All about Startup Funding: Types, Stages and Resources

The startup ecosystem is booming significantly in India. So is the curiosity behind how startup funding stands out to be one of the most important pillars of growth for a startup. 

September 2022: 

India has emerged as the third largest ecosystem in the whole world with an approximate valuation of around 340 billion dollars.

Today we hear stories of founders inspiring us all and it all starts with an idea!

In 2016, the number of startups was at around 400 which has skyrocketed to approximately 72,000 as of 2022. A significant rise in numbers.

At 25, he quit his MBA school and started selling tea on the highways of Gujarat- this was the story of Praful Billore, the founder of the famous MBA Chailwala with a 10 cr turnover as of 2022. All it took? An idea and the courage.

What is a Startup?

You have an idea of a new product that can help fill the deficiencies of an existing product.

You have an idea of a breakthrough product that you think has the potential to solve an existing problem.

You want to bring it to market and be a disruptor.

There you go!

That’s a startup. 

What is Startup Funding?

You have an idea that you want the market to know about. But transforming an idea to a venture requires financial resources. 

Startup Funding is the process of identifying and calibrating financial resources to enable your idea in the marketplace. For the various stages of growth that your startup would experience, resources would be required to fund the developmental processes like expansion, product development etc. Hence startup funding is extremely important to run your startup at every stage.

Who is an Investor?

Investors offer their capital for a startup in exchange for equity stakes in the company. Hence they claim a portion of ownership in the startup and rights to the profits of the startup. So when the company generates profit, investors gain profits equivalent to their share in the company. Although they carry the risk if the growth of the business doesn’t go as planned.

All about startup funding: types, stages and resources!

Startups grow from one stage to another, from an idea to a profitable venture. Startup funding is the backbone of this growth. Hence we have curated the various stages of startups along with their source of funding below:

1. You’re all set with your idea(Pre-seed stage):

You have a clear picture of your idea, and you have your product or service ready to penetrate the market. This is what we call the pre-seed stage. But what next?

You start identifying the financial resources which can help you fund your startup, these are some of the ways:

• Bootstrapping

You knew you wanted to startup. So you started saving your hard-earned money till you had enough to kickstart your idea. This would save you from any debt and wouldn’t cost you your equity since the entire idea will be facilitated by your resources.

This is bootstrapping.

• Friends and family

Of course, your family and friends would be the ones supporting your idea. For your initial financial resource, this would be the best-case scenario.

• Grants/benefits:

There are organizations or platforms which host business events. Your startup can be a part of such business challenges or competitions to raise funds.

2. Ideation done! Validation, next? (Seed stage)

Your startup is ready to enter the market. But are you ready to test the ground?

 Your product or service is ready to be tested on a few potential customer bases and you can now perform market trials. This is the stage that enables you to form your dream team. During this stage these are startup funding resources you can think of:

• Angel Investors

Certain individuals would analyse the potential of your startup and would be willing to invest in their startup in return for equity. This involves dissolving your equity shares. A number of platforms like Angellist, Mumbai Angels, Lead angels etc provide such opportunities for potential startups.

• Crowdfunding

It’s as simple as it sounds. Funding from the crowd, that’s what it means. A large group of people would invest in your idea with smaller individual contributions, hence carrying a smaller individual risk weightage. 

Read more: Crowdfunding 

• Incubators

Incubators are organizations that assist in building startups. A number of services such as finding office spaces, utilities, registrations etc are also offered by Incubators. They often make equity/grant/debt investments. Ex: Incense, GIEC(Tamil Nadu) etc.

• Government Loan

The government of India has come up with schemes/loans for budding entrepreneurs such as the Startup India Seed Fund Scheme, SIDBI Fund of Funds. This enables founders to get low cost-capital easily.

3. You’re out there. Market tractions next? (Series A funding)

You have already started up but during the early stages, it’s essential to analyse the performance parameters for your startup like revenue, customer base etc for a better understanding of your next stages.

Funds for your startups are raised at this stage when you are thinking of enhancing product development, expanding the customer base or opening more branches.

• Venture Capital Funds

Venture capital funds invest in high-potential startups based on their key performance parameters in return for your startup equity. They are professionally managed investment funds and would be an active mentor for your venture.

• Venture Debt Funds

As the name suggests, Venture Debt funds would invest in your startup in the form of debt. You are expected to pay back the amount as per the agreement you both shook on. This wouldn’t dilute your equity stake.

• NBFCs (Non-Banking Financial Companies)

After analysis of the early traction of your startup, NBFCs can offer investments in the form of debt. This would enable your working capital without any dissolution of equity shares.

4. Series B, C, D, and E Funding:

You have already gone through the Series A funding and you see you are generating enough revenue. You realise that your startup is stable and you have a great future ahead. 

This gives way to more scales up. 

Enter Series B, C, D &E Funding.

Investors would help you:

• Enhance marketing strategies
• Form teams as per the business need and add new employees
• Form a market penetration strategy

The above stages would mainly opt for the following two options for funding:

• Private Equity/Investment firms

If you have maintained a consistent growth record then there are certain private equity firms who would be willing to invest. They have started investing in late-stage startups which is a great way to raise funding too.

• Venture Capital

Once you have unlocked significant market traction and have seen subsequent growth in revenue, you can approach venture capitalists in order to raise funds for further scale-up. They are entitled to higher ticket investment amounts and can a number of venture capitalists can even pool into your startup funding.

5. Planning exit avenues

• IPO ( Initial Public Offering)

This means that your startup would go public and will be a listed company now wherein the public can buy shares and help you raise more capital for faster scale-up.

Read more : IPO: All you need to know about Initial Public Offering

• Mergers and acquisitions

Often the investors would be selling you other company profiles for mergers and acquisitions. This means that the company can either be acquired completely or be acquired partially.

• Buybacks

If you want to want to buy back the shares from your investors and want to regain control of your company, you can. This would require liquid assets to make the purchase.

What do Investors look for in a startup?

• Customer problems are a priority!

How’s your startup solving a unique customer problem? What are your further goals as a founder? Your idea and its growth potential would increase curiosity among investors.

• How clear is the market picture?

This involves the market growth rate and how viable the market will be for product adoption and how big the market size is for your product will help investors make up their minds about investing in your startup.

• Scalability matters

The potential of your startup to scale faster along with formulating a solid business growth plan piques the interest of investors.

• Your team is important

Investors often get intrigued by the passion, and skills of not just the founder but also your team members because that plays a huge role in the further growth of the startup.

• The number game!

You have a great idea and a product but what ultimately would determine the potential of your product is sales. To have an idea about the market you are trying to penetrate and to have a generous sales forecast is crucial for investors.

• Know your customer!

You know your product but what is equally important is to know who your potential customer base would be. A solid prediction of the target customer base will directly help with your sales prediction and would enable you to penetrate the market better and faster. This is equally important for investors to be aware of.

From ideation to market validation, the journey of a startup is overwhelming. Your idea needs startup funding at all stages of its growth to stay at par with your demands and growth plans.

It was 2020 when India’s leading full-stack Payments and Banking Platform for Businesses, Razorpay, entered the Unicorn club after bagging 100 million dollars in funding! 

It’s 2022 now when Razorpay was awarded “ Startup of the year” at the 6th The Economic Times’ ET Startup Awards 2022

•  RazorpayX allows business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort. 
• It fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.

With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees.

Frequently Asked Questions