One Size Doesn't Fit All

India is the third biggest startup ecosystem in the world today. Over the years, India has become increasingly startup friendly, so much so that you can now pitch your startup idea on a television show and walk out with a multi-million deal!

However, the harsh reality is that several successful startup ideas fail due to one crucial mistake: founders fail to determine the funding structure that aligns best with their revenue model.  

In other words, how you raise capital should complement how you plan to make money. This requires determining whether you need all the funding now (e.g., to build out a location), or whether you receive your funding in stages or “tranches.” To assess this a financial forecast has to be constructed. Before approaching any investor, your business plan should be as watertight as you can make it. Curate a plan with a projection of the company’s short-term and long-term growth, considering projected sales, market conditions, and global & economic indicators. Basis this, the right source of funding can be made. 

One size can not fit all. This means all needs are different, and the amount of funding you seek will affect the source of funding you approach. For example, if you require INR 50 Lakh in funding, angel investors are more applicable than venture capitalists. If you need INR 5 Crore, the opposite is true. In the end, for making the right choices, it’s also important to understand the right timing of the funding. 

Funding is indeed necessary for a business to cultivate more, but the enormous challenge is where and how to source funds? 

Pre-seed stage

The first option for founders is the good ol' bootstrapping. It is easily the best way to fund your start-up, especially in the pre-seed stage. You may have to liquidate assets and savings to support the business idea, but it is a price you must pay to avoid giving away equity in your company. That said, bootstrapping a business can be challenging, especially if the project is sizeable or the returns are short-lived. In that case, you could also go for, a family and friends round. For your initial financial resource, this would be the best-case scenario.

At the initial stage, you can also secure a government grant for your start-up. These are usually awarded to innovative and high-impact ideas as part of a competitive process. Consequently, you must create a robust application outlining your concept and the benefits it can bring to the space you wish to operate in, which requires a detailed understanding of the application process. Acquiring a grant can offer a significant advantage to your business by freeing up capital that would have otherwise been tied up. 

Seed stage

Bank loans can be a viable financing option for your start-up owing to lower interest rates and extended repayment tenures. But, to secure a bank loan, you must have a solid business plan and a strong credit score. A bank loan can help you care for your equipment, infrastructure needs, and initial operating costs. The government of India has come up with several schemes/loans for budding entrepreneurs such as the Startup India Seed Fund Scheme, SIDBI Fund of Funds. This can enable you to get low cost-capital easily. However, you must factor in the additional liability of monthly repayments before taking out a loan.

Next, you can consider approaching an angel investor seeking seed funding. Mostly, angel investors are high net-worth individuals (HNIs) looking to invest in promising business ideas. An angel investor will help your start-up get off the ground in exchange for equity in your company, provided your idea has legs. One significant advantage of securing seed funding is that such investors are relatively more risk tolerant and have a hands-on approach to business, offering much-needed mentorship and advice when needed. Much like angel investors, venture capitalists fund early-stage businesses for a stake in the company. The only difference between the two is that the latter uses funds raised from limited partners and operates like a risk capital company. Also, just like angel investors, venture capitalists offer you guidance and direction. 

Business accelerators and incubators have also sprung up nationwide, particularly in cities with a robust business environments. There are 651  Accelerators & Incubators in India. These spaces also act as mentorship and development centers, helping upcoming entrepreneurs network and build their businesses. 

Series A and beyond

Once a startup has unlocked market traction, generated some profits, and has seen subsequent growth, venture capitalists can again help to raise further funds to scale up. Founders can also consider approaching corporate investors. There are close to 146  Corporate VC Investors in India. Some of the most active corporate investors include The Times Group, Qualcomm Ventures, Intel Capital, Cisco, etc. Like angel investors and venture capitalists, corporate investors fund promising start-ups in exchange for a stake in the company. Also, besides offering guidance and direction to start-ups, they become active participants in the business's decision-making process. 

After analysis of the early traction of a startup, NBFCs can also offer investments in the form of debt. This can be utilized for working capital without any dissolution of equity shares. Lastly, if a startup shows a consistent growth record then certain PE firms can invest in late-stage.

Ensure you carefully weigh the pros and cons of partnering with each and their impact on your business before securing funding. But no matter what stage or source a founder chooses to raise funds, It is important to remember: Investors are in it to make money. A founder has to show them that they will do just that — and do it better than their other investment opportunities. If you believe in your business, it will become easier to convince others too.