Startup Funding
Startup Funding
Funding refers to the money required to start and run a business. It is a financial investment in a company for product development, manufacturing, expansion, sales and marketing, office spaces, and inventory. Many startups choose to not raise funding from third parties and are funded by their founders only (to prevent debts and equity dilution). However, most startups do raise funding, especially as they grow larger and scale their operations. This page shall be your virtual guide to Startup funding.
Why Funding is Required by Startups
A startup might require funding for one, a few, or all of the following purposes. It is important that an entrepreneur is clear about why they are raising funds. Founders should have a detailed financial and business plan before they approach investors.
Prototype Creation
Product Development
Team Hiring
Working Capital
Legal & Consulting Services
Raw Material & Equipments
Licenses & Certifications
Marketing & Sales
Office Space & Admin Expenses
Types of Startup Funding
|
Working Capital |
Equity Financing |
Debt Financing |
Grants |
|
Brief |
Equity financing involves selling a portion of a company's equity in return for capital. |
Debt financing involves the borrowing of money and paying it back with interest. |
A grant is an award, usually financial, given by an entity to a company to facilitate a goal or incentivize performance. |
|
Nature |
There is no component of repayment of the invested funds. |
Invested Funds to be repaid within a stipulated time frame with interest |
There is no component of repayment of the invested funds |
|
Risk |
Financer: There is no guarantee against his investment. |
Financer: The lender has no control over the business's operations. |
Financer: There is a risk of the startup not meeting the goal or objective for which the grant has been provided. |
|
Threshold of Commitment |
While startups are under lesser pressure to adhere to a repayment timeline, investors are constantly trying to achieve growth targets |
Startups need to constantly adhere to repayment timeline which results in more efforts to generate cash flows to meet interest repayments |
Grants are distributed in different tranches w.r.t the fulfilment of the corresponding milestone. Thus, a status is constantly working to achieve the milestones laid down. |
|
Return to Investor |
Capital growth for investors |
Interest payments |
No Return |
|
Involvement in Decisions |
Equity Investors usually prefer to involve themselves in the decision-making process |
Debt Fund has very less involvement in decision-making |
No direct involvement in decision making |
|
Sources |
Angel Investors Self-financing Family and Friends Venture Capitalists Crowd Funding Incubators/Accelerators |
Banks Non-Banking Financial Institutions Government Loan Schemes |
Central Government State Governments Corporate Challenges Grant Programs of Private Entities |
Stages of Startups and Source of Funding
There are multiple sources of funding available for startups. However, the source of funding should typically match the stage of operations of the startup. Please note that raising funds from external sources is a time-consuming process and can easily take over 6 months to convert.
Ideation 
Validation 
Early Traction
Steps to Startup Fund Raising
The entrepreneur must be willing to put in the effort and have the patience that a successful fund-raising round requires. The fund-raising process can be broken down into the following steps
- Assessing Need for Funding
- Assessing Investment Readiness
- Preparation of Pitchdeck
- Investor Targeting
- Due Diligence by Interested Investors
- Term Sheet
The startup needs to assess why the funding is required, and the right amount to be raised. The startup should develop a milestone-based plan with clear timelines regarding what the startup wishes to do in the next 2, 4, and 10 years. A financial forecast is a carefully constructed projection of company development over a given time period, taking into consideration projected sales data, as well as market and economic indicators. The cost of Production, Prototype Development, Research, Manufacturing, etc should be planned well. Basis this, the startup can decide what the next round of investment will be for.
What do investors look for in startups?
Objective and Problem Solving
The offering of any startup should be differentiated to solve a unique customer problem or to meet specific customer needs. Ideas or products that are patented show high growth potential for investors.
Management & Team
The passion, experience, and skills of the founders as well as the management team to drive the company forward are equally crucial in addition to all the factors mentioned above.
Market Landscape
Market size, obtainable market share, product adoption rate, historical and forecasted market growth rates, macroeconomic drivers for the market your plans to target.
