The startup ecosystem is significantly on the rise in India. A startup is a company, Limited Liability Partnership (LLP) or a firm established below ten years and has an annual turnover below Rs.100 crore in a financial year. It should work towards developing or improving a process, product or service. Startups need funding to grow their business. This article talks about startup funding, how to get funding for a startup and how to raise funds for a startup. 

Startup funding

Startup funding is the funds a startup obtains to support or establish its business. It is one of the essential pillars of growth for a startup. Newly established startups use funds to cover marketing and operating expenses to launch their business.

Established startups need funding to increase their capital for initiating the development of their ideas and formulating plans for the expansion and growth of their business. It also helps startup founders to build a network. Hence startup funding is vital to run the startup at every stage.

How does startup funding work?

Investors give funds to a startup in exchange for a percentage of ownership or equity shares in the firm/company. Hence, they get the right to claim the profits of the startup. Thus, when the company generates profit, investors also get profits equivalent to their share in the startup. But there can also be a risk of loss if the startup does not earn profits as expected.

There are different stages of startup funding. Startups/companies planning to get funds from investors usually start with a seed round. After that, startups continue to Series A, B and C rounds. But a startup must first do a company valuation before going for startup funding. To arrive at the company valuation, startups must consider its management, track record, market size, risk and profits. Startups can begin a funding round after the valuation is complete.

Startup funding stages

Startups are established with a business idea, which goes through many stages to become a profitable venture. Startup funding is the backbone of its growth. The various stages of startup and funding are as follows:

Pre-seed stage

In the pre-seed stage, the entrepreneur/founders have a business idea and work on establishing the startup. At this stage, the funds required are usually small and are very limited. They mostly get funding from informal channels, which are as follows:

Bootstrapping

Bootstrapping means establishing and running a business with little capital or low outside investment. Here the entrepreneurs rely on their own savings to operate and expand the startup. There is no pressure on the entrepreneur to pay back the funds or give equity to someone else.

Friends and family 

Getting funds from friends and family is a common type of funding that entreprenuers choose in the early stages. The benefit of taking funds from friends and family members is that there is trust between the entrepreneurs and the investors.

Grants

Entreprenuers can also raise money from grants or financial benefits provided by organisations or institutes conducting pitching events or business plan challenges and competitions. Even though the fund is generally not huge, it is usually enough for entreprenuers at the idea stage.

Seed stage

At the seed stage, a startup is ready with a prototype and wants to expand its product’s potential demand. It is called Proof of Concept (POC), where the entreprenuers test the business idea and see how it works in the real world. After POC, entrepreneurs launch the product or service in the market. In this stage, startups take funding from the following: Incubators 

Incubators are organisations established with the specific goal of assisting entrepreneurs with launching and building their startups. Incubators offer many value-added services, such as utilities, office space, legal assistance, administration, etc. They often make equity or debt and equity investments.

Government loan schemes 

The government has launched various loan schemes to provide collateral-free loans to aspiring entrepreneurs and help them get low-cost capital, such as the SIDBI Fund of Funds, Startup India Seed Fund Scheme, Pradhan Mantri Mudra Yojana, Stand Up India, ASPIRE scheme, etc. 

Angel investors 

Angel investors are individuals who invest money or offer funds to high-potential startups in return for equity. They analyse a startup’s potential, invest in them and get returns when it makes profits since they get the startup’s equity. Many platforms, like Mumbai Angels, Angellist, Lead Angels, etc., provide opportunities for potential startups to find angel investors.

Crowdfunding

Crowdfunding means raising money from many people who contribute a relatively small amount individually. This is usually done through an online crowdfunding platform.

Series A stage

At the series A funding stage, the startup has launched its services or products in the market and received early traction. Key performance indicators, such as revenue, customer base, app downloads, etc., become important to obtain funds. Funds are raised to enhance product development, expand the customer base or open more branches. The following are the types of funds obtained at this stage:

Venture capital funds 

Venture Capital (VC) funds are investment funds managed by professionals that invest exclusively in high-growth startups. Each VC fund has its investment requirements, such as the stage of the startup, preferred sectors and funding amount, which should align with the startup. VCs actively engage in the mentorship of startups and take equity in return for their investments.

Banks/Non-Banking Financial Companies (NBFCs) 

Startups can get formal debt, i.e. loans from banks and NBFCs, as they can show revenue and market traction of the startup’s products or services to ensure their ability to return the principal and interest loan payments. This is mainly used to get working capital. Some entrepreneurs prefer debt over equity as debt funding does not require diluting/giving away their equity stake.

Venture debt funds 

Venture debt funds are investment funds that invest money in startups in the form of debt. Debt funds usually invest along with an angel investor or VC. Startups pay back the debt amount as per their agreement with venture funds. Here the entreprenuers do not have to give away/dilute their equity stake.

Series B, C, D and E

After raising funds in the Series A round, startups enter Series B, C, D and E funding. In this stage, startups are generating revenue and are stable. Here the entreprenuers want to grow their business further. Investors will help the startup improve marketing strategies, form teams, form a market penetration strategy and get new employees. The main options for funding at this stage are as follows:

Venture capital funds 

Startups with consistent growth records can approach VC funds that provide funding for late-stage startups. However, these VC funds invest only after the startup has generated impactful market traction. A pool of VCs may also come together and fund the startup.

