What do you need to build a successful startup? Does having a great idea and a strong will to succeed suffice? What sets a successful startup apart from the rest? Although an innovative solution to a prevalent problem is fundamental for the success of any startup, there is more for a startup to thrive in today's world.
Every year over 305 million startups are created. Surprisingly, 20% of these startups run out of business in their first year (source: Business Employment Dynamics report). And it turns out that one of the most common reasons is the unavailability of funds.
Acquiring funds is crucial for the growth of a startup at any stage. Startups need capital at all stages from developing products and hiring talent to expand and reaching markets. New founders, unlike well-established companies, need to look for alternative sources of capital as they neither have access to stock markets nor do they have enough cash flow to take debts from traditional institutions. The startup ecosystem today has a number of funding options to facilitate the growth and development of startups.
THE STORY OF ZOHO
Zoho is a well-known name in the world of web-based business tools. But what is interesting about Zoho, is that it reached a valuation of $ 1 billion without a dime of external investment!
The founders started the company, then known as AdventNet Inc., from scratch, fully funded from their savings and later from the revenue it generated. This process of growing a company with minimal or zero investment from the outside is what we call bootstrapping. Bootstrapping means that the founders own 100% of their business, as opposed to external investments which place a certain share of the company in the investors’ hands. It also allows for greater flexibility and complete control over the direction that the startup would take.
“If VC funding is the fabled hare, then bootstrapping is the tortoise. It’s slow and steady, but it keeps on going…”
Aytekin Tank, Founder and CEO of Jotform
Although bootstrapping comes with a host of benefits and is considered extremely desirable in the early stages of a startup, not all startups are able to go about without external funding. More so is the case when it comes to deep tech startups, which spend most of their early years in R&D before taking it to the market and generating revenue. In such cases, startups look for external funding to accelerate their growth and meet their needs.
ANGELS OF INVESTMENT
A startup takes off, with a validated idea, and a market to it can provide value. But venture funds are still out of reach at this stage without a proof of concept. This is where angel funding comes in. It bridges the gap between venture capital funding and bootstrapping. Angel Investors are wealthy individuals who invest their own money in early-stage startups which pique their interest, even those with just an idea. In return, they obtain shares in the company. Along with the funding, angel investors also bring with them a large pool of business knowledge and experience. They provide startups with invaluable mentorship for development and growth and access to a huge network of investors and market opportunities.
The equity that angel investors look for in startups is high, about 20-30%, and the funding amount they provide is quite small. This is because hardly one in ten companies that angel invests in gives returns.
While investments from angels typically range from $25,000 to $100,000, startups could look for higher amounts, an average of $7 million, from venture capitalist firms. Venture capitalists are private equity investors, part of a venture capital firm, who provide funding to companies that show potential for growth, in exchange for equity in the company and typically exit as the revenue grows stronger and the profit margin widens.
FUNDING - A ONE TIME JACKPOT?
Contrary to what one may believe, startups don’t raise these funds in a lump sum. Rather they go through multiple rounds of funding, each with a specific goal, diluting their equity (or their ownership of the company) in each round. There is usually a six to nine months gap between each funding round, during which it achieves its set goals.
Let’s go over the most common funding rounds...
Series A($2 million to $15 million funds, with a valuation of $10 million to $15 million) In this round, startups look for funds to implement their big ideas and strategies for developing their business model.
Series B($7 million to $10 million funds, with a valuation of $30 million to $60 million) The startups participating in this round, are usually looking forward to expanding their product or service.
Series C (average of $26 million funds, with valuation $100 million to $120 million) Typically these startups are looking to expand their business beyond their home base to new markets.
Accelerators and incubators offer an avenue for startups to attain exponential growth. Along with funding, they also offer curated programs and mentorship. Some programs available to startups today are - Nirmaan incubator at IIT Madras Research Park for startups at the idea valuation stage, Surge by Sequoia Capital, Google’s startup accelerator program, and more.
Contemporary governments have come up with multiple schemes and policies to promote entrepreneurship in the country. In India, startups can receive financial help from the government through schemes like the Atal Innovation Mission, GoI’s flagship initiative to create and promote a culture of innovation and entrepreneurship all across the country.
In recent times, crowdfunding has been gaining popularity as a source of capital. Crowdfunding is when entrepreneurs pitch to a large pool of investors, in contrast to a few VCs, who give small amounts of money in return for goods or services. For example, pre-order of products or sale of items at a discount. There are multiple online platforms that facilitate crowdfunding across the world. Popular crowdfunding platforms in India include Kickstarter, Indiegogo, Start51, and GoFundMe among others.
Startups also have the opportunity to acquire funds by participating in competitions. Apart from the funds that these competitions reward, they could also help startups gain recognition and open windows to markets.
Investing in a startup is a risky endeavor that does not always guarantee profits. To put things in perspective, only 3 out of every 5,000,000 companies become unicorns. Over the years multiple funding methods have evolved to overcome the challenges. Although startups today can acquire funds more quickly from diverse options today than ever before, it is still a tricky task that requires great proficiency and competence.
No matter what challenges come across, the startup funding ecosystem will continue to evolve into something diverse!