Start-Up Funding Challenges and Types

Building your own company is exciting, but it can also be hard, and it requires investment, a lot of it. Finding funding has and always will be a challenge for any start-up, but having adequate financial resources is critical to your company’s ongoing success. Innovative products and business models are the foundations of a promising start-up. However, you’ll also need a steady flow of funds, especially in the early stages, to turn those ideas into reality.

Funding is crucial for improving technology, hiring the right people, and launching a comprehensive marketing strategy to get a foothold in the market. However, sourcing enough money to start your new venture can be difficult.

Type 1- Bootstrapping 

Bootstrapping means self-funding your start-up. This option is ideal for those entrepreneurs who have just started their businesses. Getting funding can be a difficult task for first-time founders unless they show some traction and a potential business plan. Through bootstrapping, once your start-up gain some traction and build the required confidence before exploring to raise funding through investors.

Type 2 – Crowd funding Your Start-up

Crowd funding your start-up means raising funds from more than one person at the same time. In this type of funding option, more than one investor is involved. These investors offer a fixed amount of funding depending on several parameters such as your business idea, goal, financial plan of action, and plans of making money i.e being profitable. The concept is similar to that of mutual funds on a basic level.

Crowd funding can help you in multiple ways. It ensures that the start-up idea is believed by other experienced players in the ecosystem and hence it can help you raise funding right from the first stage itself i.e. at the idea stage. Since multiple stakeholders are involved crowd funded can get you the right feedback at the initial stage through different investor’s perspectives.

And the best part is that you can involve common people and get your start-up funded. You can gather funds from family, friends and budding entrepreneurs that believe in your vision and are ready to support you in your start-up journey.

Type 3 – Through Angel Investment

Angel investors are always on the lookout for promising start-ups and offer funding in exchange of convertible debt or ownership equity in the start-up. These individuals can work alone or in groups of networks to screen start-ups, share research, pool their investment capital, as well as to provide advice to their portfolio companies. Apart from offering money, angel investors can also offer mentoring and advice for your start-up.

Many companies such as Google, Yahoo & Uber are well known examples of angel-funded firms.   Raising funds through angel investors is advantageous as these investors are experienced entrepreneurs who have gone through the same phase themselves and are the ones that understand what it takes to create a billion dollar start-up right out of an idea.

Type 4 – Through Venture Capitalists

Venture Capital (VC) is a type of start-up funding provided to small, early-stage start-ups that are emerging businesses and are deemed to have high growth potential, or the ones that demonstrate high growth value (be it in terms of the number of employees, annual revenue, or both).

The firms or funds invest in early-stage start-ups for exchange of equity, or an ownership stake, in the companies they invest in. These venture capitalists take on the risk of financing start-ups that are risky in nature in the hopes that some of the companies they support will become successful. The start-ups that attract VC funding are usually based on an innovative business model or technology and they are usually from the high technology industries, such as information technology (IT), biotechnology or clean technology.

Typically a venture capital investment occurs after an initial “seed funding” round in Start-ups. The first round of institutional venture capital to fund growth is known as the Series A round. VCs provide this financing in the hopes and interest of generating a return through an eventual “exit” event. This exit can be in the form of the company selling shares to the public for the first time in an initial public offering (IPO) or undergoing a merger and acquisition (also known as a “trade sale”) of the company.

Series A

In Series A round, VCs look for start-ups that already have a business model, and they are expected to use the money raised to increase revenue. Investments at this stage typically range from $2MM to $15MM. Some of the largest Series A VCs investing in software start-ups are New Enterprise Associates (NEA), Andreessen Horowitz, Accel Partners, Bessemer Venture Partners, Sequoia Capital, Grey croft Partners, and GGV Capital.

Series C

Series C is the third injection of investment capital. Start-ups at this stage are considered “young mature.” Series C funding is often used to enable a start-up to take on a larger market share, acquire a competitor, or embark on an ambitious product development plan. Series C funding ranges from $30MM and $100MM.

Type 5 – Raise Funds Through Business Incubators & Accelerators

Early stage Start-up founders that are looking to start off on the right foot can raise funds through a start-up accelerator or start-up incubator by joining their start-up programs. Start-up incubators and accelerators have a few key distinctions between them.

Accelerators “accelerate” the growth of an existing company, while incubators “incubate” disruptive ideas with the hope of building out a business model and company. So, accelerators focus on scaling a business while incubators are often more focused on innovation.

IF AN ACCELERATOR IS A GREENHOUSE FOR YOUNG PLANTS TO GET THE OPTIMAL CONDITIONS TO GROW, AN INCUBATOR MATCHES QUALITY SEEDS WITH THE BEST SOIL FOR SPROUTING AND GROWTH.

Raising funds through incubators and accelerators is useful for early-stage start-ups as these options are readily available in almost every major city. The programs of Incubators and Accelerators typically run for 4-8 months of duration during which a start-up founder is introduced to various mentors, investors and other budding entrepreneurs that have enrolled for the same program.

Entrepreneurs should look for the right fit while choosing the right program for their start-up. Some start-ups may benefit from being in an incubator, while others could be fit for an accelerator.  

Type 6 – Raise Funds through Bank Loans

The conventional means of taking a bank loan can also be one of the viable funding options for start-ups. However there are certain factors that the bank considers before offering you a loan. These are related to your start-up business model, expected returns, your ability to pay back the loan, management experience and expertise and last but not the least – the collateral security that will be provided by you. Under this option, entrepreneurs can raise funds through the following types of bank loans:

  1. Term Loans – These are lent out for the purpose of buying and constructing capital assets for your business such as machinery, plant, equipment, etc. for the use of the business.
  2. Working Capital Loans – Thesecan be obtained for the purpose of stocking inventory or even providing credit to customers. However, banks adopt a conservative outlook while lending out money for this, and try to evaluate the working capital requirement for the start-up business based on the model and details provided.
  3. Asset Backed Loans – Asset backed loans solve the purpose of Research &Development or marketing or expanding the start-up business. However, these are usually lent out depending upon the market value of the residential or commercial or industrial property that is to be pledged as collateral security. Usually for a period of 7-15 years banks lend approximately 70% of the assessed market value of the pledged property. In addition to this, the start-up founder will also be required to provide the bank the details of the business model as specified earlier i.e. expected returns, your ability to pay back the loan, and management experience and expertise.

Type 7 – Through the ‘Start-up India’ initiative

The Start-up India project by the Narendra Modi led government can be another option to raise funds for your business. As part of this initiative, the government of India has set up a Fund of Funds with a total corpus of Rs 10,000 crore ($1.6 billion) to empower start-ups and build a robust ecosystem by nurturing them to grow through innovation and design. This money is disbursed via the Small Industries Development Bank of India (SIDBI).

Dr.Kiran Kumari Patil
Director REVA NEST TBI
REVA University Bangalore

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