Ways to Raise Capital for Your Start-up Business
Hey, budding entrepreneur, innovator!! If you are reading this, chances are either you have a brilliant idea waiting to be executed, or you have a running venture aiming to expand it. And as every start-up company knows, I am sure you know that raising proper funding at the right time is crucial. Financial capital is undeniably essential for businesses to grow and sustain, varying at each stage of business. Finding funds for a start-up business is often challenging and tiresome.This article is a modest attempt to discuss aspects you (don't) want to know about raising capital- alternative sources and challenges.
In India, the start-up landscape has been evolving fast, with the central and state governments actively promoting the start-up ecosystem. Despite this, many start-ups shut down yearly due to their limited capacity to raise capital, particularly in their seed and early stages.
Initially, it is challenging for start-ups to source capital from traditional bank debt. Thus, the fundraising journey starts with 3 Fs – friends, family, and fools, typically referred to as bootstrapping. It is easy to raise funds as there are a smaller number of formalities and compliances. Start-ups looking for equity investments would encounter angel investors, early-stage investors, and late-stage investors, depending on their life cycle stage – infancy, early growth, and late-stage. Angels are investors with surplus cash and a keen interest in investing in upcoming start-ups. They offer mentoring services along with capital. Incubators and Accelerators nurture the business and provide shelter, training, infrastructure, and networks, encouraging enterprises to walk and take a giant leap. Participating in contests like Shark Tank, where one prepares a business plan or develops a product, helps pitch the business idea and garner media coverage.
Coming to the debt category, Venture Debt is a viable option to raise money without stake dilution, similar to a bank loan. Alteria Capital is one of the prominent players in India's venture debt fund for start-ups.
Another option gaining traction these days is crowdfunding, which implies taking loans, contributions, or investments from more than one person. Under this option, the entrepreneur puts a detailed business description on a crowdfunding platform. It helps in marketing and financing the product and generating interest.
Further, thanks to the various government schemes, all banks offer loans to start-ups. However, the terms and conditions may vary from bank to bank. Access to conventional banking would be restricted for someone new to lending and does not have a financial history or maintain any credit score. In this case, non-bank finance companies (NBFC) and Microfinance Institutions (MFI) can help fulfill the financial requirements.
Initial public offering (IPO) as a fundraising option comes quite late when the start-up has reached a relatively mature stage in terms of market penetration and growth.
So, my dear readers, I hope one of the above-discussed options or their combination would help you raise capital for your start-up business.Do remember
- There are no stated game rules with many options, from venture debt and accelerators to crowdfunding.It is best to act prudent and judge what is best according to the start-up's nature, stage, and growth prospects. For instance, raising funds from the community signals that your community believes in you and has a robust user-backed product.
- Prepare a full-proof business plan, outlining the model, its scalability, competition, market size, product development, marketing strategy, cost competitiveness, management bandwidth, and overall financing requirements (including working capital requirement)
- Look for a potential financial partner who can offer more than the money, e.g., experience in the industry, contacts with potential suppliers or customers, and a good reputation. Make use of various platforms like CrunchBase to dig out information.
- Don't underestimate the time, effort, and creative energy required to get the cash in the bank. These ever-evolving dynamics show that raising capital is not as straightforward as it meets the eye initially. There can be conflicts or synergies among the different sources of funds.
"The value of an idea lies in the using of it" - Thomas A. Edison