How to Raise Funds for Startup in India – Why is funding required?

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How to Raise Funds for Startup in India – Start-ups are popular and increasing worldwide. Many start-ups have become established brands with wide operations. However, it takes huge efforts and planning to launch and grow a start-up. One of the most challenging steps for most entrepreneurs is to raise funding. There are various methods available for funding a start-up, but they can only be available if the team-credentials, idea and business plan are attractive for investors. Therefore, it is essential to plan every step of the start-up to avail the best opportunities.how to raise funds for startup in india

How to Raise Funds for Startup in India – how to raise funds for business in india

Why is funding required?

A start-up requires funding for:

1- Prototype and Product Development

The fabled one-meeting funding rounds based on the entrepreneur’s credentials and his idea are far and wide. Mostly, a start-up requires the creation of a working model or a prototype. The entrepreneur has to go through different stages of trial and error to create a realistic prototype. Once the prototype is developed, the next thing may be to create the next-level of the prototype or in many cases the final product. Hence, funding is required at this stage to procure the necessary inputs for the business so that the next step can be taken.

2- Working Capital

Once the product is developed, basic teams hired, the entrepreneur requires funds for the working capital. Working capital is the day-to-day expenses required in a business. It includes maintaining a cash flow for payments, rents, inventory, etc.

3- Registration and Legal Fees

There are various legal requirements for a start-up. These include registration, licensing, insurance, taxes, etc. The entrepreneur would require money for covering these costs.

4- Machinery, Equipment, Hardware, Software

Depending on the business model, the entrepreneur may need funds for purchasing and installing the required machinery and equipment for production. It is a big and essential expense of any start-up. If a start-up is service-based, it would require computers and software costs. Many businesses require heavy investments for Capital goods and need external funding.

5- Hiring

A high-skilled team is essential for a successful start-up. Hence, an entrepreneur will require funds to hire skilled professionals for their team. For service-based startups or those involving scientists and technicians, the upfront cost of launch can be substantial and hence require money for keeping the operations running

6- Office, Admin, and Marketing

The entrepreneur will require funds for renting or leasing office space, overhead costs, and marketing costs. Marketing and promoting the products and services is crucial for any business and one of the more difficult heads for which to raise money

Must Read:Start-up Now – Easy steps to launch – How to start a start-up?

How to Raise Funds for Startup in India

Steps of Funding

The funding for a start-up happens over different stages. The following stages state different types of funding required by start-ups:

1- Pre-Seed or Self-Financing

It is the first stage of a start-up when the entrepreneur is developing and testing his start-up idea. It is when the entrepreneur will work on the prototype and experiment with the product. During this stage, the entrepreneur works with savings and does not borrow any outside funds. They may borrow money from family or friends but rely mostly on their own funds. Nowadays, some HNI’s also invest at this stage.

2- Seed Capital

The next stage of a start-up is to develop products after successfully creating a prototype. The entrepreneur will require to reach out to people to invest in the business. These sources include incubators, loans, angel investors, and crowdfunding.

  • Incubators – Incubators are organizations that support and invest in start-ups. These include non-profit organizations like universities, research organizations, NGOs, etc. The incubators assist in launching a start-up and help with various formal procedures.
  • Bank Loans – Nowadays, various banks loans are available for new businesses. An entrepreneur can take a business loan or a machinery loan, depending on his requirement from a public or private bank.
  • Angel Investors – Some Angel investors invest in the seed stage of a start-up in exchange for equity in the business. Many a times, some angels may join hands if they all believe in the venture
  • Crowdfunding – Crowdfunding is an online fundraiser where an entrepreneur can raise funds. The funds may be in the form of donations or the entrepreneur can provide them with rewards like free products, discounts etc. , or as per the law of the land. In India, crowd-funding is not allowed.

How to Raise Funds for Startup in India

3- Venture Capital

Venture capital is funding carried out at different stages or series. These investments are professionally managed and are offered to only high-growth start-ups. The entrepreneur will be required to provide a detailed business plan. The venture capitalists would acquire a stake in the business and provide their resources and knowledge for the business growth. The funding may start with pre-series A, Series A and may go up to various stages (B, C, D, E, etc.) depending on the business model & requirements.

Must Read:Top Electric Vehicle Start-ups in India 

4- Initial Public Offering (IPO)

It is a stage when the entrepreneur opens his business for public investment. Only after the IPO, the business can be traded on a stock exchange. However, only those start-ups which have decent profits, huge consumer base and/or expecting high growth in the future go for this type of funding. It requires complex formalities and regulations to list for an IPO.

5- Later Stage or Exit Options

After successfully launching their business, entrepreneurs may sell their business or merge with large brands. They may also buyback from the venture capitalists to regain complete control of the business. It is an entrepreneur’s choice whether he wants to autonomously run the business or sell it for a huge profit.

How to Raise Funds for Startup in India

A start-up goes through various funding rounds during different stages. However, it must have an excellent business plan to attain the required funding and a successful business.

This article is meant only to demystify the subject of funding for the common people and entrepreneurs who are not well-versed with the modern way of business. This is by no means a conclusive article on the subject of funding and an entrepreneur would need sound advice from professionals to raise any funds. There are risks involved with all kinds of fund-raising, be it debt or equity, and one needs to be fully aware of the risks before going ahead.

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