Have you ever thought about how Startups Get funding & If you are planning to launch your startup but don’t know how startup funding works? Now is the time. India is currently in its phase of the startup ecosystem and the economic environment is favoring aspiring creatives’ minds. However, careful planning and a futuristic approach are imperative to make sure your startup doesn’t end like the else those who do not work that shut down their shutters within the first year of operation.
Many people do not know what startup funding is. Startup funding or financing is the process of raising capital to support a business idea. Funding or financing can come in many forms and differs by how old the startup is, but a large no.of companies take part in fundraising to boost their potential.
Companies can Gain capital in several ways. The funding/financing you hear about are the most in the news and involves raising capital through outside investment, known as funding/financing rounds. In that case, investors can exchange their capital for equity — or ownership/Debentures of the company.
How the Startup Funding Works
How to get funding for a startup, & How does Startup funding work? Now that you simply understand the fundamentals of funding or financing, let’s practice how the everyday startup funding process works for the founder, investors, and therefore the company. Let’s say you are the startup founder. Your business is becoming increasingly mature day by day, and you are looking to hire more employees to showcase your product prototype in the XYZ deal. But you would like funding to make it happen and you would like to regard an outside investment, so you start looking to find investors. Investors usually want to support startups they believe in and the ones that attract them by their creativity or diff ideas and plans, but they also want to create a return on their investments. That’s why most deals with angel investors, venture capitalists, or private equity firms include equity within the company the concept is that when the corporate begins to earn a profit, the investors will get their initial compensation— plus the additional slice of equity for taking an opportunity. Companies trying to find outside funding usually begin with a seed round before continuing to Series A, B, C, and D rounds. But before any seeding rounds begin, a corporation valuation must happen. A valuation considers the startup’s maturity, management, market size, journal, profit, and risk, which may impact what kind of investors have an interest in the company and the way much new capital it can usher in.
Once the startup valuation is complete, they can start the funding round. The timeline and process vary by company — some founders hunted for investors for months, while others closed a round in a very matter of weeks, and the How the startup funding works part is pretty much clear now. It is not impossible for a unique startup with an innovative idea to spice up some million in one to 2 rounds. In contrast, a startup company raises $25 million within an equal number of rounds.
Type of Funding
Now, we got to know How startup funding is but now we have to discuss the types of funding that a startup owner has to know before appearing for startup funding. These are the following types of funding for the Startups:-
- Crowd Funding
- Self Funding
- Venture capitalists
- Angle Investment
The concept of crowdfunding for startups is kind of like mutual funds on a basic level. In this option, over one investor is involved, and they offer a set amount of capital to support your business idea, goal, plan of action, and plans of constructing a profit. All you wish to own are those that truly believe in your business idea.
Crowdfunding is gaining popularity because it ascertains the idea that your idea is additionally believed by other experienced players within the market. Crowdfunding also helps you in getting the crucial funds from the concept stage itself. you’ll gather crowdfunding from friends, family, and entrepreneurs who believe in your business concept and have the means to return together and fund your aspiration.
Self-funding also known as Bootstrapping is a perfect plan of action when it’s hard to convince others of your business idea and vision. Often investors kindle traction before making an investment, the initial round of self-funding allows startups to prove the feasibility of their idea and build confidence with the investors for an extra round of funding.
Self-funding could be a great idea for startup funding especially if the new startup requirement is tiny. It also gives the startups the liberty of being their boss. They are not answerable to anyone and it allows them to stay watch on the revenue earnings furthermore.
Venture capitalists provide you with professionally managed funds for people who are trying to find startups that have success potential. the most effective part about VC’sl investments is the expertise and monitoring that they carry along. VCs usually invest in that equity and once the business releases its IPO or is acquired, they leave. But if you’re choosing capital funding, be flexible enough to require their inputs and accept the close monitoring.
Angle Investments are individuals with surplus cash looking for investing in promising startups and earning their share once it grows to their potential. Angle Investors either work alone or collectively in a network to screen startups with huge potential. This funding option has business minds looking to earn interest out of your success and they may expect as high as 30% equity as well.
Although an angel investment comes with its issues of high-interest expectations and lesser investments as compared to Venture capitalists; it is important to remember that Google, Yahoo, and even Alibaba were a result of Angel investing. Till now we got to know how startup funding works and what are the types of startup funding. Now let us tell you how Startups get funding.
Fundings Round of a Startup
The following are the fundings round of startups in which Startups can get Capital for their business ventures.
- Pre-Seed Funding
- Seed Funding
- Series A of funding
- Series B of funding
- Series C of funding
- Series D of funding
Pre-seed funding takes place because the founders have gotten their companies off the bottom. it is the earliest stage of funding an organization, and it always involves an investment from the founder’s savings, family, friends, supporters, or network of other founders. This round can persist for years as an organization establishes its legs. Or, if a corporation can prove itself, it can happen rather quickly.
Seed funding is the primary official funding a company raises, and it’s often tied to equity. This capital helps a startup finance its first steps, like conducting research, launching a product, marketing to a target market, and building an audience. consider this stage because the “seed” by which the rest of the company is in a very position to grow and flourish. Without it, a founder wouldn’t be ready to hire a team or test their idea within the market.
Seed funding can come from friends, family, incubators, private equity firms, or angel investors. But the amount can vary widely — some companies can raise $10,000, while others raise $2 million. Usually, companies raising a seed round are valued approx between $3 million to $6 million.
Series A of Funding
When a business uses its seed funding to develop a product and build a customer base, it’s going to be time for a Series A funding round. This capital is usually wont to expand a company’s product offerings, herald more customers, and develop a long-term growth plan.
That’s why startups looking for this funding round attract investors from traditional private equity firms, like Sequoia Capital, Greylock, Accel Partners, and more.
Capital raised during Series A rounds can range from $2 million to $15 million, but with increasingly high valuations within the tech industry, high-growth companies have raised significantly more during this round.
Series B of Funding
Series B rounds are all about business development and the way to succeed in the subsequent level of growth. The capital raised during this round goes towards supporting a longtime customer base by hiring new talent and boosting sales, marketing, tech development, and customer support.
Companies undergoing Series B rounds tend to be valued between $30-60 million and lift a mean of $33 million. the next valuation and a proven business plan tend to draw in identical high-level investors because of the Series A round, additionally to later-stage investment firms.
Series C of Funding
Series C funding rounds are for successful startups that require extra funding to assist create new products, acquiring other companies, expanding into new markets, or hiring an exceptional leadership team. The capital is supposed to assist scale the company’s efforts so it can grow as quickly as possible — and since investment is a smaller amount risky by this round, new investors inherit play.
This can include private equity firms, hedge funds, secondary market groups, or investment banks that want to cement their place within the world of successful investment. Companies within the Series C stage are often valued at or above $118 million and use this round to spice up their numbers before an IPO.
Series D of funding
Many companies do not grow further from Series C into the Series D round. those that do are often trying to find a final influx of capital before an IPO or need more funding to realize the goals they launched to accomplish within the Series C stage. Any organization which is at this stage of funding should have a longtime customer base, a chronicle of growth, a solid plan for a way it’ll utilize new capital and revenue streams.