Funding for Start Ups: An Overview of Different Stages of Funding.

In one of our article, we discussed what is a Start Up as per the Start Up India Scheme and what are the benefits for start ups under that Scheme. The article highlighted that any business having unique and innovative business idea and the capacity of job creation can be recognised as a Start Up under the scheme. However, one cannot ignore the fact that even the start ups with unique and innovative idea need funds to launch its product or implement its ideas, to operate the business and lastly to expand the business to its highest potential. The central government has floated a corpus of INR 945 crores under the Start Up India Seed Fund Scheme (SISFS) for providing financial assistance to start ups for proof of concept, prototype development, product trials, market entry and commercialization which will benefit to approximately 3600 start ups as recognised by eligible incubators across India. Although, the SISFS is a good move by the government the same is not enough as there are many more start ups which are either being established or are already operating for a few years, which shall not be able to receive the benefits under the said scheme. The reason being that firstly not every start up is linked to an eligible incubator secondly even if a start up is under the eligible incubator they may still not qualify for the benefits under the scheme. For this purpose, the start ups need to fetch for funds from other sources as well. In this article we shall discuss the different stages of funding that a start up entity needs to go through:-

A. Self-Financing Stage: -

This stage of funding is known as ‘Bootstrapping/Pre-Seed Funding’ stage. This is the first stage of funding where the entrepreneur has to rely on his own funds or funds from his family and friends for starting the business and for its operations and has to rely majorly on its own revenue.

Albeit limited, the benefit of this stage of funding is that the control of the business is solely in the hands of its promoters/partners. The funds required at this stage are comparatively less than the other stages. During this stage of funding the entrepreneur has to mostly invest in generation and operation of the business so that the business is able to establish as a brand. Moreover, it is a task to raise funds at this stage as there are limited funding channels available at beginning of any start-up business

Generally, if there is a good business plan the start up can also receive money/ grants/financial benefits by participating and winning in events and competitions held by institutes and organizations. Even though the prices earned during these events are less yet the same can be sufficient for the start up at the initial stage. .

B. Seed funding stage: -

The next stage after the Boot strapping stage is the Seed Funding Stage. A start up which has successfully crossed the first stage now has to get to the next stage of funding for the growth of the business. During this stage the start up entrepreneurs need to run field trials or test the product on potential customers, if required get mentors onboard, and have a formal team which shall help in getting funds under this stage. Seed Funding in a start up can be done with the help of Incubators, Government loan schemes and Crowdfunding

  • Incubators: - Incubators are organisations established with the purpose of assisting new entrepreneurs with building and launching their start- ups. They provide a host of value-added services to the start ups and also make grants, debts as well as equity investments. Depending on the type of business idea (eg: Block Chain, IOT, AI etc.), the start up has to approach such an incubator for their assistance and funds. Some government recognised incubators also assist in providing recognition for getting benefits of government schemes.

  • Government loan schemes: - The government of India under its Initiative of Start Up India Scheme has been providing low cost capital and debt free funds to the start ups through various channels and schemes. Some of such schemes are New Venture Capital Fund, Start-up India Seed Fund Scheme and SIDBI Fund of Funds.

  • Crowdfunding:- Start ups who are unable to get funding from the Incubators or under the Government Schemes can opt for crowdfunding method for raising capital. Under this method the entrepreneur has to raise funds either through an online platform or through a large group of people who invest relatively small amount each. For raising funds under this method the entrepreneur may have to provide the product or service to the investors before it goes public and also a detailed road map of the funding goals and its usage for the growth of business. Fundable, FuelADream, KickStarter and Indiegogo are some of the online platforms from where the start-ups can raise seed funds for their products and ideas.

C. Angel Investor: -

This is the 3rd Stage of Funding for start ups. Start Ups who have survived and established their brand and a demand for its product and services can seek investments from Angel Investors. Typically, at this stage the Start Up needs funding for scaling the business or for product development or marketing or simply for expansion of team to meet the incoming demands for the business. Angel Investors are High Net worth individuals or institutes who seek to invest in High Potential start ups in exchange for equity. The investment through angel investors can be individually or through a group of such investors. Considering that the amount of money raised can be significantly greater than that raised at the seed funding stage, entrepreneurs should lay out a well-researched and promising business plan to the Angel Investors.

D. Venture Capital: -

Venture Capital (VC) Funds are professionally managed funds that invest in late stage and high growth start ups. This round of funding is required by the start ups who have acquired substantial traction in the market place and require further funds for expansion in terms consumer acquisition, product offerings, geographical reach or for better marketing. VC funds usually provide funds to those start ups who have shown steady growth over the years and still looks promising for future. The investment through these funds is typically in the form of Equity or convertible notes.
VC funding stage involves multiple series of funding. These series are Series A, B, C, D etc. All these rounds of funding raises higher value and also increase the Start-Up’s valuation in the market. Moreover, the Start Up can remain a private limited company for a longer time with the abovestated funds which has its own benefits.

E. Initial Public Offering (IPO): -

A Start Up which has succeeded over the years and has gained its own customer base and still is looking for growth can go for Initial Public Offering (IPO) where the company sells its shares to the public at large. In this stage shares of a company are sold to institutional investors and also to retail (individual) investors. Initial Public Offering is also known as ‘Stock Launch’. As per the laws of the country certain companies which surpass the turnover thresholds set by the SEBI have to necessarily go for IPO. The start ups which have grown at a steady pace over the years and are making profits can go for the public listing process which is elaborate and replete with statutory formalities.

Conclusion:

In addition to the schemes and funds from the investors, start ups can also raise debt funds from Banks and Financial Institutions if the business can sustain the burden of regular interest payment obligation. Start ups sometimes choose fund raising by debts than by equities as the same does not dilute the equity stakes of the promoters of the business. Even though the stages comprehended above are not exhaustive and there are many other ways of raising funds for the start-ups depending on the stage of the start up. This article has attempted to provide the broad category of funds that a start up may require to attain its full potential.