Looking for Funding?

What is Funding? (Starting Paragraph)

Funding refers to the money required to start and run a business. It is a financial investment
in a company for product development, manufacturing, expansion, sales and marketing, office
spaces, and inventory.
While funding is not essential for all startups and there are startups, which are self-sustained;
it might be imperative for other startups. If you are an entrepreneur seeking to understand
why funding is needed, types of funding available and how to raise funding; then read on to
find answers to these troublesome but important questions.
Why is Funding Required? (Prompt 1)
A startup might require funding for one, some or all the following purposes. It is important
that you, as an entrepreneur, are clear as to what purposes is this funding going to be used for
and have a plan as well as a vision before you approach investors.
 Provide the initial push for growth
 Prototype creation and product development
 Covering working capital requirements
 Marketing and Branding
 Expansion and increasing the Scale of business
 Managing operations and logistics
Types of Funding (Prompt 2)
Generally funding can be classified under three categories; Equity, Debt, or a mix of both.
While no one type of funding is necessarily better than the other, each of them do have their
own advantages and disadvantages.
Equity Financing vs Debt Financing
Characteristics Equity Financing Debt Financing
of Investment

Nature There is no component of Invested Funds to be repaid

repayment of the invested within a stipulated time frame
funds.

Risk Risk factor for the investor is
higher as he has no guarantee
against his investment
Pressure for Less pressure for startups to
Repayment adhere to a repayment timeline
but added pressure from
investors to achieve growth
targets
Return Capital growth for investors
Risk Factor for the investor is
lower as he generally has
collateral against his investment
More pressure for startups to
adhere to repayment timeline
and as a result more pressure to
generate cash flows to meet
interest repayments
Interest payments
Involvement in Equity Fund Investors usually
Decisions prefer to involve themselves in
decision making process
Challenges 1. Incorrect valuation of the
cost of equity
2. Difference of opinion with
the investors in the
decision-making process
3. Pressure for higher revenue
growth to show the
investors, financers and
stakeholders.
Sources Self-financing, Family and
Friends, Venture Capitalists,
Crowd Funding,
Incubators/Accelerators
Debt Fund Investors do not
have a direct interest in the
startups’ growth and thus have
very less involvement in
decision making
1. Proper cash flows to be
maintained for interest
payments to be made
2. If a startup raises too
much debt, it might face
problems with attracting
equity in the future due
to increased overall risk.
Banks, Non-Banking Financial
Institutions, Government Loan
Schemes (CGTMSE, Mudra
Loan, Standup India)

Stages of Startups and Sources of Funding (Prompt 3)

There are multiple sources of funding available for startups. However, it is important to
understand that the source of funding should match with the stage that the startup is in.
Confused? Don’t worry, see this chart.

 Ideation/Pre-Seed Stage

This the stage where you, the entrepreneur, has an idea and are still working to bring
it to life. In this stage the amount of funds needed is usually small. However, given the
 fact that you are at such an initial stage in the startup lifecycle, there are very limited
and mostly informal channels available for raising funds. Common funding sources
utilized by startups in this stage are:
 Bootstrapping/Self-financing: Bootstrapping a startup means growing
your business with little or no venture capital or outside investment. It means
relying on your own savings and revenue to operate and expand. This is the first
recourse for most entrepreneurs as there is no pressure to pay back the funds
or dilute control of your startup.
 Friends and Family: This is also a commonly utilized channel of funding by
entrepreneurs still in the early stages. The major benefit of this source of
investment is that there is an inherent level of trust between the entrepreneurs
and the investors
 Business Plan/Pitching Events: This is the prize money/grants/financial
benefits that is provided by institutes/organizations who conduct business plan
competitions and challenges. Even though generally the quantum of money is
not sizeable, these events and competitions serve as a great opportunity to
network and meet individuals who might be of help for your startup.

