An entrepreneur has to deal with several essential aspects of the start-up, to turn it into a successful one. An idea alone cannot make it lucrative; it demands equal focus on other facets too. The hiring of people, building space, marketing campaigns, company launches and many more areas need attention to give a better start to business. And one fuel that is a common component to get it going seamlessly is, of course, money.
Money or funds, as is called in business terms, is the crucial factor for any start-up. Adequate funds can take the start-up to the direction we want, whereas inadequacy of the same compels us to make adjustments at every step. It snatches away the liberty of executing the plan the way we wanted it to happen. Data shows that most of the start-ups close down in the want of funds. It is thus essential to have comprehensive knowledge about funds – its need and how to raise it? This article covers all fund-related issues that an entrepreneur should know.
When an entrepreneur uses his savings and wealth and the existing resources to start his business, it is known as bootstrapping.
Bootstrapping is effective till a certain point, for scaling up the business; one should have the idea of how to raise funds.
Why do Start-ups Raise Funds?
There are several areas in business that demand funds, and we can’t ignore them. We can categorize them into four major areas that require funding.
- Physical Environment
Building a workplace with an appropriate physical environment is a necessity. It demands set-ups and related devices, equipment to maintain a good work environment. It ultimately requires funds.
- Man Power
Recruiting skilled people and building an efficient team for apt functioning of the system again demand funds.
- Intellectual System
Areas like branding, patenting, marketing, partnerships, technical experiences etc., come under the Intellectual system. It requires a good amount of funds.
- Financial System
Purchasing raw material need cash in hand. Cash flow is essential for bank formalities too. So funds are in demand for the running of the financial system.
- Other Factors
Apart from the above four areas, there are other unavoidable factors too for which funds are needed. From scaling up the business to expanding business connections, for everything, we require money. It also bestows us with financial flexibility and freedom of taking decisions.
Requisites for the Process of Fund-Raising
- Understand the Fund requirement – How much fun we have and how more is required.
- Documents – Preparation of essential documents required to demand funds.
- Eligibility – Check our business plan for its eligibility to raise funds.
- Investors – Next are to search for the investors who show interest in our business plan and get ready to invest.
- Apply – Once done with the previous steps, apply for fundraising.
Reality Check – before applying for funds
- Make sure that all the figures of expenses are from reliable sources.
- Be sure that you need external funding. If generated revenue and profit margins are more than expenses, then we may not need it actually.
- Double-check the expenses mentioned in the application. Do not fill it with assumption based figures as it makes the wrong impact on the investors.
Eligibility Check – for fundraising
- Registered company with at least two co-founders.
- Base (idea) of a start-up is appealing or not.
- Business modal is profitable or not.
- Sales prospect in the market of the business proposal.
- Product is beneficial for the customers or not.
- How the company and products are distinct from its competitors.
- Plan for handling market competition
- Skilled and efficient team ready to work with passion and dedication.
- Paying capacity of the customers.
- Retain graph of customers and do they refer others too.
- Social media reviews and ratings of the product.
- Use of latest technology.
- Legal documentation.
- Valuation of company.
These are the eligibility checkpoints to be marked before applying for the funds.
Types of Investors
- Family and Friends – They are the first ones to invest and support the start-up.
- Angel Investors – Individual investors who provide financial support to small start-ups in exchange for ownership equity.
- Venture Capitalists – Organisations that provide capital to small start-ups having high-growth potential in exchange for an equity stake.
- Private Equity – Firms that provide equity in exchange for a share of company ownership.
- Government and NGO – Help or aid provided to start-ups, fulfilling the criteria of government schemes.
Categories of External Funding
– Debts – A type of loan to be paid with fixed interest.
– Equity – A financial aid in the exchange of a share of the company’s ownership.
– Grants – Funding by Government or NGO.
Sources of Cash in a Start-up
– Co-founders – They invest in the start-up.
– Revenue – Generated by the business.
– External Funding – by investors.
Documents Required for External Funding
Pre-requirements are – Pitch deck, Financial projection, Wireframes, Company valuation, Capitalization table.
Post-requirements are – Term sheet, Shareholder’s Agreement Allotment Letter, Share Certificate.
Stages of Start-up for Fundraising
- Conceptual stage – when the only concept is ready. It is generally less.
- Product stage – Depending on the product and its market demand, the fund is released.
- Early Traction – Interest that customers are showing for the product, funds are given based on that.
- Growth stage – At this stage funds received depend on the revenue generated.
Search for Investors
Investors, can be searched through references, social media, websites, statutory filings and angel networking.
How does Fund Raising Help?
It helps us in marketing, getting customers and generating brand awareness among people. It also makes us stress-free and gives us the freedom of taking decisions for growth and expansion.