How to Raise Funds for Startups

Know How To Raise Funds For Your Startups - In Details

Online Legal India LogoBy Online Legal India Published On 13 Sep 2022 Updated On 18 Jan 2023 Category Business

The startup ecosystem in India is excellent at the moment, with lenders, borrowers, ideas, and consumers of new goods and services engaging well. This is a fantastic time for people who want to establish a business there. Such a setting is favorable for successful enterprises. A startup needs money in order to get going in addition to having a strong business idea, doing extensive planning, and having a vision. Because entrepreneurship needs money to start and thrive, funding is crucial. There are numerous forms of business financing, and each of these forms of financing has further uses.

Why Should Startups Need Funds?

Startups typically seek capital when their resources are limited, about to run out, or when the company is just getting off the ground. This is a crucial moment for cash raising. Experts frequently suggest that even if a firm does not need capital, it is a good idea to stick with it. In addition to giving the startup visibility with people and in the market, this has numerous positive effects for it.

It enables the business to fast scale up before a rival enters the market and seizes a sizeable portion of the startup's market share. The traditional approach of steadily expanding and adhering to budgetary constraints could result in the startup missing out on a number of chances in the present business environment.

Business credibility is boosted through fundraising. A source's willingness to invest money in a startup only serves as evidence that they have faith in its potential for success. A source's endorsement gives the startup instant credibility with stakeholders. The media typically reports on funding provided by venture capitalists. As a result, the startup receives cash as well as publicity through media coverage.

Due to the relationship between the business and the investor, the startup receives business skills, enormous resources, and quick network expansion.

Another benefit of obtaining capital for a business is that when an investor is committed to seeing a return on their investment, they are more likely to become an advisor to the startup or to get involved directly.
 

In contrast to borrowing money from a lender like a bank, a company that raises money from an investment firm has more time to repay it. A monthly return or interest payment are not necessary while working with an investing firm. Instead, there will be a protracted repayment period, which will free up money and allow the firm to continue expanding.

With fundraising, a startup won't need to invest personal property in the company registration or use it as security for loans.

How To Raise Funds For Startups

A startup must decide on its funding source based on its industry, risks for investors, conditions of repayment, investor returns, and the degree of investor involvement in the day-to-day operations and decision-making of the business. Here are some of the different places a startup might get money for its venture.

Bootstrapping

Bootstrapping is a term used to describe raising money through personal contacts and networks. Private funds and savings, gifts from family and friends, and/or personal debt would all fall under this category. When the initial business requirement is minor, this is a great course of action.

With bootstrapping, a company may determine whether the idea is viable, create a plan for scaling up, keep track of all costs, and exercise complete decision-making autonomy. Conversely, bootstrapping carries a considerable danger of losing all of one's funds and can result in financial difficulty. Long hours are needed, and equity stockholders occasionally get into disagreements.

Bootstrapping businesses that have a significant consumer base divert their earnings to cover costs. They would need to borrow money or go into venture capital in order to scale up.

Angel Investors

A person with a high nett worth who is willing to invest in entrepreneurship in exchange for an equity stake is known as an angel investor. The "high risk, high return" tenet governs angel investing. Entrepreneurs with strong growth potential will attract angel investment in order to maximise rewards.

When the firm requires it, it could offer a one-time investment. Angel investors can choose to be actively involved in the business, remain passive, or take a specialised role. Sometimes, angel investors favour funding ventures in specific regions or industries. You can ask wealthy friends and family to serve as angel investors.

A startup may have to give up its managerial independence when applying for angel investor support. The investor will make a claim for its investment returns. Even if this is the agreement, make sure the startup is treated fairly under the contract.

Venture Capital

Private equity provided to such startups with long-term growth potential is known as venture capital (VC). These professionally managed funds pool the money of investors to create a portfolio that includes shares of prospective start-ups. Both established businesses aiming to grow and young businesses expecting future success seek this type of finance.

A venture capitalist will present a term sheet after reviewing the startup company's legal documents as the foundation for deciding to invest.

Startups can seek VC funding at several stages:

  • Used to examine whether an idea is workable.
     
  • Funding for startups — this will be used to pay for product development and marketing expenses.
     
  • First round: money for both manufacturing and sales
     
  • Second round: funding for such unprofitable enterprises to continue operating
     
  • Third round - for profitable firms to grow
     
  • In the fourth round, a firm can go public.
     

Crowdfunding:
 

Through a network of people, crowdfunding raises money through contributions that can be made in little or big quantities. This is a powerful way to introduce a concept to potential investors.

Typically, crowdfunding is done on websites that Indian startups and growing enterprises can use. It significantly shortens the several months that are typically needed to grow a business.
 

The following campaign types are typically used with crowdfunding:
 

  • Donation-based crowdfunding
  • financing based on equity
  • funding determined by incentive.
     

Equity-based financing: In exchange for their investment, the backers will receive a portion of the company and become co-owners. The most common form of crowdsourcing is this one.
 

Another type of fundraising is reward-based funding, where contributors or backers receive goods, services, tokens, or other benefits.

Donation-based funding has backers who are not seeking a profit or any other kind of return.

Crowdfunding is a prompt and easy method. However, if a premium campaign needs to be strategically positioned and well-marketed, it may be expensive and time-consuming. The key lesson here is that not every firm will benefit from crowdfunding.

 

Public Offering
 

With an IPO, a private firm can issue shares to the general public. A startup's shares can be bought directly from them by anyone, which is advantageous for both the seller and the buyer.

An IPO will be the penultimate stage of raising capital for a startup. Sharing rewards with those who invest in the startup's IPO offering is a great way to raise money for its long-term objectives. While not appropriate for every firm, an IPO has significant advantages for those with high recorded profitability and a stellar reputation. It is difficult to navigate the IPO procedures for a company, but it is possible with the aid of IPO professionals.

On a Concluding Note:
 

If a company is searching for funding, it must be clear about the amount needed, the purpose of the investment, the control it wants from the investor once it receives the funding, metrics, costs, expenses, and future growth predictions, the assistance it needs, and it is long- and short-term goals. Additionally, it must consult specialists to confirm that the money it is considering is appropriate for its company.

 


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