Startup funding

Bootstrap:

Bootstrapping is the opposite of funding . It takes place at the initial stage of business when you and your co-founder invests money from your own savings. You are the only owner of your business at this particular point of time, working on your ideas inorder to create real time value.

The Family and Friends Round:

When you think of putting an ad in the newspaper saying, “Startup investment opportunity.” But then, your lawyer friend tells you that it would violate the securities laws. This is because , now you are a “private company,” and is asking for money from “the public,” who are people you don’t know and that would be a “public solicitation,” which is illegal for all private companies. So from whom can you take money?

1. Accredited investors — These are people who either have $1 Million in bank or else make $200,000 annually. They are called the “sophisticated investors” — because the government thinks that these people are smart enough to decide whether to invest in an ultra-risky company, like yours.
2. Family and Friends — Even if your family members and friends are not as rich as an investor, but still you can accept their cash. For example , if that is what you decide to do, since your co-founder has a rich uncle you give him 5% of the company in exchange for a cash amount of $15,000 . Now the thing is , you can afford room and ramen for another 6 months while you are building your prototype.

• Seed Funding

Seed funding is what from which your business starts external financing . This occurs when the business owners realize the requirement of a little more money to cover the expenses until they can start earning revenues.Just as the name implies, seed funding is relatively a small amount of money that is obtained from family , friends or small angel/ seed investor. This is quite a bit of high risk investment as the potential of the product or service offered by your business is yet to be discovered.The seed funding opens the doors for the dilution of the stake of your business. However, if you are getting funds from smaller investors at the initial stage , it can also open channels for the bigger future funding.

Angel Funding

Now as the business starts growing, the requirements for manpower, publicity and better administration also increases, that means you need more funds which cannot be accomplished through the seed funding. Thus, comes the time for second round of funding from the “Angel Investors”.

The Angel investors will decide to invest in the company only after considering the valuation and the future prospects of the business and also taking a share of the equity as well. There are also incubators and accelerators which provide working space, cash as well as advice for your business to grow.

Angel Investment can set the tone for many other investments to come and thus provide you with the credibility and advice that you desperately need.

VC Funding

The Venture Capitalists (VC’s) are specialized financing businesses which invest in the upcoming ventures. Alongside with funds, they also provide legal and the marketing expertise which a high potential venture that has a good team and a brilliant idea may be lacking.The VC investors analyze the startup on the basis of progress made till now from the use of previous fundings like Seed capital, Angel funding and other factors like quality of the founder team, their market size, quality of the concept in comparison to its competitors and the risk involved.

There are different types of funds which the VC’s provide at different levels of your business;

• Series A Financing

Series A refers to the first round of investment that happens during the Startup stage of your business. This is required for promoting the product or service across the geographical locations and also getting a business model. Series A funding is a critical stage for the investment as the company has not yet fully established its presence and is still striving to make a difference in the market. However, it should be noted that the Series A funding is not for running the operations of the company but to scale up its business to the first level.

• Series B Financing

Series B is the second-stage of the investment that usually happens after the company’s product has been accepted and sold in the market and thus has proven its potential viability. The main purpose of this stage of funding is to use the investment for facing the competitors and also to have a market share.Here factors like sustained performance of the company in comparison to the industry and its strength compared to its competitors are usually considered.At this stage , the experienced VCs can offer the kind of networking opportunities and mentorship which the unconnected smaller investors may not have provided.

• Series C Financing

Series C funding is the latest stage of funding, and this happens when the company has captured substantial portion of the market and is now looking for diversified products, market acquisitions and greater market share. The VCs and private equity investors also supports at this stage of financing rounds as well as further future funding rounds that are required by the established companies to reach future milestones. This is the last round of the funding stage before a company goes into an “Intial Public Offer”(IPO).

Today, every startup is looking for the funding options to convert their ideas into a successfull business model. However, it should be understood that the investors are not looking for the prefect business idea but for the quality of teams that have the potential to think out of the box,who are flexible and adaptable to the changing market preferences.At the end bottom line remains that , keep pitching for your business, find the potential investors beyond your personal network, engage with investors beyond money and add value to your business.

IPO:

There are two basic reasons for a company to go into an IPO. Technically , an IPO is just another way to raise money, but this time from millions of regular people. Through an IPO , a company could sell their stocks on the stock market and anyone can buy them from there. Since anyone can buy , the company can likely sell a lot of stocks right away rather than going to individual investors and asking them to invest. Thus , it sounds like an easier way to get the money.

Other than the above said reason , there is another reason to an IPO. That is , All those people who have already invested in your company so far, including you, are now holding the so-called ‘restricted stock’ — basically this is the stock that you can’t simply go and sell for cash. Because , this is the stock of a company that has not been the so-to-say “verified by the government,” and which is what the IPO process does. Now the people who have invested so far want to finally convert or sell their restricted stocks and get cash or unrestricted stock, that is almost as good as cash. This can be called a liquidity event —that is , when what you have becomes easily convertible into cash.

There is also another group of people that really want your company to go to an IPO. They are the investment bankers, like Morgan Stanley and Goldman Sachs, to name the few of the most famous ones. What they does is , they will give you a call and ask to be your lead underwriter — that is the bank that prepares your necessary IPO paperwork and calls up the wealthy clients to sell them your stock. Here in this case , there can be a question ,Why are the bankers so eager? the answer is ,because they get the 7% of all the money you raise through the IPO. For example, In the infographic shown at the beginning, suppose if your startup raised $235,000,000 in the IPO — the 7% of that , which is about $16.5 million is what they get.(for two or three weeks of work for a team of 12 bankers). As you see, it is a win-win situation for all.