 Validation/Seed Stage

This is the stage where your startup has a prototype or proof-of-concept ready and need
to validate it to understand the potential demand for the solution that your startup
provides. Validation is the stage where a startup needs to onboard mentors, build a
formal team, and approach incubators/accelerators. As an entrepreneur you have
more formal channels of funding available in the validation stage. Common funding
sources utilized by startups in this stage are:
 Incubators/Accelerators: Incubators are organizations set-up with the
specific goal of assisting entrepreneurs with building and launching their
startups. Most incubators provide support in the form of office space,
mentorship, product development support, and market connections. As the
name suggests, accelerators, "accelerate" the growth of an existing startup.
Accelerators are set-up with the goal to provide selected startups with hands-
on mentoring, learning opportunities, networking, and demo days. Generally,
incubators/accelerators select startups through an open call for applications
and take a small portion of equity in the selected startups as payment for the
services provided by them. Startups usually spend 3 months to 1 year in
incubators/accelerators however, this might vary based on the startup’s
product and sector.
 Government Loan Schemes: The government has initiated multiple loan
schemes to provide collateral-free debt to aspiring entrepreneurs and help
them gain access to low-cost capital. Loans under these schemes are generally
routed through public sector banks. Some such schemes include CGTMSE and
Standup India.
 Angel Investors: Angel investors are individuals who invest their money into
high potential startups in return for equity. Angel investors are selective with
their investments and seek to make a sizeable return by selling their equity
stakes in a startup to a venture capital fund or other investors in the long run.
 Crowd funding: Crowdfunding refers to raising capital from the general
public. This is usually done through crowdfunding platforms. Crowdfunding
platforms are usually open and anybody who is on the platform may end up
backing the concept, idea or product.
  Early Traction/Series A Stage
This is the stage in which your startup’s products or services have been launched in the
market. By this stage, generally startups have an established user base, revenue, and
other key performance indicators. In early traction startups generally raise funds to
further grow their user base, product offerings, expand to new geographies, etc. This is
the round of funding in which venture funds usually start investing. Common funding
sources utilized by startups in this stage are:

 Small Venture Capital Funds: Venture capital funds are professionally

managed investment funds that invest exclusively in high-growth startups.
Each venture capital fund has its own investment thesis, preferred sectors and
funding amount. Venture funds take equity in return for their investments and
actively engage in the decision-making process of their investee startups. Most
venture funds have former entrepreneurs in their teams who serve as mentors.
Generally, smaller venture funds invest in the early traction stage.
 Banks/NBFCs: Formal debt can be raised from banks and NBFCs at this stage
as the startup can show market traction and revenue to validate their ability to
finance interest payment obligations. Some entrepreneurs might prefer debt
over equity as they debt funding does not reduce the entrepreneur’s control
over the decision-making process.
 Debt Funds: Debt funds are private investment funds that invest money in
startups primarily in the form of debt. Debt funds are a good source for
unconventional startups that are facing problems while raising debt capital
from traditional banks and Non-Banking Finance Companies.
 Scaling/Series B & Above Stage
In this stage the startup is experiencing fast rate of market growth and increasing
revenues. This stage of funding is mostly undertaken by startups with very specific
requirements. Common funding sources utilized by startups in this stage are:

 Large Venture Capital Funds: Large venture capital funds provide funding
for late stage startups. It is recommended to approach these funds only after
the startup has generated significant market traction
 Private Equity/Investment Firms: Private equity/Investment firms
generally do not fund startups however, lately some private equity and
investment firms have been providing funds for fast-growing late-stage
startups who have maintained a consistent growth record.

 Initial Public Offering

Initial Public Offer (IPO) refers to the event where a startup lists on stock market for
the first time. Since the public listing process is elaborate and replete with statutory
formalities, it is generally undertaken by startups with an impressive track record of
profits and who are growing at a steady pace. One of the benefits of an IPO is that a
public listing at times can increase the credibility of the startup and be a good exit
opportunity for stakeholders.

Please note that one of the most important things to keep in mind while raising funds from
external sources is that it is a time-consuming process. It is common for external fund-raising
round to take over 6 months from start to end and sometimes it can take years.
How to Raise Equity Funding? (Prompt 4)
Raising equity funding is an art as well as a science. The entrepreneur must be willing to put
in the effort and have the patience that a successful fund-raising round requires. The fund-
raising process can be broken down into the following steps:
 Assessing the need for funding: As the first step, the startup needs to assess why
is the funding required i.e. for what purposes the funds shall be utilized. After this the
amount of funding required needs to be approximated. Skilfully and accurately
deciding how much money to ask for in a fundraising round continues to be a tricky
point for many entrepreneurs and startups. However, as a start, an entrepreneur can
explore the following ideas:

 Key elements or Parameters

Developing a proper framework and a clear timeline as to what the Startup wishes
to do in the next 2, 4, and 10 years. Basis this framework, the reasons for
investment must be narrowed down. Some possible reasons can be:

 Research and Development

 Marketing
 Customer Acquisition
 Expanding and streamlining operations

Thus, the reasoning for an investment should be clear and the idea on how to take
it forward be robust as well.

 Approximate Costs

The cost of Production, Prototype Development, Research, Manufacturing etc

should be planned and made with expertise so that the level of funding matches
with the need and cost that the startup is looking at.

