The current scenario is for start-ups and the world economy are also supporting them by contributing their money. Initially, every start-up has various expenses like office rent, staff salary, office expenses, equipment purchase etc. and there is always a limit to spend own promotor’s money. So, its important to raise funds from the market to grow the business.
The initial capital raised by the start-up from the outsiders usually called as “Seed Capital”. It is crucial to understand the concept of funding, when to raise funding, how much to raise funds and whom to approach for funding.
Why does Funding require?
Majority of start-ups will die without funding. High growth companies almost always need the funds to sustain their growth before achieving profitability. Only very few start-up companies do successfully self-funds themselves.
Funds not only allows the start-ups to live and grow, and also provide a competitive advantage in all ways over their competitors. There are lots of investors in the market who are ready to fund the growing start-ups. However, the process of raising the money is long, complex, and ego deflating in some cases. Nevertheless, it is the path that almost every start-up has to cross. So, it is important to know when is the right time to raise the funds?
When to raise the funds
Investors can invest their hardcore money only when the idea of start-up is compelling to them, and they can assess and realize the founder’s vision. Usually, a product that can be seen, use or touch is not enough to impress the investor. They also want to know the commercial viability and the reviews of consumers of the product.
Therefore, the start-up should raise money only after figuring out the product’s market viability, audience of the product, delivery time of the product to match consumer needs and consumer’s feedback.
How much funds should raise
Ideally, start-up should raise fund as much as require for their profitability with minimum ownership dilution. If you succeed in this, not only you will find easy to get funds in future, even you will be able to survive in funding tight environment. The goal should be to raise as much funds as needed to get their next ‘fund milestone’, which is ideally 12 to 18 months later.
In choosing how much funds should raise depends upon various factors, that includes benefit from utilization of funds, credibility of the investors, dilution of ownership etc. If founder’s can manage to dilute as minimum as possible, that will be good for the start-up. The plan or project report you present to investors can persuade them that their money will have a chance to grow. It is usually a good idea to create multiple plans for investors to invest and carefully articulate your belief that the start-up will be successful by either plan. Usually, start-ups take the help of professionals in preparing good project reports and various financing plans to fulfil the investor needs.
Whom to approach for funding
There are multiple ways by which funds can be raised are as follows:
- Commercial Revenue: This is one of the best way to source fund for your start-up. This is the most simple way to develop your product in your customers’ need and generate revenue for any period of time. The same thing is presented to potential investors, where investor analysis your generated revenue and need of your product in the market and proceeds for your start-up business investment.
- Corporate Funds Programme: Generally, giant corporate or IT firms look to invest their funds, so they also choose to invest in start-ups with a really good idea to grow exponentially. This type of sourcing gets you connected with big names, giving your brand a big visibility in the market. IT firms like Apple, Google, HCL, Microsoft and many more are running their programs to invest funds in start-up businesses.
- Incubators Programs: Usually, incubators provide small funding, but they are always passionate about providing your start-up funding on each stage. Incubators help you connect with various potential investors to showcase your start-up business idea to have fresh seed funding. Besides helping in fundraising, the incubation centre also provides services like Legal Services, HR Support Services, Incorporation Services, Tax Consulting Services, and many more.
- Banks and NBFC: Sometimes, there are no other options left other than loan from banks or non-banking financial institutions. In this type of sourcing, you also need to consider the monthly installments added to your monthly recurring expenses. There can also be pressure on you if the business doesn’t perform well.
- Small Venture Capital Companies: Apart from the above-listed options, micro VCs or micro venture capital firms, have garnered quite a lot of attention in recent times. These firms are into an investment of institutional money when the start-up is in the seed stage itself.