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How do startup funding take place?Is the process complicated?

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Kavii SuriTop Contributor
GEEK | Content Writing Intern | Pursuing CS | Exploring ML and Data Science

There a few options when it comes to startup funding:

1) Bootstrapping your startup business: This basically means that the founders themselves, invest without any help from outside. This is also called self-funding. Most of the times, startups have a hard time getting investments without showing any success or traction, this is the way to go for it.

2) Crowdfunding As A Funding Option: Crowdfunding is one of the newer ways of funding a startup that has been gaining lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time. This is how crowdfunding works – An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his business, plans for making a profit, how much funding he needs and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.The best thing about crowd funding is that it can also generate interest and hence helps in marketing the product alongside financing. 

3) Get Angel Investment In Your Startup: Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting a upto 30% equity.

4) Get Venture Capital For Your Business: Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organisation is going, evaluating the business from the sustainability and scalability point of view.Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organisation is going, evaluating the business from the sustainability and scalability point of view.

5) Get Funding From Business Incubators & Accelerators

6) Raise Funds By Winning Contests

7) Raise Money Through Bank Loans

8) Get Business Loans From Microfinance Providers or NBFCs

9) Govt Programs That Offer Startup Capital

10) Quick Ways To Raise Money For Your Business

  • Product Pre-sale
  • Selling Assets
  • Credit Cards
Devashish Shrivastava Top Contributor
Undergraduate student | Content Writer

Here is the typical process of raising a funding round for a Startup which translates to the below steps:-

How do startup funding take place?Is the process complicated?

 I’ll skip step one and two from the picture assuming you’re through both these steps and investor has shown interest to hear you pitch.

  1. Pitching to Investors:
    Whether you’re pitching your business casually to an individual investor or formally to institutional investors, angel networks or VCs, this is usually where you get started.
    You reach this stage when they show interest to hear your pitch after looking at your credentials and/or pitch deck (screening).
    Less than 5% of our monthly applicants qualify to pitch to our angel investors.
  2. Termsheet Signoff:
    Based on several factors like investment instrument (equity, debt or a mix of both), stage of your business and structure of the investor (individual or institutional), you get a TermSheet (TS) from them.
    The termsheet enlists all the terms of investment you mutually negotiate and agree upon.
    The termsheets are usually non-binding and have an expiry date of 60 to 90 days at max to close the transaction and move to SHA (see step 4).
  3. Due diligence:
    Upon executing the TS, you’re moved to financial and legal due diligence (DD) by the investor.
    The rigorousness of DD is based on the age and stage of your startup (idea, PoC, post revenue or growth stage), type of investor (seed stage, angel, VC or PE).
    This might typically take 4 to 8 weeks including workplace verification.
    Important: Some investors do their due diligence even before moving to the termsheet stage.
  4. Shareholders agreement (SHA):
    SHA has different names like offer documentation, definitive documentation, SSHA etc but only one purpose- protecting incoming shareholder’s rights.Upon getting the positive outcome from due diligence, this much more elaborated document is signed between investors and founders.
    SHA covers a range of aspects to protect all the shareholders from the likelihood of any potential disputes arising in future. It is often signed on stamp paper.
    Pro Tip: Make sure you get the vetting done from your corporate lawyer before signing anything out of good faith :)
  5. $Money$:
    After the execution of SHA, you get your ... In case of Foreign Direct Investments (FDI), the compliances are tough and the penalties for non-compliance are severe. Make sure to consult your CA, CS and corporate lawyer for the same.

Idea lights up,creates logo and and put a name,here begins your startup ventures.Your company will need a legal structure and government will ask a lot from you.Now134 you need to rent a server, may be hire one or two,but we need more money.So129 you go looking for investors.The first might come from friends, family or crowd sourcing,anyway you have the seed money.

now suppose someone whom you know invested 50k on your idea.You160 and your friend with whom you started the venture decide to issue a 100k shares and split 40k among each other and give the rest 20k to your seed investor.So149 the total valuation of your company stands at 250k because he gave 50k for the 20k shares.

now the business expands and you need a room with more employees,you need more money.You137 go for the series A investment.You141 go asking for fund from angel investors and venture capitalists,terms which you might already know.You145 propose your idea and explains your business model.They interview you and finds you competent,they decides to invest.Now123 they value your company.There is pre-money valuation and post-money valuation. Pre money valuation is where you currently put your company.Post153 money valuation is the value of the company after the series A investment.The post money valuation is the one usually referred in negotiations.The series A investment divided by the post-money valuation is the investors share in startup(imagine your company had 100 million pre valuation and VCs invested 25 million to it,your post value became 125 million.Now164 the 25 million investment amounts to the 20% share in the company which is now valued at 125 million).Investors usually negotiates for low post money to keep a larger share.

Now imagining the about the company we mentioned above,if we manage to lure 1.5 million at a post money valuation of 6 million,the share we have to give for them will be the 25 % share.We have to dilute the share,after the series A investment ,the cumulative share of the three of us will be the 75% share and the rest share is issued by the company,like federal banks issuing currency to be given to the new investors.Our shares are diluted proportionately.But how many shares must be issued?our 100k shares amount to 75%,so by simple math 25% is roughly 33k shares,so the total amount of share becomes 133k.Now166,1.5 million dollars invested  by the VCs and angel investors for the 33k shares put the share value of the company at 45 rupees per share.So139 one founder now holds 40k*45 which is 1.8 million.This issuance of new shares is called Capital rise.Now149 the investment go for Series A,Series B,Series C etc.,Most of the time the founders stocks are diluted unlike Facebook where Zuckerberg tricked Eduardo Savarin to dilute his shares instead of his or Sean Parkers'.Shares can also be split so the number of stocks may not remain,it can be doubled or tripled along with others stock the same always and this can cause effect when the company is put on stock market.

Now the exit can be in two ways,sell them to big companies like flipkart or put them on stock market like infosys. Selling to big companies will make you stay at the company for further development of company,the big companies will provide the shares equivalent to the share the founders have on the company and the other investors usually sell their shares off.This is called share vesting.Going for IPO puts the company on stock market for the public to buy and the sell the stock .

This is a simple explanation about the funding dealing only with the essential concepts with an aim to understand.