A startup begins with a brilliant, unique business idea. The transition from a mere idea to a sustainable business requires adequate funding. To further emphasize the importance of funding, let’s quote-unquote the words of the famous venture capitalist Richard Harroch. ‘It’s almost always harder than your expectations to raise the capital, and it takes longer. So, plan for that.’ This planning is crucial for the survival of the business. As per the reports of the IBM institute, 90 percent of startups fail within the first five years. One of the major reasons is money running out.
After deciding to kick-start the business idea, the first hurdle is to estimate the amount needed. Then comes the crucial questions of how, when, and where. This helps in choosing the best funding options for the business. It is hence crucial to know the different practical ways to get the funding for your business idea. A sneak-peak into the list:
- Tapping the known external sources
- Government schemes
- Bank loans
- Loans from NBFCs and MFIs
- Angel investors
- Venture Capitalists
- Incubators and Accelerators
To put it in simple terms, bootstrapping is nothing but self-financing your business idea. Since a bootstrapped business is not using outside resources, it will have a lean starting. The path to success of a bootstrapped company is dependent on personal savings, sweat equity, operational revenue, etc. The reasons why entrepreneurs opt for bootstrapping are many. A newbie entrepreneur may find it difficult to promote their idea in a skillful manner. It can also be the lack of knowledge regarding the funding options or the lack of interest to pursue an investor.
The major advantage of bootstrapping is the freedom of control over the business. While the major disadvantage is the financial risk the entrepreneurs take upon themselves. The online financial services company, Zerodha, is an example of a successful bootstrapped Indian company. The world-famous company GoPro is another successful example.
Tapping the known external sources- friends and family
Here, parents, siblings, or friends play the role of investors. The major advantages of this funding are- the cost of interest is nil or almost negligible and repayment time will be more. In return, the entrepreneur can give them equity in the business. Investors and bankers dub it ‘love money’ or ‘patient capital.’ There are emotional risks attached to this funding. Money should never cause a problem in relationships. The seriousness given to this funding must be like a box of glassware with the tag ‘handle with care.’
The government of India and many state governments have come up with schemes to enhance the startup ecosystem in India. It caters to different categories of entrepreneurs like the educated youth, women, etc. The Pradhan Mantri Mudra Yojana (PMMY) provides low-interest loans up to Rs 10 lakhs via the MUDRA scheme through Micro Units Development and Refinance Agency (MUDRA) Bank. Startup India Initiative is yet another scheme with many tax benefits and concessions. There are others, like the ATAL Innovation Mission, Multiplier Grant Scheme, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), etc to support the entrepreneurs of India.
There are many incubators and accelerators promoted by many state governments too to aid the growth and sustenance of startups.
The public and private sector banks also provide business loans for startups. There will be variations in the interest rate, amount, etc. from bank to bank. The banks provide business loans mainly as a line of credit and equipment financing. A-Line of credit is like having a credit card tied to the business. As the name suggests, in equipment financing, they pledge the equipment as collateral.
Loans from NBFCs and MFIs
According to an article published in Business Standard in August 2021, the gross loan portfolios of Non-Banking Finance Corporations and Micro Finance Institutions are likely to grow 10- 15 percent in the current fiscal year. The growth trend is because of the revival of economic activities which were setbacks with the onset of the pandemic. The interest rate is slightly higher than the PSU Banks.
Angel investors are private wealthy individuals who invest in a business idea that they find promising in the future. They fund the business for a 10 to 50 percent ownership in equity. Though they are flexible regarding the amount and the return on investment when they see potential, they will put the pressure to set a higher standard. The angel investors not only put in money but their expertise as well. They handhold the startup in the path of success. So, the success rate of startups with angel investors is high.
It is but natural for angel investors to be called business angels or informal investors or seed investors.
Venture capitalists, too, invest in a promising business idea or startup or a matured business in return for a certain percentage of stakes or annual fee. This sounds similar to angel investors, but they are actually not. While angel investors are individuals, venture capitalists are firms with a higher amount to invest in the business. Since their investment is huge, the return on investment expected will also be higher.
Venture Capitalists do not take up the role of mentors. They usually demand a seat on the board of directors and exercise a certain amount of control over the business. When a potential business idea requires a bulk amount to kick-start, venture capitalist funding is definitely a practical possibility.
Incubators and Accelerators
The success rate of a startup is really low. There may be many reasons for the failure, prominent among them being lack of experience, innovation, and money. Even if the idea is brilliant, it needs the right exposure and planning for it to go forward. It will do the startups good if they are handheld during the process. This is what incubators and accelerators do.
Startup incubators screen and pick potential business ideas and help them with workspace, mentoring, and seed funding. The incubators may not always provide the funding, but they will help connect the startup with the correct investor.
Accelerators help in the business’s growth. There is a tight screening to be eligible for the accelerator program. They help with mentoring, training, seed funding for a fixed duration of time. The focus is to speed up the growth of the business.
Over to You
From the inception of the business idea to building up the business, there is a lot of planning and advice needed. It is difficult to see the half glass full because the failure rate of startups is sky-high. Diligen has always been a catalyst in the growth of upcoming businesses by guiding them with timely and apt advice and services.