Startups: Methods of raising funds

Discover the diverse methods of raising funds for startups, from equity financing with angel investors and venture capital, debt financing through bank loans, to grants from government and corporate entities. Understand seed funding for early-stage ideas and growth stage funding for expanding businesses. Gain insights into the dynamic startup ecosystem and its financial strategies.

♦ Introduction

According to the notification G.S.R. 364E dated April 11, 2018 issued by the Department of Industrial Policy and Promotion (DIPP), Startup means an entity that is incorporated or registered in India.

A Company will be considered as a startup:

• Up to seven years from the date of incorporation/ registration.

The entity needs to comply with the following conditions:

• It has an annual turnover not exceeding INR 100 crore in any preceding financial year, and
• It is working towards improvement of processes, development, innovation of products or services, or it is a scalable business model with a high potential of wealth creation or employment generation.

In case of biotechnology sector, an entity shall cease to be a startup on completion of a period of 10 years from the date of its registration or its turnover for any previous year exceeds Rs 100 crore.

A startup requires funding for business development, product development, working capital, etc.

♦ What are the types of startup funding?

♦ Equity Financing

Equity financing refers raising of finance by the way of selling of company shares, wherein the investors who purchase such shares are purchasing ownership rights to the company. Equity financing includes financing through equity shares, share warrants, etc.

The main sources of equity financing are:

1. Angel Investors

2. Crowdfunding platform

3. Venture Capital funds

4. Initial Public offer

♦ Debt Financing

Debt financing is the types of raising funds wherein companies obtain finance by way of issuing debt instruments or bank borrowings, etc. The funds are generally used for buying resources, working capital and business expansions.

The common types of raising finance through debt financing are:

1. Debentures or bonds

2. Bank Loans

3. Factoring

♦ Grants

A grant is basically an financial award, usually given by an entity or government organization to a company for facilitation of its goal or incentive performance.

The following are the types of grants being offered to the startups in India:

1. Government Grants

2. Corporate Grants

♦ What is seed Funding?

Seed funding means funding for a startup at the early stage i.e., ideation, inception stage. It is basically the funds used to start a company and are prone to high level of risks.

Seed funding is basically the first stage of investment wherein the business could conspire of only an idea and is still in the market validation process. Since the its early stages and hasn’t proven its position in the market, it involves high risk on the investor.

This type of funding is generally raised from family, friends, angel investors, venture capital funds, incubators, etc by issuing equity shares in exchange of the amount offered by them or by way of raising through debt financing or by way of government grants or seed funding schemes offered by the government.

♦ What is Growth stage Funding?

Growth stage funding refers to funding raised by a start up in its growth stage, wherein the startup has eventually launched its products or services and looking to expand its business to achieve objected business model.

Generally, this type of funding is raised from Angel investors, venture capital funds, bank loans, etc either by way of issuing equity shares or by way of issuing debt instruments against the funds raised.

♦ Conclusion

The Startup’s ecosystem are on a rise in the Indian market and every startup needs funds to setup its business and expand its operations, and a basic knowledge of raising funds through various identifiable means is very important part of setting up an startup. The various sources of funding helps an entrepreneur to have the financial assistance to capture the market and build a proper ecosystem for growth of the business.