Beginner’s Guide To Startup Funding: When & How Much To Raise

My Geek Score: Raising funds for a startup is not easy by any mean. In fact, most of the businesses fail because of failing to collect funds to get their business off the ground.

As a budding entrepreneur, you might find the process of collecting funds intimidating.  Moreover, stressing on convincing potential investors and venture capitalists often drain the energy and motivation of aspiring entrepreneurs.

Though collecting funds for your startup can be pretty challenging, understanding the underlying aspects of the process can make it less painstaking and more exciting. Because, at the end good funding is critical to safeguarding your startup business from crashing.

Start-up funding is generally associated with venture capital. However, the venture capital only funds a small ratio of businesses. Most of the companies are funded by personal debts and loans. Understanding which type of fund you are going to choose for investing your business can be a hectic job.

Each type of funding comes with their own set of risks and rewards. This article is going to discuss all the major aspects of fundraising from its stages to options available in the market.

Stages of Fundraising

Every business owner and entrepreneur needs to opt for fundraising to support the business in a particular stage. Now, when it comes to setting up a start-up, the need of fundraising can’t be denied at all. With the advancement of time, the process of fundraising has changed its forms and structures. Let’s take a glance at some basic stages of fundraising.

The Bootstrapping and Seed Funding

Bootstrapping is one of the most popular forms of fundraising. It indicates the process of raising funds from the family and friends. After bootstrapping, seed funding comes at second. It is again a popular form of fund collection. It is proven that nearly 29% of business fails during the bootstrapping stage. In the Seed-Funding, the primary funding refers to the ‘Seed’ that leads business to flourishing. 

Angel Investor Funding

One is free to raise money from his or her personal funds or opt for Angel Investing Route. An angel investor refers to a person who can arrange capital for a start-up. Usually, the angel investing process is dealt against the ownership equity.

Angel investing process is generally executed to support any start-up when other investors are not ready to give them back up.

IPO (Initial Public Offering)

IPO refers to a process where the company offers its corporate shares to the general public. This can be considered as the final stage of start-up funding that assists new businesses to grow and diversify themselves.

Utilization of Venture Capital

Venture capital funds generally refer to an investment that assists in managing the money of investors who look for personal equity stakes in different sizes of business from small to medium. These types of investments are generally considered as the high risk opportunities. In every stage of venture capital, the collection and the valuation get improved.

When to wait for Fundraising

Fundraising is a great way to boost your startup growth. However, like everything, it also has the proper time and the entire process is abides by certain situations.

• If you are not sure about the validity of your business or you don’t have any proper idea of generated ROI, you should restrict yourself from fundraising.
• Maximum business raises fund from the bootstrapping. Therefore, don’t opt for an investor at an early stage without having the clear idea of funds you require.

However apart from this, never think of raising funds if you are confused about the reliability of the business.

When to raise Capital for your Startup

The question may sound easy but the answer is complex. Generally, what happens is that the business owners have to go through research to find the answers to this question. However, if you are looking for the exact time, we can say that the last quarter of the year can be considered as the best time to collect funds.

Every business is different. They need money at regular intervals; therefore, there is no accurate time of fundraising. However, before opting for fundraising, make sure to analyze all the fundraising stages.

How much Capital you need

This query doesn’t have any concrete answers. Every business is different; therefore, their requirements also differ from each other. Generally, market research about the particular sector can help you to determine the probable funding required at the time of setting up a start-up.

There are some major expenses that can be considered during making an estimate of fundraising. We can divide the expenses into two sections; one-time expenses and ongoing expenses.

 One Time expenses

• Money is required to acquire the place for setting up a business.
• Fees related to the registration, permits, and license.
• Fees associated with the company’s website and logo designs
• Brochure and business card printing
• Money required upgrading the chosen places, etc.

Ongoing expenses

• Rent, Payroll, and Taxes
• Legal services
• Payments related to loan and insurance
• Utilities
• Marketing costs

Don’t forget to analyze all these aspects before making an estimation of the required funds.

Now you know when and how of fundraising, next step is to evaluate your business, how much it is of worth in value before starting fundraising process.

How to do your Startup Valuation

Evaluation of a Startup Company determines the particular amount of equity a startup needs to offer an investor against the funds. Not only funds, however, the time taken to collect the fund is also important. Suppose, it takes too much time to collect the fund, it is a sign that your start up might have to experience increased market competition.

Here, we have brought some basic ways to evaluate your start up.

• Berkus Approach
• Future Valuation Method
• Cost-To-Duplicate Approach
• Discounted Cash Flow (DCF) Method.
• Risk Factor Analysis Method and many more.

How much of Equity should you give away

There are different opinions about this. However, it differs from business to business and owners to owners. Generally, 10-12% of the equity is generally offered to the investors. However, all the decisions are made as per the contract made between you and your investor.

Options for Fundraising

In India, there are some common options for fundraising. We have tried to cover this part in the stages of fundraising. However, if you are looking for customized options, you can go for the following methods.

• One may opt for bank loans.
• Crowd-funding is a great option.
• Consider self-funding.
• Seek assistance from Venture Capitalists.
• Opt for Angel Investment.

In a Nutshell…

Fundraising is required to seek all the advantages associated with the existing and future market scopes. Apart from bootstrapping, external funding is also required here to sustain in the longer run.

Reading this blog, we hope you have got a basic idea of different aspects of fundraising. To learn more, feel free to leave your queries in the comment section.

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