Funding is an important and crucial factor to start a business. The financial investment determines how much product development, expansion, sales, office space and marketing a business or company can generate. Some entrepreneurs or startups choose funding by borrowing loans or from third-party investors. Some are funded by their founders itself to prevent debts or mental headache. Funding can only be raised after an organization keeps exceeding and scaling its business to heights and grow larger. Now it’s important to know how much and from where funding is needed or can be raised.
To understand why funding is required, it is to be focused or seen what type of business or startup it is. A startup may need one funding source or maybe others depending on its expansion and reach. There should be a detailed financial plan and business plan before starting a business. Funding is required for the following aspects:
Raw materials and equipment
The hiring of a strong team
Capital for workout
Marketing and sales
Legal and consulting services
License generation with certifications
Office space and other additional requirements
There are various facets and directions of funding such as:
Invested funds that need no repayment, funds with risks has high threat and comes with no guarantee of investment, pressure-related funding that requires repayment within a timeline along with pressure from an investor to achieve the target is difficult, funding that generates capital growth is advantageous funding, funding from equity fund investors involves decision making and there are other types of funding such as venture capital funding, angel investors, self or family financing, crowdfunding and funding from incubators or accelerators.
Now the entrepreneur must be willing to give effort for a successful fundraise based on:
Firstly, he must assess the need for funding to understand the right amount to be raised and have a milestone plan for at least the upcoming 10 years. The basis of funding is formed through production cost, research and manufacturing along with prototype development.
Secondly, the fund must be assessed properly to check whether it can satisfy all requirements. Any investor will fund the business if they understand the plan, growth and revenue projection of the startup. He will be convinced to invest based on market position, favourable returns, and uniqueness of startup, entrepreneur vision, passion and reliability along with his plans. Funding is also generated through a proper pitch deck or detailed presentation of the business plan stating all important aspects.
Another important factor is to target the right investors who are interest-oriented in your business. Identifying active investors, their sector preferences, location, and average ticket size of funding and engagement level can help you to generate proper funds for your business.
Pitch deck can be shared with the VCs and Angel Network on their contact email IDs. Before finalizing the equity deal, they look up at the past financial decisions as well as team credentials. The investor should be able to identify the objectives of the startup as well as agree on the mutually agreeable terms.
Some common source of funding are:
Venture Capital Funds (VC) – Professionally managed investment funds that sponsor high- valued startups.
Banks/NBFCs: They deal with formal debts when market traction and revenue validate their ability to finance the obligations of payments based on interests.
Venture Debts Funds: These are private funds that invest money if the startup rises through the help of debt as the source of finance.
TReDs: It’s an institutional mechanism introduced by RBI in 2014 to reduce financing concerns faced by MSMEs. It provides financing fir trade on a secure digital platform.
Private Equity/Investment firm: They don’t fund startups directly but provide funds for fast-growing late-stage startups with consistent growth record.