Finance is the lifeblood of business. Every business requires funds for day-to-day operations and to invest. For a startup, finance is more important, as the business has to develop from scratch.

But it doesn't mean that you can issue shares to the public when you have just planned your startup. That is why you should raise funds appropriately as your startup progresses through different stages.

Here, you will understand the apt ways to arrange funds for your startup at various stages. Let's start with the ideation stage. 

Ideation Stage

It is the first stage of launching your startup. Here, the startup is an idea in the mind of an entrepreneur. So, the investment required is small. But the formal funding is not available. That is why he has to arrange funds from the following sources:

  1. Bootstrapping: It means self-financing the startup. When the startup is an idea, nobody is willing to provide funds for your startup. That is why the entrepreneur has to arrange for the initial funds through prior savings.

There is no burden of repayment or interest. Also, it does not dilute the ownership of the venture. But every entrepreneur doesn't have adequate savings. If that is the case, Private Equity or Venture Capitalists wouldn't exist.

  1. Friends and Family: After exhausting the savings, an entrepreneur relies on his friends and family for funds. Generally, the funds can be arranged for a long time at nominal or no interest because there is trust and relation between the investor and the entrepreneur.
  2. Business Plan Events: Nowadays, the public attitude towards startups has changed. Business Incubators have tied up with educational institutes to promote entrepreneurship. Educational institutions and organizations organize many business plan competitions.

Attending business plan events provides an opportunity for the entrepreneur to receive feedback about his project. He can also network with like-minded people. What's more, the cash prizes are also hefty. Winning the competitions may help you to finance your startup at an early stage.

Next time you get an opportunity to participate in a B-Plan event, you shouldn't miss it.

Validation Stage

After the initial prototype gets developed, the startup comes to the validation stage. Here, trials and tests are conducted to evaluate the product. Here, the entrepreneur switches from being a one-man army to a team leader. He hires a team to carry out various functions like research, product development, etc.

Following sources are there to arrange funds:

  1. Angel Investors: As the name suggests, they are no less than angels for entrepreneurs. Angel investors invest in startups having high future potential. They are the high-net-worth individuals who invest in exchange for equity in the company.
  2. Business Incubators: Just like angel investors, business incubators are organizations that provide funding to entrepreneurs. Besides funding, they may also give other facilities like office premises, consultancy services, etc. In short, they are a corporate form of angel investors.
  3. Government Schemes: The government has taken many initiatives to promote entrepreneurship, as they prefer making people job creators instead of job seekers. Such initiatives include providing subsidies, collateral-free loans at nominal interest, etc.
  4. Crowdfunding: In the validation stage, the product gets tested on a few customers, and the feedback is evaluated. If they like the product, why not make them an investor as well?

And crowdfunding is just the way to do that. As you may have guessed, crowdfunding means funding taken from the public in small amounts. After all, unity is strength.

Series A Stage

After the trials are successful, the startup launches the product. At this stage, the focus is to expand the customer base. Following sources are there to finance your startup:

  1. Venture Capital (VC) Firms: They are investment funds that invest in high-growth startups. VC manages each fund professionally. And they have a preferred sector and the investment amount that depends on the risk appetite of the investors. In short, you can consider it a mutual fund investing in startups.
  2. Venture Debt Funds: Like Venture Capital Funds, they invest in high-potential startups. The only difference is that Venture Debt Funds invest in debt instruments. While VCs invest in the equity of the startup.
  3. Banks and NBFCs: At this stage, the startup has already advanced to a certain level. That is why banks and NBFCs don't hesitate to provide loans if they find the business model to be sustainable.

But they may charge a higher interest rate, owing to the risk involved. That is why entrepreneurs prefer other sources of funds.

Series B Stage

After the customer base expands, the startup experiences massive growth in terms of revenue. But the profits may tell a different story. Why, you ask? Well, it is no secret that even the unicorns like Zomato, Paytm, and many more haven't shown a positive figure in the bottom line yet.

Anyways, startups require funds even if they face losses. At this stage, the entrepreneurs can raise funds through huge Venture Capital funds and Private Equity funds.

Exit Stage

After the startup has grown adequately, the promoter or the investors may want to sell or reduce their stake. So, they plan the exit stage through the following methods.

  1. Mergers and Acquisitions (M&A): It is one of the simplest exit options available to the stakeholders. Here, the startup gets acquired by another company. You can also sell your startup to a friendly individual to cash out your returns.
  2. Initial Public Offering (IPO): While M&A may seem to be the easiest option, the Initial Public Offering method is the most attractive exit option recently. 2021 saw more than 60 IPOs in just a year. And most of them were a success. Pretty fantastic, isn't it?
  3. Make it a cash cow: In case you don't know, cash cows are the business that can generate cash without requiring much investment.

If your startup has become stable and generates adequate revenue, you can make it your cash cow. This way, you can get cash without much effort. What's more, you can invest the earned revenues for initiating other startups, leading to a network of startups.

  1. Liquidation: If you think that you have enough adventures in your entrepreneurial life, there is always an option to leave everything and relax. And that is what liquidation is.

Summary

We hope you have learned the different sources to raise funds for your startup. It is better to select the apt method while raising funds at a specific stage. Else your startup may fail to arrange funds appropriately. In extreme cases, it may even lead to the shutting down of your dream startup.

So, don't forget to make your decision after proper analysis.

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