Exploring the Right Funding Option for Your Startup
Welcome folks to another week of an enlightening study. This week will be going to see us continuing our previous series based on Funding.
Startups can actually have many different ways to get the money to begin. It’s about exploring your options and some of them include:
These investors come in when business grows beyond the preliminary startup phase and starts generating revenues. These investors fund in huge amounts if convinced by business models, valuations and growth trends. They come with expertise and vast industry knowledge and mostly invest for smaller windows with expectations of high returns.
This involves pooling in your own resources, usually at the ideation stage or a prototype stage, to avoid the need for external funding. Often, people who bootstrap their projects, keep their job.
Choosing between bootstrapping and external funding depends on how much money you need. Consider bootstrapping:
- when your concept is to be proven and can be proven with limited capital
- when you are unsure if you would like this to be a long-term career
- when you already have the resources to go beyond the concept stage
3. Convertible debt or debenture
This is a loan that the founders take from, say, angels for a certain period of time or till the next round of investment takes place. When the next round of investment approaches, the angels have the option to either take their money back at a predefined interest rate or convert their loan to equity.
This helps the startup team to do away with the valuation of their company at a pre-mature stage.
4. Loan from Banks & NBFCs
Banks and Non-Banking Financing Companies(NBFCs) grant loans and become business leaders and not owners unlike VCs and angels. These loans so procured can be used for various business needs like:
- Purchase of inventory and equipment
- Operating capital (working capital)
- Fund requirement for expansion etc.
5. SME lending
Businesses can opt for unsecured or secured working capital loan offered by numerous micro-financing firms in market today. However, this option comes with a fixed monthly obligation and relatively higher interest rates.
6. Revenue from business
This is by far the best mode of funding. If you have a cash flow, reinvest your profits in the business and keep away from diluting your stake.
7. Incubators & Accelerators
Incubators are basically the programs where they provide you with an in-house space and equipment with their funding to run your startup against stakes going as high as up to 20%. On the other hand, accelerators are the programs with a short span of time where you are assigned a small seed capital along with a return of a large mentor network against the stakes of 2–10% of your business.
8. Customer Advance
Once a company has a well-accepted product in the market, it can take advance payments from its customers for using the product or service. This advance works as an interest-free loan for the startup. You need to create a product that’s compelling for customers to buy.
9. Government Startup Funds
The government has launched various investment programs such as:
- India Aspiration Fund (IAF) — Instead of directly investing in startups, under this program, the government would invest in various VC funds which in-turn would invest in MSMEs.
- SIDBI Make in India Loan for Small Enterprises (SMILE) — With a corpus of INR 10,000 Crore and focus on 25 sectors under the Make in India program, SMILE will offer quasi-equity and short-term loans to startups.
- Micro Units Development and Refinance Agency (MUDRA Bank) — In the Union Budget 2015–16, a corpus of INR 20,000 Crore was earmarked for promoting startups. The finance minister has pointed the SC/ST enterprises would be given priority while lending.
There are a host of crowdfunding platforms that will allow you to invest in all kinds of startups, from tech brands to food trucks. And, once you invest, you’ll own a stake in the business and will have the ability to cash out — potentially after making big gains.
A business needs to have a sound business model and realistic future plans ready before it goes for a funding. Responsible business owners should advance very cautiously and make wise financial decisions that counts for the future.