How Can a Startup Raise Funds?
If you have ever come across a startup founder in your life, you must have surely heard enough about and asked for enough funding.
“How did you procure funds?”
“I am in the seed funding stage. Long way to go.”
“I have borrowed funds from my in-laws, and that is terrible sometimes.”
“I am stuck with the financing stage. These investors still don’t want to invest in my business.”
If you have heard and read about all such stories, it is evident that you are super-confused about what to do next. Let us first understand funding by a business and a startup.
A business is a venture initiated for personal employment purposes. It does not have a significant vision like a startup. You can start a business with or without using technology or expertise. For example, you can start a business reselling apparel or home accessories, but you cannot open a startup with this objective. On the contrary, a startup is a venture that has a big vision right from the day of its inception. You use technology, skills, and expertise to produce goods or provide services to your customers.
What is investing in a startup?
When people invest in a startup, they are known as investors. These investors put their hard-earned money in different start-ups like the stock. They are like limited partners of a startup. They are not interested in whether your products sell or the way you sell. They are merely interested in the investment they have made and check whether its valuation has been increased or not. So, your job is to find such people who would like to invest in your business and watch their money grow.
Different stages of startup funding
- Bootstrap.
This is the basic or stage zero of the startup funding phase. In this phase, you borrow funds from family members and friends. It is the stage at which your venture is still at the business stage (as what it is called in India). The real funding seems to be far away, but you need to gather all your basics through borrowings. If you add a family member as an investor, we are afraid it will be a complicated process. Hence, it is advisable to differentiate between the investors and the people who help you financially to start your business.
In the bootstrap phase, your venture can be in two forms: a proprietorship or a limited liability partnership. Let us explain these two in short.
In a sole proprietorship, you are the one who makes decisions and owns the business. You don’t have any partners, and the business revolves around you. For instance, it could be a home-based baking business or a tiffin service. It is you who is the centre of all the business activities.
In a limited liability partnership, all partners are accountable for the losses and profits in a limited way. No one takes the business home, and no one has to suffer all the losses if any. It all depends on the extent of liability of each partner. The benefits are much better in an LLP as compared to a proprietorship, but you need to have serious partners to start this one.
In the bootstrap stage, the entity can either be started by a single person or in the form of an LLP. You cannot execute the startup funding at this stage; please remember it. In order to initiate the startup funding, you need to start a private limited company. So, if you have a wider vision and want to enter the funding phases, you need to make a note in the beginning itself. Open a private limited company to avoid the hassle of converting it later.
It is not challenging to start a private limited company in India. You can refer to the instructions online and start digitally. The process has become much simpler with the help of a few valid documents.
- Seed funding phase.
As the name suggests, seed funding is done when you have an idea in your mind. An idea is compared to seed in the business world and hence, the name – seed funding. You might only have the idea in your mind, and still, you can proceed with the funding process. Alternatively, you can even do this if you have created the Minimal Viable Product and pitch it to the investors. You can approach angel investors who are interested in your idea and would like to grow their money by investing in the same.
- Series – A, B, C, D.
In the series stages, your startup undergoes a sequential step of funding. In short, it is the time when you get into real funding, or no more a part of the bootstrap family or the seed funding phase. Your idea is mature, your venture is mature, and you are not capable of handling serious investors. You mainly seek institutional investors and know very well you are going.
Series A is mostly seeking finance from a venture capital firm. In the Series, the valuation increases at every stage, and hence, you have done it carefully. You no more rely on your family or friends for the capital, but you seek institutional financing options.
- IPO.
After the Series comes the actual phase in which you are a startup and is now capable of holding an IPO. In this phase, your company goes public and lists its shares on a stock exchange. Yes, it is a memorable event in your startup tenure, and it should be an incredible way of funding.
In a nutshell, a startup can raise its funds through a number of vital phases as described above. You can learn more about the stage in-depth or consult an expert on it. But it is a serious thing to secure funds as the stage advances, and you cannot take anything for granted. Hence, be careful and take steps wisely.
FAQs
A startup raise funds is a process in which a startup company collects capital from outside investors in order to grow and expand operations. This is done through a variety of methods, such as equity crowdfunding, venture capital, angel investments, and more.
The benefits of a startup raise funds include expanding a business’s network of potential investors, increasing its public visibility, and generating capital that can be used to finance business operations.
Preparation for a startup raise funds includes formulating and refining a business plan, creating financial projections, and performing market research. You’ll also need an experienced legal team to handle legal issues involved in the process.
Factors that can affect the success of a startup raise funds include the amount of capital needed, the level of preparedness, the startup’s business strategy, the company’s financial history and projections, and current trends in the startup market.
Financing options for startup raises funds include angel investing, venture capital, debt financing, equity crowdfunding, and hybrid structures such as revenue-based financing.
Financial instruments for startup raises typically include stock and options, convertible securities, debt instruments, warrants, and preferred stock.
An investor plays an important role in a startup raise funds. Investors provide capital, serve as an advisory board, and evaluate the business’s management and financial plans.
During a startup raise funds, you will be presented with various documents such as term sheets, offering memorandums, and disclosure documents.
The time it takes to complete a startup raise funds varies depending on several factors, such as the nature of the business, the amount of capital needed, and the types of financing options chosen. Generally, the process can take anywhere from a few months to over a year.
Eligible companies for a startup raise funds include early-stage companies that are trying to raise capital to expand operations, acquire business assets, and reach the next level of growth.
