Startup funding: Understanding the investment process

Starting a business can be an exciting but challenging task, especially when it comes to securing funding. While some entrepreneurs might have enough capital to launch their businesses, most startups require various types of funding to get off the ground. This could include a business loan or startup funding from a bank.

Whether you are a first-time entrepreneur or a seasoned pro, understanding the various funding stages can help you navigate the complex world of startup funding and increase your chances of success. Here we will discuss the various aspects of startup funding, understand series A funding, series B funding and more, and how important these are for a startup's steady growth.

What is a startup?

A startup is a newly established business venture, typically driven by innovation and designed to rapidly grow and scale. Startups are often founded by entrepreneurs who seek to create unique products or services that meet the needs of an untapped market, usually with use of technology.

What is startup funding?

Startup funding is raising capital to finance the business's operations and growth. Startups require funding to cover their initial expenses, such as product development, marketing, and hiring. As the business grows, it may need additional finance to expand its operations and scale up.

Startup funding sources

Several sources of startup funding are available in India, including the following -

• A business loan

Banks or other financial institutions typically offer business loans and require the borrower to repay the loan with interest.

• Angel investors

These are high-net-worth individuals who invest in startups in exchange for company equity. Angel investors are experienced entrepreneurs who mentor and guide the startups they invest in.

• Venture capitalists

They are professional investors investing in startups with the potential for high growth. Venture capitalists typically invest at the seed or early stages.

• Crowdfunding

This is an entirely different type of funding. In this, investors raise capital by asking the public to contribute small amounts to a project or startup through an online crowdfunding platform.

Stages of startup funding

• Seed funding

The initial stage involves raising money from friends and family, angel investors, or crowdfunding platforms. The funds are used to develop a prototype, conduct market research, and build a minimum viable product (MVP).

• Series A funding

This is the first significant round of institutional funding and typically involves raising between $2 million to $15 million. Series A funding is used to scale the business, hire key employees, and expand into new markets.

• Series B funding

The second round of institutional funding is raised once the company has proven its viability in the market. This is Series B funding, it is used to scale the business further, acquire other companies, and invest in research and development. 

• Series C funding

After Series B funding, the next round of institutional funding is typically raised by companies experiencing rapid growth and are on the cusp of going public. The funds acquired during Series C funding are used to prepare for an initial public offering (IPO) or to continue scaling the business.

Exit options

As a startup grows and becomes successful, the founders and investors may decide to exit the business. There are several exit options available, including - 

• Mergers and acquisitions

These involve the sale of a startup to a larger company or a competitor. M&A is a common exit strategy for startups that have achieved a certain level of success and are looking to scale up their operations.

• IPOs (Initial Public Offerings)

These involve listing the company's shares on a stock exchange, allowing the public to invest in the company. IPOs can be an attractive exit strategy for startup owners that have reached a specific level of maturity and are looking to raise additional capital for growth.

• Share sales or buybacks

It involves the sale of the shares held by the founders or investors to another party, such as a private equity firm. This strategy is often used by startups that want to maintain control over their operations while realising their gains.

Conclusion

Startup funding is essential to commencing and growing a new business in India. Since most startups seek startup funding, it pays to understand everything about it to manage expectations and plan accordingly. 

IDFC FIRST Bank supports startups, regardless of their size or industry, through their FIRST WINGS Startup Banking Program. The program is designed to provide curated offerings to startups in their success journey. To learn more about this program, click here.

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