Scalability & Sustainability
Startups should showcase the potential to scale in the near future, along with a sustainable and stable business plan. They should also consider barriers to entry, imitation costs, growth rate, and expansion plans.
Customers & Suppliers
Clear identification of your buyers and suppliers. Consider customer relationships, stickiness to your product, vendor terms as well as existing vendors.
Competitive Analysis
A true picture of competition and other players in the market working on similar things should be highlighted. There can never be an apple-to-apple comparison but highlighting the service or product offerings of similar players in the industry is important. Conside...
Sales & Marketing
No matter how good your product or service may be, if it does not find any end-use, it is no good. Consider things like a sales forecast, targeted audiences, product mix, conversion and retention ratio, etc.
Financial Assessment
A detailed financial business model that showcases cash inflows over the years, investments required key milestones, break-even points, and growth rates. Assumptions used at this stage should be reasonable and clearly mentioned.
Exit Avenues
A startup showcasing potential future acquirers or alliance partners becomes a valuable decision parameter for the investor. Initial public offerings, acquisitions, subsequent rounds of funding are all examples of exit options.
Why do investors invest in startups?
Investors essentially buy a piece of the company with their investment. They are putting down capital, in exchange for equity: a portion of ownership in the startup and rights to its potential future profits. Investors form a partnership with the startups they choose to invest in – if the company turns a profit, investors make returns proportionate to their amount of equity in the startup; if the startup fails, the investors lose the money they’ve invested.
Investors realize their return on investment from startups through various means of exit. Ideally, the VC firm and the entrepreneur should discuss the various exit options at the beginning of investment negotiations. A well-performing, high-growth startup that also has excellent management and organizational processes is more likely of being exit-ready earlier than other startups. Venture Capital and Private Equity funds must exit all their investments before the end of the fund’s life.
Mergers and Acquisitions
The investor may decide to sell the portfolio company to another company in the market. In essence, it entails one company combining with another, either by acquiring it (or part of it) or by being acquired (in whole or in part).
IPO
Initial Public Offering is the first time that the stock of a private company is offered to the public. Issued by private companies seeking capital to expand. It is one of the most preferred methods by investors to exit a startup organization
Selling shares
Investors may sell their equity or shares to other venture capital or private equity firms.
Distressed Sale
Under financially stressed times for a startup company, the investors may decide to sell the business to another company or financial institution.
Buybacks
Founders of the startup may also buy back their shares from the fund/investors if they have liquid assets to make the purchase and wish to regain control of their company.
Startup India Funding Support
SIDBI Fund of Funds Scheme
The Government of India formed a fund of INR 10,000 CR to increase capital availability as well as to catalyze private investments and thereby accelerate the growth of the Indian startup ecosystem. The Fund was set up as a Fund of Funds for Startups (FFS), approved by the Cabinet and established by the Department for Promotion of Industry and Internal Trade (DPIIT) in June 2016. FFS does not invest in startups directly but provides capital to SEBI-registered Alternate Investment Funds (AIFs), known as daughter funds, who in turn invest money in high-potential Indian startups. SIDBI has been given the mandate of managing the FFS through the selection of daughter funds and overseeing the disbursal of committed capital. The fund of funds makes downstream investments in venture capital and alternative investment funds that in turn invest in startups. The fund has been formed in a way that creates a catalyzing effect. Funding is provided to startups across different life cycles.
As of 31st May 2021, SIDBI has committed INR 5,409.45 Cr to 71 AIFs further INR 1,541.79 Cr has been distributed to 51 AIFs. A total of INR 5,811.29 Cr has been injected to boost 443 startups.
Startup India Seed Fund Scheme
Department for Promotion of Industry and Internal Trade (DPIIT) has created Startup India Seed Fund Scheme (SISFS) with an outlay of Rs. 945.00 CR, which aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market-entry, and commercialization. This would enable these startups to graduate to a level where they will be able to raise investments from angel investors or venture capitalists or seek loans from commercial banks or financial institutions. The scheme will support an estimated 3,600 entrepreneurs through 300 incubators in the
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