TYPES OF FUNDING IN A STARTUP
Everyone at some point in their life dreams of having his or her own company and becoming an entrepreneur but only some are able to do so. According to statistical data, out of 100 start-ups, only 10 are successful and the rest 90 are not able to make it till the end.
There are many reasons for a start-up failing and not able to complete the race, some of the primary reasons being – financial problems, competitors, location etc. but the main reason why most of the start-ups fail is because they are not able to be profitable or don’t get the next set or round of funding that is required for them to survive in this dynamic business environment.
There are a lot of ways a start-up can raise funding and we will be looking at some of them down below-
- Personal Savings- This is the most appealing source of financing, because you use your own money to jumpstart your business and don’t owe anyone else in the process. Since you don’t own anyone, the ownership of the business is completely yours. With power comes responsibility, so it’s risky because if the business does not take off, your entire hard-earned money also goes down.
- Friends & Family- The most common way of borrowing money from your near and dear ones in return of nothing. A lot of people go for this method, initially using their parent’s savings or borrowing from relatives to start their own business. This works on a relationship of love and family but if someone is not from a well to do family this method might not be feasible for him.
- Loans- Banks provide business loans to start-ups to fund them, but this usually carries a medium to high interest rate to be repaid. Banks don’t look at the idea and then evaluate whether to proceed with the loan or not. For them the idea does not matter provided the person/company they are sanctioning money to has the ability to repay.
- Series funding- This word is very famous in the start-up culture because in almost every successful start-up, this type of funding has been done and they have experienced it.
- Series A funding- Once the start-up makes it through the initial capital also known as the seed capital and gains some traction in terms of sales, popularity or anything, they go for Series A funding. It usually involves funding up to 10-15 million dollars. Series A funding is done by angel investors and/or venture capitalists. Both of them get the part ownership or equity of the company in return of their money invested. The main difference between angel investors and venture capitalists is that the former ones are high net worth individuals who think that the idea of start-ups can have a positive impact on the world. Angel investors invest in the company in return of equity from their own money whereas venture capitalists are firms that invest into start-ups using the firm’s money.
- Series B funding- When the start-up has found the right target market and they feel that they need to expand, Series B comes into the picture here. Series B funding usually comes from venture capital firms, often the same investors who led the previous round. Because each round comes with a new valuation for the start-up, previous investors often choose to reinvest in order to ensure that their piece of the pie is still significant.
- Series C funding- This is usually the last stage of funding companies go for. If a company plans for Series C funding, it means that the company has been doing very well and plans to introduce a new product/service or it is planning to acquire a business to increase their customer base and reach.
The growth potential and the idea of the start-up mainly are responsible for the funding it can raise. If the idea is really innovative or has the potential to change the world, the start-up will be able to get funding and be successful.
Futurepreneur Hub LLP