How Startup Funding Works?

The unflagging – sometimes true and sometimes fake promises of easy, huge, and fast fundraisings to launch new business ideas has undoubtedly inspired numerous aspiring entrepreneurs to chase their dreams. Some blindly hurl their hats in the ring to try their luck while some pre-plan everything to grab more of their market shares and turn their visions into a reality.

However, for some industrialists, the gamble of providing or raising funds to startups for building businesses and achieving buzzworthy footholds in the market has itself become a business. And no need to say, it is a business of more profits than many other business ideas. Anyways, keeping that aside, let’s check out how to do funding work for startups and how complex and demanding it can be for a newbie.

How Does Funding Work For A Startup?

Before digging deep into the nits and grits of startup funding, we need to understand what “Funding” means. Well, funding refers to the capital money required to launch and run a new business. It is a financial investment that is done for a brand or business to develop products/services, manufacturing, sales and marketing, business expansion, office space setups, inventory, and everything else.

Startup funds mean the capital, taken for launching a new business or running a newly launched company. Funding is done from an individual or group of individuals to raise capital for new companies, which allows the business to run and grow. Funding is essential to operate and run a high-cost yet low-revenue business in its initial stages of development.

Funding a startup or investing in a new company means expecting or planning to retrieve a larger amount of profits from the same business in the long term. Considering the fund amount someone has given you or invested into your startup company, the investors also can make important business decisions that affect how your company operates and runs in the future. Undoubtedly, it can be risky sometimes too.

Types Of Startup Funding

  • Equity Financing: Equity financing means raising fund capital for your startup, by selling company shares.
  • Debt Financing: Debt Financing means your company will be borrowing money with the contract to pay it back on a specific date with interest.
  • Grants: Grants are the financial help, offered by the government to the alienee for launching and running the business.

Stages Of Startup Funding

Below are 8 phases that every startup goes through to get its funding:

Pre-Seeding Stage

This is the preliminary stage for setting up a startup. Make sure to assess and analyze a few of the crucial concerns at this stage, i.e.

  • Having a viable business idea
  • Checking the uniqueness of the idea
  • Assessing the expenses for the venture
  • Preparing the business model
  • Where & how to get started with the idea

Seed Funding / Ideation Stage

At this stage, your actual work will start as you will be working on your ideas. This stage needs smaller funding, which may be sourced from:

  • Bootstrapping
  • Friends & Family
  • Pitching Events
  • Business Plan Competitions & Challenges

These funds will be used for further market research, key hires, product development, and product marketing.

Seed Validation Stage

This is the stage, you need to prepare a prototype for yourself and validate its potentiality by trying it on potential customers, onboard members & mentors, and others. This step is known as conducting a ‘Proof of Concept (PoC)’. This is a stepping stone for your startup’s big market launch. The funding you can get at this stage can be sourced from:

  • Incubators
  • Government-Funded Loan Schemes
  • Angel Brokers / Investors
  • Crowd Funding

Series A Funding Stage

The Series A funding stage, also known as the Early Traction Phase marks the beginning of venture capitalist investment. You will be offering the shares of your company to the investors in exchange for capital. Common funding sources for this stage are:

  • Venture capital funds
  • NBFCs / Banks
  • Venture Debt Funds
  • TReDs

Series B Funding Stage

During all these three stages, startups will be experiencing market growth and increasing their revenues. It works for optimizing business, offsetting financial shortfalls, and investing in a stable blueprint for business growth. The common funding sources for this stage are:

  • VC Funds
  • Private Equity
  • Investment Companies

Series C, & D Funding Stage

Series C funding is required for accelerating the growth of the company. You can use these funds for developing new products, reaching new markets, or expanding globally, and buying underperforming companies from the same industry. Going beyond Series C means raising funds for new business opportunities and fixing unattended issues of Series C.

Mezzanine Financing & Bridge Loans Stage

A mezzanine loan is a hybrid of debt and equity funding, while a bridge loan is the short-term funding required for startups to removes their existing obligations. Startups can use these capitals to close the financial gap between their company and the IPO (Initial Public Offering).

IPO Stage

In this stage, startups will be listing down their names in the stock market for the first time. However, this process is quite lengthy and complicated. It also involves elaborated statutory formalities and thus funds for this stage can be a bit higher. Major funding sources for this stage are:

  • Angel investors
  • Venture Capital Funds
  • Private Equity Funds

Bootstrapping Your Startup To Success

Bootstrapping is one of the prime success mantras for many top-leading companies. Bootstrapping means launching, running, and growing your business with small-or-no outside investment or venture capital. It means investing your savings and in-house capital to operate and expand the business. Though it is not easy to do, in long run, bootstrapping is incredibly rewarding. All you need is risk tolerance, willpower, trust, self-regulation, and competitiveness.

For this reason, many smart startups choose to not raise funds from investors or any third parties. This also works great for preventing business debts and equity dilution. However, if you are aiming for a larger-scale business; smartly raise funding, following the tricks and stages mentioned above is advisable. It will keep your company rick-free, independently operating, and rewarding for the future too.