Every startup began with an idea, a venture with a potential for a business opportunity that solves an existing problem. However brilliant the idea may be, multiple factors like time, effort, and funding also contribute to its success. Most entrepreneurs do not have enough funds to fuel and sustain startups. More than 60% of all startups need investment from external sources. Numerous funding sources are available, and knowing at which stage the startup is and what its needs are, can help find the best fit.
What are the possible funding sources?
Many new funding sources have popped up to keep up with the growing number of startup projects. Here are some of them:-
- Crowdfunding: As one of the most recent and yet competitive forms of fundraising, it involves small donations from a large number of sources. Entrepreneurs are allowed to present their business on an online platform and interested investors can access the site. The funders are given a token/gift when their contribution has been received.
- Personal Savings/Bootstrapping: Utilizing your savings to jumpstart a business is ideal since there would be no debts and the business would be independently owned. This means that no one else would have a say in decision making and you may do what you please with your own money. However, it also means that in case of failure, all of your savings will be lost and as an independent venture, you may not have mentorship from angel investors or capitalists.
- Family and Friends: You can ask members of your family, friends, or close acquaintances to contribute but this is more dependent on the nature of the relationship. It provides a way to acquire funding with flexible repayment to get the business to a point where it can seek funding from other investors.
- Incubators and Accelerators: This includes programs run by venture capitalists, government firms, and universities to provide infrastructure, networking, and other financial assistance. Incubators are to take off a business from its early stage and accelerators help scale them up.
- Angel Investors: They are single individuals who invest small amounts in the early stages to get a stake in the company and earn profits while providing mentorship.
- Bank Loans: Banks provide loans for various stages of growth but are more conservative with risks and account for every dollar spent. They also have longer waiting periods for approvals and may require collateral.
What are Funding Rounds?
Depending upon what stage the startup is in and the type of funding you require, the rounds are categorized as follows:-
Pre Seed Funding
The startup is generally in its idea-stage and working to build a prototype or MVP or Minimum Viable Product. To provide the initial boost to set it off, the founders raise the money, collecting their savings and contributions from angel investors. At this stage, incubator programs are recommended since they provide guidance and networking opportunities along with funding.
Seed Funding
At this stage, a prototype or MVP and a feasible concept that fulfills market needs has been established. Potential investors include venture capital firms, angel funds, angel groups, and accelerator programs. Revenue records and financial forecasts are evaluated by venture capitalists before investing.
Series A Round
The first round after seed funding where the startup has a decent customer base and a proven business model and displays key performance indicators and has started generating profits. Angel investors of VCs invest in exchange for equity. Series A funding is done to optimize the start-up, increase product development and introduce promotion and requires results that show the profit potential.
Series B Round
Round B helps turn the startup into an enterprise and establish itself in the market. Companies work on talent acquisition and product promotion using the funds. They have grown, passed product development, have a large user base, and are looking for a VC level of participation. This stage is about building a successful company, expanding the team and geography.
Series C Round
A higher level of expansion means encountering small levels of competition. The companies are already successful and require additional funding to approach competition, expand further and develop new products and markets to lead its sector or industry and work with corporate-level investors.
At this stage, most companies plan their exit strategy and stop external equity. But some have been known to go through further rounds.
IPO stage
At the final stage of the startup’s existence, it works towards opening a private company shares to the public, also called Initial Public Offering. This is a more complex funding stage because it involves raising capital from public investors which takes a lot of effort and money.
Conclusion
Startups are always a risk. Finding the right investor who could help to get your business to the next stage calls for the right words and proof of concept to present a good pitch. While a startup may not be able to fill all the white spaces, with the right team you can get through funding rounds and advance your business in the market successfully.
