investors but can also include family, friends, customers, or shareholders. Crowdfunding is usually held via online platforms like Kickstarter, Ketto, Milaap, Impact Guru, Wishberry, Crowdera, GoFundMe, etc that are available in India for startups and growing businesses.
Crowdfunding helps you drastically minimize time spent in growing your business, which traditionally would take months.
There are roughly four kinds of crowdfunding campaigns that take place, generally.
- Reward-based funding
- Donation-based crowdfunding
For each business, the requirements could be different. Starting with equity-based crowdfunding in India, the backers get a share of your business. They become part-owners based on their contribution. It is known to be one of the most popular ways to crowdfund.
The second option is reward-based funding that involves backers or contributors receiving products, services, tokens, or any other advantage of offers for their contribution.
For donation-based funding, the backers help funding without expecting or receiving anything in return.
The crowdfunding process is smooth, effective, streamlined well, and is timely. Your ideas can kickstart a new business or a new parallel within your existing startup with clear financial backing that can be tracked. Crowdfunding motivates business owners who have always wanted a platform to back their companies and shine a spotlight on it, now possible with exposure on public forums. In difficult times, crowdfunding can be the most effective way to collect funds faster for urgent business needs. Your business campaign on crowdfunding websites could go viral for the right reasons if backed with sustainable ideas that contributors would like to support.
It’s important to note that building a successful campaign can be costly if it’s premium. The process could take time and money if it needs to be marketed and positioned extremely well. The campaign could backfire for several reasons. Crowdfunding is not for every business out there. The requirements could vary and it’s important to understand that before asking for funding for your startup or business.
Initial Public Offering
An Initial Public Offering (IPO) is the process through which a private company opens its share issuance to the public. Only companies that have an IPO can be publicly listed and traded on stock exchanges. Any individual can buy a company’s shares directly from the company which makes it fruitful for both the company and the investors.
When a business is well-established and well-trusted, it can branch out into different markets or domains. An IPO is a final step for any startup to hone funds for their ventures. It is the ideal way of gaining capital to meet the long-term goals of the company by sharing the rewards with the public. It requires several stipulations and formalities to establish an IPO, but it is highly beneficial for startups that have high recorded profitability and are considered reputable.
Experienced IPO experts such as consultants, bankers, and brokers can guide you through intricate procedures from registering for an IPO to allotting shares. They can help you gage whether your business is ready to be publicly traded.
In India, major companies that were already loud and proud in the market have recently set up IPOs. Zomato Ltd and Tatva Chintan Pharma Chem Ltd. had lines of investors ready to pay up for eagerly awaited equity stakes in the company.
As a startup founder seeking funding, begin by developing a thorough understanding of where you are placed when it comes to
- Amount of funds required
- Purpose of funds (preliminary feasibility test/covering marketing costs/scaling up)
- Amount of control you’d like to retain
- Metrics, costs, expenses, and future growth projections
- Type of support you are seeking (only financial/strategic and financial)
- Short-term and long term business goals
When you have a startup, you can’t just take any route to get investors to favor your idea. Hence, it requires acute and incisive study and analysis before you take a giant step. Everything comes down to where you are in the market at present. It’s only afterwards you’ll be able to chart the specific plan to follow to acquire the funds and investors that best suit your business.