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Funding 101: A Founders’ Guide To Understanding Startup Funding

Funding 101: A Founders’ Guide To Understanding Startup Funding

Funding can be the lifeblood of a business. Wisely chosen funding sources guarantee fewer worries and hassles for the founder

Indian startups have already raised $11.2 Bn over the course of the first three months of 2022

A carefully chosen investor can be the source that nurtures the company and takes it to the next level

The last decade has seen India emerge as the third-largest ecosystem globally, only behind the US and China. The Indian startup ecosystem has witnessed a YoY consistent annual growth of 12%-15%. With over 57K startups launched till date, it can be said that India’s startup landscape is thriving. 

This boom across India’s private tech landscape has accelerated startup funding. Indian startups have raised $112 Bn between 2014 and 2021.  Additionally, unicorns have helped expedite this growth, the key focus being on acquiring talent, a new revenue stream, or its expedited transition. The number of Indian unicorns stands at just one shy of a century and have raised a total of $83 Bn in funding to date and are valued at $332 Bn combined.

The startup boom did not happen overnight. Globally speaking, it can be traced back to the dot-com boom. The 2000s saw people investing in technology and internet ventures with the firm belief that tech would change the way businesses operate. In India, the startup revolution began in 2008 with the recession and subsequent job layoffs, especially in IT. 

This alone indicates the unique transformation that the Indian startup ecosystem is going through. This article will help you understand the inner workings of startup funding. 

What Is Startup Funding?

In order to sustain and grow, startups require capital. This capital or funds can be raised from various sources.

Most startups prefer not to raise funding from third parties, with their funding being undertaken by their founders to prevent equity dilution and accumulation of debts. 

However, as startups continue to grow and scale up their business operations, limited capital necessitates additional funding. Investor sentiment was bullish regarding Indian startups during 2021 with startups raising more than $42 Bn across 1,583 deals with 2,487 unique investor participation

The first quarter saw Indian startup funding grow almost 186% compared to the corresponding period last year. Indian startups have already raised $11.2 Bn over the course of the first three months of 2022.

This accelerated funding has benefited even early-stage Indian startups and changed India’s startup funding scenario. As a result, celebrities and cricketers are now joining the startup investment bandwagon and startup founders and individual investors. 

For example, startups like Growth School, Wint Wealth, and HYPD are some of the early-stage startups that have raised funds from influencers such as Bhuvan Bam, Tanmay Bhat, and Ranveer Allahbadia, among others.

When Is The Right Time To Raise Funds?

A startup might need funds for various reasons which might include prototype and product development, hiring skilled staff, working capital, licences and certifications, inventory, promotions, and so on. 

Startups should be clear from the get-go about their reasons behind fundraising and should have their financial forecast mapped out. 

Startup Funding 101

A new-age venture might raise funds from various sources. The founders must decide what kind of financing fits its requirements at the time. Some common forms of financing a company might go for include:

  • Equity Financing: It refers to a company selling a part of its equity in exchange for capital. It does not carry a repayment obligation, but investors are paid dividends.
  • Debt Financing: The company raises money by selling debt instruments to investors and repaying them with interest.
  • Grants: This is generally in the form of a financial award provided to incentivise performance and rebates of patent costs, among others.

A few key sources of startup funding include:

  • Venture Capitalists (VCs): They are private investors who fund promising startups and expect a payout when the company succeeds.
  • Angel Investors: Individuals who invest in aspiring startups and expect a payout from the company in equity or ownership stake.
  • Crowdfunding: Funding backed by private investors who buy products/services before they are available in the market. It is mostly conducted via a crowdfunding platform, enabling investors to browse through diverse ideas and back solid ones.
  • Banks and NBFCs: Startups can also raise funds via debt through banks and NBFCs. This has to be repaid with interest.

The Funding Checklist

A startup must ask itself certain questions before it starts the process of fundraising. They should have already evaluated their need for funding and the right funding amount. 

The next step is to assess if they are investment-ready. One way of checking is by testing their prototype on at least 50 to 100 people. Now comes the part with the pitch deck. Keep it short and crisp with your product information, market size and team details.

Now comes the part where you do your own ‘due diligence’. It falls on the startup to research extensively into the investors that you want to target. Their brand portfolio, the sector they prefer to invest in along with their history. Reach out to them via their websites, personal connections or even through various platforms and formal networks. 

Always be ready with your financial forecast and a functional product prototype. This process might take anywhere between 3 and 6 months. Generally, it takes even longer. So be an expert on your term sheet and documentation.

Funding can be the lifeblood of a business. Wisely chosen funding sources guarantee fewer worries and hassles for the founder. This allows the entrepreneur to focus on their key business. A carefully chosen investor can be the source that nurtures the company and takes it to the next level.

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