How does Start-up Funding Work ?
A great business idea needs the right funds to scale up. Explained for the benefit of the uninitiated, these are some of the best ways to ensure your startup can, not just sustain, but also profit!
Venture Capitalists:
One of the oldest methods in the textbook, and also the most explained on online portals and various books, pitching your idea to a venture capitalist is still considered a safe and promising option to secure investment or funding. Over the years, however, the competition that surrounds this option has risen at an alarming rate.
The basic idea behind this process is to choose a venture capitalist firm which will support your start up financially in exchange for equity. Since they have an investment in your venture, they will do their best to support you and provide their expertise in matters of business. It is difficult to convince such firms to give you their money, because you have to make sure that yours is a fast growing start up with very less risk of failure.
Venture capitalists focus only on those companies which project stability and which are growing exponentially as compared to other companies in the same league. If your company has a high growth rate with an exit strategy in place, it is more likely to secure the top dollar.
Angel Investors:
While venture capitalists and angel investors may seem one and the same superficially, there is a huge difference.
An angel investor, as the name suggests, is a wealthy individual/s who has a special interest in the business that you’re aspiring to pursue. These investors mainly get involved with small businesses at their early stage. They can be anyone, even a member of your family. These are the people who make their own decision to invest in the startup which might help the company get off the ground and make some initial progress to kick start their business. The major difference between venture capitalists and angel investors is that VCs are organizations which require proper pitches and months of hard work in order to win them over, while these investors approach you or are very easily persuaded. That being said, angel investors have a quick action plan as compared to VCs.
Crowd-funding:
Many companies use the option of crowd funding by starting a Gofundme page or a post on Kickstarter or Indiegogo which are websites which allow users to make a post for securing funds. These kinds of portals enable a business to pool very small amount of investments from various sources as opposed to getting a huge amount from one investor. However, one must have appropriate knowledge and an experience with crowdfunding to make this option successful, because there are millions of companies which ask for funds from these portals and the rate of success is low.
There are goals which you can set to secure an amount to invest in your company; some websites have a condition that you must fulfill the preset amount in order to withdraw the money that is invested. Moreover, achieving this goal requires an undefined amount of time which many companies do not have.
There are techniques one could opt in order to make this option more successful. One such technique is reward based crowdfunding, which means that you will provide your investors with a reward (the manufactured product, or a membership to your service) in exchange for the money that they invest in your company. Equity crowdfunding is the same as reward, except that investors are provided with shares instead of material rewards.
Grants:
There are grants that are available for a startup. Some of them are provided by the government. In order to get the grants the company has to appeal to the government department or take part in any event that the government organizes.
Companies have to fulfill requirements for participation, like in Australia, a company need to have a turnover of less than $1.5 million in order to get the CSIRO Kickstart funding. The Indian government, for example, is encouraging the emerging presence of startups with programs like Pradhan Mantri Micro Units Development and Refinance Agency Limited (MUDRA), or that they have launched a 10,000 crore startup fund in order to improve the ecosystem of startups in India. They have also launched a ‘Bank of Ideas and Innovations’ program for small businesses to gain traction.
Grants are an integral part of investment for companies which are science or research based. They can secure these funds from the government or from universities or larger companies which also work on research. There is also the option of participating in competitions, which can help you win prize money if your idea is sustainable and unique.
Bootstrapping:
This option favors the people who have enough capital investment of their own to invest in their idea. Self-funding is a good idea only if there is extensive surety of financial success because if that idea fails, you can end up stranded in debt or facing an empty bank account along with a failed startup on your conscience.
You can convince your family members to also invest money in order to have enough capital to push off from the ground. Getting investment this way usually has less hassle than approaching corporate offices or VCs owing to the lack of formalities or trust between families. The positive attribute this has is not being tied to an organization or investor and the inevitable pressure of performance that comes with it, which enables you to work peacefully and with a cool mindset.
Business Incubators or Accelerators:
When you are an early stage startup, you can consider enrolling for an incubator program, which, as the name suggests is a 4–8 months program which nurtures you like a parent and assists your business to work. Accelerators have the same idea except that incubators teach you how to become stable and sustainable, whereas accelerators allow you to drastically grow your business.
The benefits of these programs are the contacts with mentors, investors or other startup members like yourself that you can build with, and also the knowledge that you’ll receive will be precious for you to pass onto others or for you to use in other ventures as well. Villgro, Amity Innovation Incubator, AngelPrime, TLabs, Startup Village are some Indian Incubators and Accelerators which can help you achieve your goal.
In Conclusion:
Funding options differ with stage, and as you grow, it is important to keep an eye out. Approach angel investors and venture capitalists when your company has equity to offer because procuring funds takes time and experience. Avoid making offers, deals or promises that you think will be hard to keep during the initial stages of growth. Overall, some research and a positive approach will go a long way!
