Overview of Funding in Startups

TaxBlock | Jan 14, 2022 | Views 34711

Overview of Funding in Startups

Overview of funding in startups

Funding is an extremely important consideration for meeting the preliminary expenses for start-ups at initial stage. The first round of funding, popularly known as seed funding forms the basis of the start-up fundraising.  The series funding helps in the evolvement of a start-up  from a very basic stage to a full-fledged organization.


Start-up business needs the support of finance to explore and grow.

The funding done at the growing stage is called seed funding and the capital is known as a seed capital.

Financing is generally of two types

  • Equity Financing

Start-ups are usually equity financed/funded by way of a venture capital/ private equity investors and/or angel investors.

  • Venture Capitalist/Private Equity

Venture capital /Private Equity is often the first large investment a start-up can expect to receive.

Convertible instruments are given in preference option and most commonly used securities for VC/PE investment which includes compulsory convertible preference shares and compulsory convertible debentures.

  • Angel Investors

Angel investors are normally individuals or a professionals group of industry who wants to fund the venture in return for an equity stake.

  1. Bridge Round
  2. Series Funding 

Structure of Series Funding

Series A round:

Once a business has developed established a  user base in the market, gained reputation or established a constant revenue model , that company may look for Series A funding in order to increase its user base and develop its operation in the market.

Why is Series-A funding so elusive?

The first time that a start-ups raises capital is normally called a ‘seed round’.

Other names include angel round or HNI round. 

Series B funding:

Series B rounds are all about taking businesses to the next level, This series of funding help the business  get there by expanding market reach. Companies that have gone through seed and Series A funding rounds have already developed  a reputation in the market  and have proven to investors that they are prepared for further funding . Series B funding is used to growth of  the company.

Series C funding and so on:

Businesses that make it to Series C and so on funding sessions are already successful. These funding help them develop new products, expand into new markets, or even to acquire other companies. Investors inject capital to receive more than double of  that amount invested by them. 

Things to be considered while raising series Funding:

  1. Be series A ready;
  2. Start early;
  3. Leverage your Network;
  4. Practice your ‘Pitch’;
  5. Create a fundraise Momentum;
  6. Know the standard market practices;
  7. Get the deal terms right;
  8. Engage a company secretory;
  9. Paperwork in place Do the Due Diligence;
  10. Raise 10-15% more than what is budgeted for;

Debt Financing:

  • Loan from Banks & NBFCs

Loans from banks and Non-Banking Finance Companies help finance the purchase of inventory and equipment, besides securing operating capital and funds for expansion.

Comparatively over other findings , which have an equity stake in the business, banks do not expect ownership in your venture.

  • External Commercial Borrowings

External Commercial Borrowings (ECB) in form of bank loans, buyers’ credit, suppliers’ credit, and securitized instruments can also be availed from non-resident lenders to fund the business requirement of a company.

The Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Trust for Micro and Small Enterprises scheme to encourage entrepreneurs, one can get loans of up to 1 crore even without the collateral or surety.

  • Once the start-ups achieves stable revenue flows from the market , it may consider an initial public offering (IPO) to raise the funds or increase the magnitude of the business operations:

During the IPO, the Company issues its shares or securities in the recognized stock exchange. An IPO allows a company to attract a large number of market investors to for large volumes of capital leading to future growths.

Unconventional modes of Finance

  • Crowd Funding

In recent time, being practiced for getting seed funding through small amounts collected from a large number of crowd, usually through the Internet.

The entrepreneur can get money for his venture by showing his idea before a large group of people and trying to convince people of its utility and success.

  • Incubators

These set-ups precede the seed funding stage and help the entrepreneur develop a business idea or make a prototype by providing resources and services in exchange for an equity stake and the span is from 2-10%.

The incubation period can be 2 to 3 years and admission is accurate.

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