What are the funding options for startups?
In the beginning, you need to get your feet wet. More money will be needed for operations, expansion, marketing, and production as the firm grows. It's possible to start with angel investors, then go on to venture capitalists, and finally launch an IPO, but it all relies on the stage of your company and its ability to turn a profit right now. A smart place to begin is with angel investors (IPO).
Bootstrapping is the first step in the process. As the company expands, you will need more funding for operational expenses, growth, marketing, and manufacturing. You may seek seed money from angel investors, then go on to venture capitalists, and eventually launch an initial public offering, but it all depends on what stage your firm is in and how well it can create profits. Angel investors are a good place to start (IPO).
There are three different forms of financing available to startups: equity capital, loan funding, and grants from the government. Every available method of fundraising has both advantages and disadvantages. For example, equity financing does not need you to make any payments back, but it does require you to sell a portion of your business, making it the most costly kind of funding.
Angel investors and venture capitalists are no longer the only participants in the ecosystem of finance for startups. Depending on their current stage and the kind of funding they need, startups may seek capital from a variety of investors and venues. In this piece, we will go through 12 different financing methods that are available to companies.
Options For Indian Start-ups In Terms Of Funding or Capital
1. Angel Investors
Angel investors are either individual investors or a network of people that have deep expertise or familial ties in the business world. The majority of them are seasoned business owners who have navigated their way through the challenges associated with launching a new company. They are aware of both the potential and the problematic areas.
These investors have extra money that they are prepared to put at risk in your business idea while it is still in the early stage. They investigate the company, screen it, and look at how much the entrepreneur has already put in before making an investment. When they are satisfied with your pitch, they will provide money in return for convertible debt or stock ownership in your fledgling company.
Young business owners might benefit from the mentoring services provided by angel investors. However, they demand a bigger return on their investments than venture capitalists do despite the fact that they invest less money. Some prominent individual investors Kunal Shah, Rajan Anandan, Ritesh Malik.
2. Angel Networks & Platforms
Angel networks and platforms are the places where individual angel investors may get together to combine their resources in order to invest in businesses. These investors are able to give greater amounts and mitigate risks more effectively since they work together as a group. The platform receives equity ownership in the firm, which means that they will profit from its success if it continues.
AngelList, Venture Catalysts, and LetsVenture are a few examples of well-known platforms.
3. Venture Capital Funds
The provision of financial backing to potentially successful new businesses is the primary function of venture capital funds as an institutional kind. At this juncture, the finance for the new venture advances to the next stage. Because venture capital funds are institutions, they are able to contribute huge sums of cash to a firm for the purpose of the company's growth and expansion while also monitoring the success of the company to guarantee that their investment results in sustainable development.
In exchange for their financing, venture capital firms often demand shares or equity-linked securities from the companies they back. They quit the firm when it either goes public with an initial public offering or is purchased.
4. Micro VCs
Micro venture capitalists are one kind of venture capitalist, and their funds typically range between $60 million and $70 million. Micro venture capitalists are investors who make smaller investments in businesses in exchange for a share of the company's stock.
5. Corporate Venture Capital
Corporate Venture Capital is yet another sub-industry within the VC industry (CVC). Corporate venture capitalists are huge corporations who invest corporate cash into tiny, inventive companies either for the purpose of acquiring a target market, for the purpose of acquiring new technology, or both.
CVCs are able to give new businesses with resources such as marketing know-how, strategic guidance, or even a credit line. Startups get a boost when they are affiliated with well-known brands.
In return for financial backing, CVC receives an ownership share in the company being funded. Mahindra Partners, Reliance Ventures, and Brand Capital, which is owned by Times Group, are examples of CVCs operating in India.
6. Venture Debt Funds
For start-up companies, equity may be a costly form of finance. Therefore, non-banking financial companies (NBFCs) provide a hybrid programme to entrepreneurs that are funded by venture capitalists called venture debt funds. These funds provide loan funding. When a company is growing and requires operating money, bank loans and equity investments are not viable options for supporting the business.
You may get financial assistance from venture debt funds in exchange for non-convertible debentures (NCDs) and equity warrants. A few of the participants in this space are Alteria Capital and Trifecta Capital; they provide venture loan funding to Indian businesses.
7. Government Grants & Funds
In 2016, the government of India introduced a programme called "Startup India," which expanded the sources of funding for Indian entrepreneurs beyond angel investors and venture capitalists. Startups who register for the scheme are eligible for the program's awards, which include a refund of up to 80 percent of the expenses associated with obtaining a patent and an exemption from income tax for the first three years.
The Small Industries Development Bank of India (SIDBI) Fund of Money Scheme is the vehicle through which the government makes the funds available in the form of loans. The strategy puts money into venture capital and alternative investment funds (AIF), both of which put their money into new businesses. A programme called the Startup India Seed Fund, which offers financial assistance to entrepreneurs in their early stages, was also initiated by the government of India in the previous year.
INR 1,000 billion has been set aside by the government for the Fund of Funds for Startups for the current fiscal year, while INR 283.5 billion has been set aside for the Startup India Seed Fund Scheme (SISFS).
8. Accelerators & Incubators
In contrast to the aforementioned financing alternatives, which are all geared toward firms that are already operating, incubators and accelerators might be compared as preparatory schools for startups. These programmes typically last between four and eight months and provide proprietors of businesses financial assistance as well as a forum for networking with investors, mentors, and other entrepreneurs running companies.
Accelerators and incubators are often located in big cities, and in exchange for participating in the programme, they demand an ownership investment. These programmes are either managed by independent organisations or are a part of the operations of huge enterprises or major technology firms.
Y Combinator, the Global Startup Fund Accelerator, the Microsoft Accelerator, the Google Launchpad Accelerator, and JioGenNext are just few of the well-known accelerator programmes available to Indian start-up companies.
Traditional financing methods, such as bank loans, are still available to Indian new businesses, despite the proliferation of alternative funding choices. Loans for working capital, loans for starting a company, and loans for equipment are some of the numerous kinds of loans that banks provide. The conditions of these loans might vary from one form of loan to another. There is a loan available for every step of a business's development.
Banks often want a greater amount of collateral for startups in the concept stage, in addition to other sources of revenue. Popular banks and non-bank financial companies (NBFCs) in India that lend money to new businesses include Fullerton India and Omozing.com.
Crowdfunding is an additional method of fundraising for companies, but one that is less common. The website brings together a number of individual retail investors who are seeking for alternative investment choices. After quickly reviewing each startup's business strategy, the investors choose one to fund. In peer-to-peer lending, each investor contributes a predetermined sum to a prospective company in the expectation of earning a greater return on their money.
There is also something called equity crowdfunding, however the legality of this practise in India is unclear. The practise of crowdsourcing is fraught with the potential for fraud and controversy. Unregistered online crowdfunding sites are a potential threat, according to SEBI.
Indiegogo, SeedInvest Technology, Mightycause, StartEngine, GoFundMe, Patreon, GripInvest, and ImpactGuru are just a few of the prominent crowdfunding platforms that are available to companies today.
As a result of the many financing opportunities that are available to entrepreneurs, India's startup ecosystem has grown to the point that it is now the third biggest in the world. These finance and fundraising solutions are intended to contribute to the expansion of the firm.