Private equity/Investment firms 

Private equity/investment firms do not generally fund startups. However, lately, some private investment and equity firms have been providing funds for late-stage fast-growing startups that have maintained a consistent growth record.

Exit stage

This is the last stage of a startup, where it plans to have a solid foundation and is ready to establish itself as a big company rather than a startup. It may also merge or sell the business to big companies.

Mergers and acquisitions 

The founders of the startup may decide to sell or merge the startup with another company in the market. When the startup is sold to another company, it is known as an acquisition. When the startup merges with another company, it is known as a merger.  

Initial Public Offering (IPO) 

IPO is when a startup lists itself on the stock market for the first time. The public can buy the shares of the startup when it goes for IPO and help it raise capital for faster scale-up. Since the IPO process is elaborate, it is generally undertaken by startups with a consistent track record of profits and steady growth.

Selling shares 

Investors who had initially invested in the startup at its early stages may sell their shares or equity to other VCs or private equity firms.

Buybacks 

Startup founders will buy back their shares or equity from the initial investors or VC when they have liquid assets to make the purchase. Here the founders will regain control of their startup.

Types of funding for startups

Startups can raise funds in various ways at different stages. Following are the different types of funding raised by startups at different stages: 

Equity funding for startups

Equity funding means selling a percentage of a company’s equity to investors in return for capital. Startups give up a portion of their ownership share to the investors, and equity investors generally involve themselves in the decision-making process. The following are the types of equity financing:

• Angel investors 
• Self-financing or bootstrapping
• Family and friends 
• Venture capitalists 
• Crowdfunding 
• Incubators 

Debt funding for startups

Debt funding means borrowing money and paying it back with interest. The borrowed money must be repaid within a stipulated time with interest. Startups may need to provide a business asset as collateral. Debt fund has less involvement in decision-making. The following are the types of debt financing:

• Banks 
• Non-Banking Financial Institutions (NBFCs)
• Government loan schemes

Grants for startups

A grant is a financial award given by an entity to a startup to facilitate its goal or incentivise performance. Grants are distributed in different instalments as per the fulfilment of various milestones. Thus, the startup must constantly work towards achieving the milestones to get the grant. The following are the types of grants:

• Central government grant 
• State government grant 
• Corporate challenges grant 
• Programs of private entities

How to raise funds for startup business in India?

Entrepreneurs must approach investors and pitch their ideas to them to get funding. Many factors influence funding. The following things can improve the chances of getting funds from investors:

• Calculate your funding needs

Entreprenuers must estimate the money required to achieve business goals before contacting investors or applying for a loan. Business loans or grants are suitable for small businesses, while angel investors and VCs are more suitable for large businesses. Understanding the funding needs helps investors take the best approach. 

• Create a business plan

A business plan or startup pitch helps entrepreneurs build confidence with leaders, investors and family members who can help fund the startup. The business plan should outline the vision of the business. It should highlight the target market, opportunity, targeted industry, timelines, marketing plans and competitive analysis.

• Check financial status

Entreprenuers can figure out the type of funding they require when they know their current financial status. They must collect the necessary documents to assess financial status, including business and personal tax returns, cash flow, bank statements and projected expenses. They should also prepare a profit and loss statement and revenue projections. These documents can help investors understand how much funding the startup has and how much more is needed.

• Research funding options

There are many funding options for a startup at different stages, as mentioned above. However, before choosing an investment option, entreprenuers can do extensive research to see if it's the right funding choice for the startup.

• Make a repayment plan

Entreprenuers can make a plan on how they would pay back the borrowed money to the investors. They need to estimate payments and create a budget. The repayment plan helps the entrepreneurs and investors estimate how much the startup must earn to repay the borrowed amount.

How to get funding for startups in India from the government?

There are many government schemes in India through which a startup can get funding. A few government schemes and funding options are as follows:

• SIDBI Fund of Funds Scheme
• Startup India Seed Fund Scheme 
• Pradhan Mantri Mudra Yojana 
• Stand Up India
• ASPIRE scheme

The complete list of government funding options is provided here.

Frequently asked questions

How do startups get funding?

Startups can get funding in different ways, including business loans, friends and family, personal savings, venture capitalists and startup grants.

Which funding is best for startups?

Some startups need massive amounts of capital, while others require a small loan for their growth. Thus, the best type of startup funding depends mainly on the business nature and the business owner’s financial situation. 

How do you ask for funding for a startup?

Startup founders must approach investors or financial institutions and pitch their business ideas to get funding. They may ask for funding from family and friends or go for crowdfunding.

Who gives funding to startups?

Venture capitalists, angel investors, banks, incubators, NBFCs, government schemes for startups and government grants provide funds to startups. 

How to fund an NGO startup?

NGO funding is done by buying goods and services, availing membership, state government grants, grants from other charitable foundations, donations from affluent individuals, municipal and private donors, etc. 

At which stage does venture capital fund a startup?

Venture capital provides funding to startups at the Series A funding stage in return for a percentage of equity. At this stage, the startup should have launched its products or services in the market and received early traction.

How to get funding for startups from Ratan Tata/tata startup fund?

Startup founders can contact Ratan Tata trust group to get funding. They can write to Tata Trusts to give them an opportunity to pitch their startup plan for funding.