Six capital raising options for your startup
Tips to ensure regular capital for your business
She was young, she was bright, she was full of energy and she wanted to do something remarkable in life. But, her impediments came in the form of gender, age, and finance. Snubbed by banks and considered as a high-risk customer, she struggled with the capital while setting up her venture.
Nevertheless, her sheer grit, determination, and the venture capital model came to her rescue. She set up her first venture with a paltry sum of Rs.10,000 from a garage in Bangalore. Now, she is a successful entrepreneur by the name Kiran Mazumdar Shaw, the Chairman, the MD, and the founder of Biocon. The success of her startup venture has inspired generations.
Are you facing the same problems as confronted by Kiran Mazumdar Shaw? If so, this blog is for you. These simple tips will enable you to find funding for your dream startup.
1. Bootstrapping method to raise capital
Bootstrapping refers to the use of a self-financing mechanism to raise capital for your venture. Individuals or institutions with an optimum amount of saving use this method. Herein, the role of external financers like angel investors, crowdsourcing, venture capitalists, etc is not present. For example, corporate giants like HP, SAP, and Dell is well known for humble beginnings through the bootstrapping method.
The major benefit of the self-financing method is the retention of the decision making power of the entrepreneur in his business. On the other hand, self-financing comes with financial insecurity in the face of cost overruns and unforeseen challenges.
2. Angel Investors
Angel investors are wealthy individuals providing funding for startups. Funding happens in exchange for ownership equity or convertible debt. Herein, funding is either on a one time or an ongoing basis. Generally, their own money is used for investing in the startup venture. For example, Meena Ganesh, CEO of Portea Medical, is an investor in four startups. In other words, friends, family, and crowd-sourcing options are the major sources of angel investments.
The major advantage of Angel investment is the inflow of a large amount of money for startups. The high inflow further brings in the option of experimenting and taking a risk. Nevertheless, there is a major associated risk of losing one’s decision making control of the company. Also, angel investments do not guarantee regular investments and cash flow. There are chances of fraudulent investment also.
3. Venture Capital
As compared to Angel Investors, Venture Capitalists do not invest their own money in a startup. Instead, the money pooled from different sources is invested in the venture. In return, Venture Capitalists get an equity stake in the venture. Moreover, unlike Angel Investors, Venture Capitalist investment happens at a matured stage of the company. Helion Venture Partners, Blume Ventures and Nexus Venture Partners are the famous Venture Capitalists in India.
In addition to the huge cash flow, the business expertise that comes with a Venture Capitalist is immense. The high profile contacts of Venture Capitalist is a long-lasting source of future business opportunities. Also, the support in the form of tackling legal and procedural challenges of a nascent company is worth noting.
On the other hand, Venture Capitalist funding comes with the downside risk of losing decision making control of your startup. This is detrimental to the success of any startup in the long run.
Bank loans are one of the safest ways of financing your business. Unlike Angel Investors and Venture Capitalists, banking loan doesn’t come with an equity stake or convertible debt. Further, bank loans come with affordable interest rate norms, usually in tune with government incentives. Also, the ensuing taxation benefits further boost startups.
However, bank loans come with procedural and approval challenges. The time consumed in paperwork runs into months in certain cases. Also, bank approval is difficult for startups in very nascent stages of businesses.
5. Government programs and Incentives
Governments across the world are putting in place incentive schemes for the growth of startups. For example, the Indian government’s Startup India scheme gives funding to startups from a consolidated pool of 10,000 crores. This brings in much-needed funding for startup growth. Further, the self-compliance clause gives room for greater trust in the long run. Also, freedom from Capital Gains Tax is a confidence builder for continuing future experimentation with creativity.
On the downside, there is an increased risk of micromanagement by government agencies. This is in the form of delay in approval and disposal of funds.
Hence, the handholding by government schemes is a vital factor for the creation of conducive startup culture.
Crowdfunding is the process of gathering funds from multiple sources like peers, individuals, venture capitals, angel investors, etc. The different types involve donations, online campaigns, debt, equity, etc. Elanco, Lego, and Unilever are some examples of companies with the crowdfunding platform.
On the positive side, crowdfunding brings in diverse funding options for a startup. Interestingly, there is a brand-building from scratch due to the wide clientele exposure. Also, there is scope for valuable suggestions and feedback which aids in the growth of the startup.
On the downside, crowdfunding brings in the risk of enhanced competition. It is seen that crowdfunding is increasingly becoming popular among businesses, both big and small. Finding the space for your startup is a time-consuming process. Also, the fees associated with various crowdfunding platform is exorbitant. This eats into the profits of startups.
Have you made up your mind on the mode of financing your startup? Depending on the domain, intent, and size of your startup, choose the apt funding option viable for your business. If you have a stable saving, dive into bootstrapping. If parting with decision making is not an issue, explore angel investments and venture capital. Further, if you find the government programs and the bank incentives interesting, go ahead with these options. Lastly, if you are looking for different ideas in addition to diverse funding options, crowdsourcing is your ideal destination.
Do not be deterred with the roadblocks. Just remember that successful entrepreneurs like Kiran Mazumdar Shaw and Bill Gates walked a similar path. The journey of a thousand miles begins with a single step.
Feel free to drop in your valuable comments in the comment section. Let’s learn and grow together.
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