Etymologically, funding is the money raised by a startup or provided by an individual, organisation or government bodies to a startup for a particular purpose.
Getting started with a business and planning the growth ladder is full of challenges and tough decisions. One of the most critical stages is when you step out to raise funds for your business. Read this article to know everything you should about startup funding, before you reach out to investors or vice versa because there’s not a lot of ‘fun’ in ‘funding’!
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What is funding?
Etymologically, funding is the money raised by a startup or provided by an individual, organisation or government bodies to a startup for a particular purpose.
Stages of funding
While a founder knows that his or her startup is excellent, it is difficult to convince people to invest millions in your company. Funding for startups is a slow and gradual process, and it is essential to know each stage well in advance.
Pre-seed funding or self-funding
Before even starting the business, the founder(s) must ascertain as to how much amount will they invest from their own pockets. At this stage, people also prefer to take help from family & friends as this does not require lengthy documentation and they can save on heavy interest rates, which the bank would otherwise charge. This is also called the bootstrapping stage of your business.
Seed funding
This is the very first set of money that a startup raises from an external investor. As the name suggests, this is the seed that (hopefully) helps a company grow when it is just planting itself. Usually, the amount raised from the seed funding during the process of startup funding round is used for market research and product development.
Angel investors are the most common type of investors at this stage. While this is the starting stage for many startups, it is also a ‘wrapping up’ stage, If the startup fails to utilise the first round and get in some results, it gets difficult for them to move to the second round of funding that is, Series A funding.
Related Read: What is a Unicorn Startup and How to be One?
Series A funding
Once a startup passes through the seed stage and has some traction on their website/app (it can be in terms of users, revenue, views or whatever the set KPI is), they are ready to go for Series A round.
In this round, startups are expected to have a plan in place for the future development of the product or service they offer. These businesses are also likely to use the raised money to increase revenue.
Series B funding
Any startup that has reached the Series B has already figured out their product-market fit. All they need is assistance in expanding it.
Usually, the expansion that occurs after raising the Series B round is not limited to focusing on gaining more customers but also in building a strong team to serve the growing customer base.
Series C funding
At a stage when a startup is ready to acquire other businesses or develop new products or expand to new markets, it can be said that the startup is ready to make it to Series C funding.
The common trend suggests that a startup gets ready to raise Series C round when they plan to go out of their home country or to acquire like business models. (similar to the one they have)
It is also seen that Series C is the last round that most of the companies go for. However, some companies move ahead to Series D & Series E rounds too.
Series D funding
This round of startup funding is a little more complicated than the other rounds. As mentioned, most companies usually exit the funding rounds after Series C. However, some companies move to Series D. Two of the common reasons here are:
Positive side- The startup has discovered new opportunity for expansion before going public or has found more opportunities to acquire businesses and increase the value of the business.
Negative side- On the other hand, another reason a startup might want to raise Series D can be because they have failed to hit the expectations laid out in the previous rounds.
Series E funding
A very few companies make it to Series E round for the startup funding. Startups looking to raise funds at this point have usually failed to meet their expectations from the previous funds raised. Another reason can be that they still need some external help before going public.
How to get funding for startup?
Now that you know what are the different stages and rounds of funding, here are some of the alternatives about how you can raise funds by yourself, by investors and other ways!
Create a detailed business plan
Before you begin with anything, have a precise business plan in place. The reasons are simple: no one would like to invest money in your business if you don’t have a detailed and long-term plan in place. Different type of investors will need to see financial projections before they even offer your business a dime. This plan should cover topics like:
- Who are you?
- What do you do?
- What are your long-term & short-term goals?
- SWOT analysis
- Competitor analysis
- Defined roles of all the employees
- Detailed financial projections (this is the most important parts)
Pro-tip: Make sure you don’t over-commit and have realistic expectations in place.
Visit a local bank
It is a better idea to approach a local bank and get into a conversation and check what the loan amount that they can offer to you, the interest rate and other pre-requisites.
Be professional and showcase your requirements.
Get in touch with several lenders and see what works best for you.
Seek help from friends & family
These are a bunch of the most trustworthy people you have. Do not be afraid to ask for help during your startup funding stage from them. The best part is that you will not have to pay any interest in case you raise money from them.
A research report also suggests that loans taken from friends and family contribute to a startup’s success as they have an add-on motivation of faith and support.
Venture Capitalists
These are well-heeled investors that often invest their capital in businesses with indelible growth opportunities. This infused capital is called venture capital.
The bitter side of this kind of fundraising is, you might have to be prepared to give away a portion of your business.
Read Beginner’s Guide to Venture Capitalists to know more.
Angel Investors
Commonly, an angel investor is an individual (or a group of a few people) who provides capital to a startup, usually in exchange for convertible debt or ownership equity.
It is very common for these investors to be an entrepreneur themselves. If you find the right angel investor, you may also benefit from their expert advice and management skills!
Crowdfunding
To put it very simply, crowdfunding is a practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, usually via the internet or via gatherings.
There are mixed views about whether a company should go for crowdfunding or no, but the final call lies with you!
These are some of the most common ways to fetch in funds for your startup. You can decide what suits your startup the best and plan your roadmap accordingly!
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