Funding means and includes the money required to start and run a business. It is a financial investment in a Company by the owner or external personal for expansion, product development, sales and marketing, office spaces, manufacturing and inventory.
Many startups choose to not raise funding from third parties and are funded by their founders only (to prevent debts and equity dilution). However, most startups do raise funding, especially as they grow larger and scale their operations. If you are an entrepreneur seeking to understand why funding is needed, types of funding available, and how to raise funding, then read on to find answers to these critical questions.
Why the fund is required?
Businessmen should have a detailed financial and business plan before you approach investors. It is essential to clearly understand why you are raising funds, without a clear understanding the business can suffer which results in a financial and operational loss. Mostly the business requires funding to expand the level of operations from the current scenario.
Types of Funding and analysis:
Funding involves internal and external funding. Internal funding involves Personal savings / Promotor fund. External funding requires angel investors, venture capital, Bank Loans, etc. There are pros and cons for every type funding the Company needed. One should be very careful while deciding the nature of the fund required.
| Characteristics of Investment | Equity Financing | Grants | Debt Financing |
| Nature | There is no component of the repayment of the invested funds. This type of investment requires the external person to take ownership of the business. | There is no component of the repayment of the invested funds. Grants are mainly given by the Government for special purposes. | Invested Funds to be repaid within a stipulated time frame with interest |
| Source of Funding | Angel Investors, Self-financing, Family and Friends, Venture Capitalists, Crowd Funding, Incubators / Accelerators | Central Government, State Governments, Corporate Challenges, Grant Programs of Private etc. | Banks, Non-Banking Financial Institutions, Government Loan Schemes (CGTMSE, Mudra Loan, Standup India) etc. |
| Return to Investor | Capital growth for investors | No Return | Interest payments |
| Risk Factor | The risk factor for the investor is higher as he has no guarantee against his investment. | There is no risk factor for the startup as no collateral is involved. | Risk Factor for the investor is lower as he generally has collateral against his investment. |
| Repayment Manner | Less pressure for startups to adhere to a repayment timeline but added pressure from investors to achieve growth targets. | No pressure for repayment as grants are a form of monetary support provided for a specific purpose. | More pressure for startups to adhere to the repayment timeline and as a result more pressure to generate cash flows to meet interest repayments. |
| Involvement in Decisions making | Equity Fund Investors usually prefer to involve themselves in decision-making process. | No direct involvement in decision making. | Debt Fund has very little involvement in decision making. |
How to raise Equity funding:
For raising equity funding, one should do the valuation of the business and the find out right investor according to business needs.
Some businesses, particularly early-stage ones, may not have the financial history required to borrow money from financial institutions. Equity investors may provide investment, understanding that the return on their investment will come later on. Investors would be accepting a level of uncertainty and risk attached to their investment. Equity investment brings new people on board as shareholders, along with their skills and connections. The right equity investor should bring the benefit of more than just their money. Many will be well-connected through their past investments or experience and this could help your business. Your equity investor’s interests and your business interests will also be aligned because your growth and profitability will increase the value of your investor’s shareholding. Hence choose wisely and upscale your business at the right time.
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Great Article. Thanks a lot for sharing your knowledge.