Startup Guide: When And Why Raise Venture Debt Funding

The startup ecosystem of India has witnessed a surge in the last few years. While some of them have established themselves as prominent players in the market by bootstrapping their growth, others depended on funding to materialise their companies’ vision and expand their brands. Although in the initial quarters of 2022, startups witnessed a generous inflow of funding from investors, the lurking economic uncertainties have pushed the investor community backfoot. 

This instability can be attributed to the prolonged impact of the pandemic, inflation, impending recession, and high-interest rates. These seem to have impacted the space, with investors cutting down on investments. They are now attracted towards proven results rather than the mere potential of businesses to gain profit in the market. Investors are being cautious before realising any funds as they now focus on the capability of a business to return the investment with interest on time. 

The changing times have compelled startups to revert to old-school methods of bootstrapping themselves, such as maintaining a complete stake in the business and striving relentlessly. Bootstrapping makes it imperative for entrepreneurs to explore possibilities and develop business strategies that work. As a result, they are pushed to devise strategies that ensure immediate and long-term cash flows, establishing themselves as a prominent name in the ecosystem.  

Launching any new business requires capital investment, and funding boosts businesses by developing their value proposition and strengthening the workforce to contribute to the growth of the company. While bootstrapping can help startups, businesses must assess and reassess their standing regularly to understand if they require external funding. This begs the question, when is the right time to raise funds?

Entrepreneurs should consider the following scenarios when deciding when to raise funds:

Proven Customer Traction

Startups must have a foolproof and demonstrable formula that will result in repeat business from their target audience. They must prove that their product or service is being adopted at a ‘hockey stick rate’, which implies a large market and sustainable growth. 

Before seeking capital investment, startups must have solidified customer acquisition methods that have been perfected through trust in the product and marketing. This demand among potential customers can be gauged with social media following and app users or website visitors. Moreover, positive reviews and testimonials can reflect a strong position of the startup among customers.

Strategic Planning

Startups must have a robust business plan that remains valid for the next five years. When an entrepreneur presents a business plan, it ensures that he has thought through every aspect of the business, from marketing strategy to sales to the target audience. A plan that will remain not just feasible but also profitable in the long term can be considered ripe for external funding. 

Mergers And Acquisitions (M&A)

Investors frequently regard startups that fund their own mergers and acquisitions as the best candidates for investing as a stronghold in the market ecosystem. They seek influential organisations that can help the startup’s future success, and a merger with a major player in the industry can be a win-win situation for both the investor and the startup. 

Expansion Through Funds

An entrepreneur should consider raising capital for a business that needs funds to grow or reach a significant milestone. When a product has earned a place in the market, and there is a clear demand for the product or service, more capital is needed for the growth of the business to increase its reach among customers. 

How Debt Funding Can Come To The Rescue 

To counter the uncertainties in the market on investments, startups can opt for debt funding. Entrepreneur-friendly debt capital allows founders to maintain control of their company without giving up equity. The drawback of debt funding is that extreme debt can make the business model risky with loan payments if revenue declines. 

With the availability of a plethora of finance options, an entrepreneur must make informed decisions. Funds can boost a startup’s growth and provide the business with much-needed flexibility. However, not only is raising funds a challenge but the funds can also get exhausted quickly unless the senior management takes the right calls in association with the investors.

Debt funds, on the other hand, give the entrepreneur the liberty to enjoy an autonomous position in the decision-making without dilution of ownership. 

Besides, there are also subscription-based financing platforms that offer startup financing without diluting equity, restricting debt, or any lengthy paperwork at every stage of their journey. These platforms also provide businesses with an ecosystem to amplify their growth without any collateral. This method of financing is flexible and fast and gives greater control to founders over raising funds and paying investors back. 

When determining the best time for funding, an entrepreneur must have a solid business plan, understand the intricacies of raising funds, and have an actionable plan to meet investor expectations. The aforementioned cases are critical junctures in any business and the perfect time to start betting on external funding to unlock the next phase of the venture’s growth.