Like it or not, but the world, other than the sun, does revolve around Money! Right from the moment, one is born, till the last moment; money is needed at every stage and day of life. While our jobs are a way to earn money and fulfil our needs, for some, a job is just not enough.
While a job guarantees a constant flow of money and routine life, there are some who want more out of life. Instead of doing a job they work to create new jobs and make their passion as their job. Entrepreneurs, as we know them, are people who try and bring new products and services into their own and other’s life. Instead of a regular, just another job, they look to create solutions to problems that others tend to either ignore or learn to live with. They are full of ideas that aim at creating a better world.
And with like every other idea, to bring their own into life, they need money to start their own company. Startup finance is the first thing they need to learn and understand, in order to establish their company and start working on their ideas. Starting a new business isn’t easy. One needs passion, ideas, resources, belief, conviction, courage and most importantly, money.
Like everything else, money matters too, need proper planning when one starts a new venture. Immaculate planning, finding legal and proper sources, calculation of breakeven, taxes are all encompassed during the forming days of a startup. And not everyone is blessed with a family business to find their new venture. Most entrepreneurs have to start from scratch and build their dream and the company.
With the startup trend catching up with India, and many laws and regulations being formed to help and protect their interests, people are trying to break their regular moulds and try something on their own. So for everyone who has an idea, but money matters are proving to be a deterrent, here’s how funding works for start-ups.
The Start-up Funding Cycle
According to experts, here’s the funding cycle that a start-up goes through:
There are three phases to a start-up’s journey here and accordingly, various stages of funding are required in these phases.
The First Phase
The first phase is the initial time period ranging from founding the company to floating it, i.e. putting it up for production. This period from receiving the initial fund to float the company until the time it starts generating revenue is also popularly known as the Death Valley curve or Valley of Death Curve. During this period money is needed to set up the company including infrastructure, registration, finding human resources, finding clients and more. The funding stages in this period are:
Seed Round – Seed Round consists of pre-seed funding and post-seed funding. Investors during this round of funding include self and FFF (Friends & Family). This is the initial investment that goes into the company. Self-funding or bootstrapping a company is very common and generally entrepreneur(s) involved with the start-up invest their own savings, or ask their close-ones to invest in them.
Angel Funding – Angel Funding or Angel Investors are people outside the entrepreneur’s close family and friend’s circle who invests in the start-up. This person is generally wealthy enough to fund the company and must have faith in the idea that he/she is about to fund (think Shark Tank).
The Second Phase
The second phase is the Growth Stage of the company. The startup has escaped the valley of death and is now in a progressive stage. Stability rushes in with products and services been figured out, major clients found and convinced, and the company can celebrate the first stage of win. To grow, the company requires the next stage of funding. If the startup is a huge hit, chances are it will fund itself for the next step. But mostly it requires going through another round of outside funding known as Venture Capitalist Funding.
What significantly makes this round different from the previous one is that now equities or ownership stakes of the company are involved. This investment in a growing company by the investors is seen as a high-risk and high-return opportunity. And the return is often in terms of shares or equity in the company in lieu of the money invested. This funding is divided into:
Series A – In this round, a start-up generally seeks to expand its base. It has its product or services detailed out and a niche already crafted. It now seeks to expand in order to turn more profitable and having a business model to present the investors is a must. The investors are now looking for ideas that have been translated into a company with a strong strategy to turn even more successful and money-making.
Series B – This round of funding is for the company’s growth to meet the new levels of demand being created by the expanding business. If a company reaches this stage, it has successfully established itself into the market and is now building itself into a brand. In order to meet new demands and expectations, it is necessary to build a strong team and a growing network which can be done through funding.
Series C – If a startup is at this stage, it is considered a successful one. Investors are looking for a quick investment with quick returns, hence a successful company to invest in. In this round focus is mainly on carrying out the successful run, scaling the company and growing.
In a successful company, the different rounds have different valuations with its stock prices increasing at every round. However, in case the company isn’t successful and is seeking investment just to redeem itself and its losses, its valuation decreases with every round.
Mezzanine Financing & Bridge Loans
At this stage, the startup is blooming with revenues pouring in but not very profitable yet. The funds raised here are channelled towards expansion to new markets, mergers, acquisitions, or preparing for an IPO (next stage). At this stage, investors Look for a clear roadmap toward profit in short duration. Mezzanine Financing, a mixed form of debt and equity financing, i.e. raising money through the sale of shares is preferred at this stage.
So a start-up at this stage raises money through mezzanine financers, or acquisitions or even mergers with like start-ups in order to grow together profitably.
The Third Phase
IPO or Initial Public Offering is the way to raise money at this phase. While not the ultimate goal, going public is an option to expand a start-up even further. Most investors have had their share of profit by now. Going forward, some investors may seek to retain their shares, while some, sell their shares. Once a company goes public, it also garners more interest and top players in the industry. The opening stock price is set with the help of investment bankers who commit to shares and raising money for the company.
More importantly, once a start-up goes public, it is no more a start-up. It is now a successful company which has made it here against all odds. The story which started as an idea is now known to all and its products and services are now being cherished by its consumers. It has grown all the way garnering adoration, generating money and profits and enriching both the investors and the lives of those it touched all along.
– Sneha Sinha
Money Begets Money: Startup Finance Explained
