Funding for Startups 101 - Everything You Need to Know

If you want to keep your startup up and running, you will need funding. For startup funding, there can be multiple sources, or you can go with one. No matter what you choose, you need to ensure that the cash flow never stops. 

Depending on how much money you are getting into the field in the beginning and what events you are planning to launch, you need to start seeking the right kind of funding. And this is where the seed funding comes into the picture. 

What is Seed Funding and How Does it Work?

The word "seed funding" comes from the analogy of planting a tree. A startup generally starts with a great idea. However, to bring that idea to fruition, you need to have the money that will make it happen for you. This is why getting seed funding is crucial. Seed funding is generally not a loan. The investor will fund your business with the right to own shares of the company or get a share of your profits. In exchange, you get the startup capital to take your idea off the ground. 

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Types of Seed Funding

There are several types of seed funding options available for any company that is about to embark on a journey of success. 

  • Crowdfunding Platforms: In recent years, crowdfunding platforms have proven themselves useful for getting seed funding for startups. It is a good idea for budding entrepreneurs to run a campaign so that they can start with their idea. However, while going for this option, one needs to identify the potential challenges, like the processing fee of each transaction, the campaign goal and timeline for each platform, and devise a plan to handle them all.
  • Angel investors or HNI (high networth individuals) can be helpful at the initial stage of a business. HNIs are individuals who can give you the startup capital, and in return, they get equity in the company. Using convertible debt lets these investors get the ROI back as equity. 
  • Incubators and accelerators are also great options for startup fundraising. While incubators can offer a small amount of capital for businesses, accelerators can offer not only capital but also mentorship and networking opportunities.
  • Venture capital investors are also helpful if you have a great idea, a business plan, and a team of resources. They typically get the shares in equity for their investment.
  • Other startup funding organizations - There are many other startup funding organizations too that invest in startups in exchange for quality work, new talent, and ideas.
  • Bootstrapping - is always an option, depending on how much capital you have as an individual. However, this option might lead to higher debts if your startup goes belly up. 

How Does Funding Work for Startups?

Your Work as a Founder Does Not End with the Start of Your Company

You need to develop your product, find a customer base, market the product, expand, and again launch new products subsequently. All of these endeavors will need funding. From product development to hiring resources, you will need cash flow to ensure that the process runs smoothly. So, getting the funding begins with searching for outside investors. 

Angel investors, venture capitalists, financial institutions, or anyone else for that matter, will consider funding your business depending on your business plan, company maturity, potential market, track record, profits, and risks. And when you start making profits, they will get the initial returns along with a slice of company equity. Before you get the seed funding, the valuation of the company will be considered by the investors, and after that, you will get the first stage of startup financing.

After seed funding, your investments will go through other funding rounds called Series A, B, and C based on the type of shares issued by the company:. While series A funding will help you develop the product and build a customer base, series B funding will be used for company development. In this stage, you will hire new talents to support the demands, expand the marketing base, and focus on customer support. Series C funding is for successful startups that are now planning to develop new products, expand into different markets, and get a great leadership team on board. For each of these rounds you will be issuing Series A/B/C shares with certain terms and conditions.

How Much Money Does a Startup Need?

Well, there is hardly a clear-cut answer to this question. You, as a founder, might want to get as much money as possible. At the initial stage, this is not going to happen. Hence, keep in mind your funding goals for at least the next 12–18 months and calculate the timeline by which the company should start seeing profits. 

In terms of equity, the best decision will be if you offer only 10% to the investors. But for startups, most likely, the investors will require 20% dilution. However, keep in mind that anything more than 25% is not an option if you want to see long-term profits and keep the company afloat. 

Funding for Startups in India by the Government

If you are the founder of a startup in India, then surely you want to know how to get initial funding for startups. You can get connected with angel investors in India or startup funding organizations. But along with these, the government of India offers several financial schemes that can help your startup take off. Some of the most prominent schemes are as follows:

  • ASPIRE – A Scheme for the Promotion of Innovation, Rural Industries, and Entrepreneurship
  • Pradhan Mantri Mudra Yojana
  • SAMRIDH Scheme
  • Multiplier Grant Scheme (MSG)
  • Sub-Mission on Agricultural Mechanisation (SMAM)

The beginning of your startup journey is stressful especially if you are yet to find the right source of funding. However, my journey has taught me that everything starts with you. So, instead of fretting over everything, first, manage yourself and your mind. When you start believing in yourself, the world follows suit. As a wise man once said, defeating a persistent man is the most difficult thing. So, persist and persevere.