Make sure that the basic and overhead cost involving the financials and the
projection growth over the years is comprehensible. A financial forecast is a
carefully constructed projection of company development over a given time period,
taking into consideration projected sales data, as well as market and economic
indicators.

 Your forecast should outline the following:

 Projected income
 Estimated expenses
 Expected growth

 Assessing investment readiness: While it is important to identify your

requirement of funding, it is also equally important to understand if your startup is
ready to raise funds i.e. will it be considered seriously by any investor. Before
approaching investors the entrepreneur needs to understand the value add for a
potential investor and the alignment of interests of both the parties. Investors are
generally looking for the following in potential investee startups:
 Revenue growth and market position
 Favourable return on investment
  Time to break-even and profitability
 Uniqueness of the startup and competitive advantage
 The entrepreneurs’ vision and future plans
 Reliable, passionate, and talented team

 Preparation of pitchdeck: A pitchdeck is a detailed presentation about the startup

outlining all important aspects about the startup including
 Product/service offering
 Market size and competitors
 Revenues and past growth rate
 Future projections
 Images/video of the product, if possible
 Team
 Major customers
 The areas where the funding shall be utilized
While preparing your pitchdeck please be aware of the following dos and don’ts
Data Incorporated in the Funding Deck Data to be avoided in the Funding Deck
1.Problems in the Market and how our product 1. Do not sell your product, try and incorporate
solves it. what you do and let them organically
understand your product.
2. Know the audience well and try to relate with 2. Do not exaggerate your facts and
them. achievements.
3. Presentation Content in alignment with the 3. Be aware of your competitors and do not
interest of investors. plagiarize ideas.
4. Include relevant information which would 4. Don’t make it a commercial and try to
interest an investor. convey a story.

 Investor targeting and approaching: After you have assessed your startup’s
funding requirements, investment readiness, and prepared a detailed pitchdeck; it is
time to identify and start approaching investors. To target the right set of investors it
is necessary to research about past investments in the market and speak with
entrepreneurs who have successfully raised equity funding. This exercise will help you:
 Identify active investors
 Their sector preferences
 Geographic location
 Average ticket size of funding and
 Level of engagement and mentorship provided to investee startups
To approach investors there are two common routes that are adopted by most
entrepreneurs:

 Attending pitching/networking events, where an entrepreneur gets the

opportunity to interact with potential investors in-person and pitch his/her
product to them as well as take feedback on the pitch
 Cold emails and social media, where an entrepreneur shares his/her startup’s
pitchdeck over email or social media with an investor that he/she has never met
before. While this method lacks the personal touch and has low success rate, it
allows the entrepreneur to reach out to multiple investors in a short period of time
  Due diligence by interested investors: Private investors conduct a thorough due
diligence of the startup before finalizing any equity deal. They look at the startup’s past
financial decisions and the team’s credentials as well as background. This is done to
ensure that the startup’s claims regarding the growth and market numbers can be
verified as well as to ensure that the investor is able to identify any objectionable
activities beforehand. If the due diligence is a success, the funding is finalized and
completed on mutually agreeable terms.

 Investor engagement: After funding has been provided, the entrepreneur must
ensure that the capitalized amount is used judiciously. The cash burn rate must be kept
under control. A new round of investment is not recommended before the previous
money is put to good use. The money should be considered as Smart Money and we
recommend them to maintain the balance of the number of people in decision making
with the apportionment of revenue sharing.

Recommendations for the Startups post funding include:

 Keeping the investor active through Annual General Meetings and Monthly Reports
 Keeping the shareholders/employees in loop of every major step
 Inclusive and comprehensive involvement of all the people in the company
 Competitor analysis and market research on a time to time basis
 Social Media Marketing through Blogs, Articles and News Feed
 Transparency in Decision Making and keeping the interests aligned

Resources for your first fund raise: (Prompt 5)

1. Right Pitch Deck to be prepared. (https://pitchdeck.improvepresentation.com/best-
pitch-decks)
2. Templates Ready for Investors.
(https://www.startupindia.gov.in/content/sih/en/reources/templates.html)
3. Market Research Ideas.
(https://www.startupindia.gov.in/content/sih/en/reources/market-research.html)
4. Government Schemes and Resources
(https://www.startupindia.gov.in/content/sih/en/government-schemes.html)
5. Knowledge Bank
(https://www.startupindia.gov.in/content/sih/en/reources/knowledge-bank.html)
6. Legal and Application Based Services
(https://www.startupindia.gov.in/content/sih/en/reources/resource-partners.html)