Startups and Funding
- Siya Heda
- Jul 5, 2022
- 3 min read
With the recent boom of startups in India, terms such as Series A funding or Equity funding get thrown around very often. Adding the popularity of Shark Tank India, where though some business terms are explained, we are often left perplexed at the terms used while the businesses talk about their earlier funding.
So, let’s take a look at how startups in India receive funding.
Forms of Funding
A startup can raise capital from any of the following persons/institutions:
Bootstrapping or personal savings
Friends and family
Venture capital
Angel investors
Banks
Crowdfunding
Accelerators
Series funding
Types of Funding
There are three main types of funding, namely equity financing, debt financing, and grants.
Equity Financing
Equity financing refers to giving a part of your company as equity to an investor in exchange for capital. Here the investors often involve themselves in the decision-making of the company, as the stronger the company is, the better their returns. There is no repayment commitment here.
Debt Financing
Debt financing refers to the borrowing of money and repaying it with interest within a specific time period. The financers have little involvement in the business itself. A business asset may be needed to be provided as collateral and repayment with interest must be done usually in set installments, within the agreed-upon time period.
Grants
A grant is an award, usually financial, given by an entity to a company to facilitate a goal or incentivize performance. This requires no repayment but does sometimes have stipulated conditions on how the funds can be utilized. The grant giver has little involvement in the company itself.
Typically, business owners go for equity financing.
Series of Fundings
There are typically seven stages or series of equity financing for a startup – Pre-Seed Funding, Seed Funding, Series A, Series B, Series C, Series D, and Series E.
Pre-Seed Funding
Pre-seed funding is the earliest stage of funding.
At this stage, founders are working with a very small team, or by themselves and are developing a prototype or proof-of-concept of the business idea (sometimes called ideation). This money typically comes from the founders themselves, their families, friends and family, and maybe an angel investor or an incubator.
Not every company does this.
Seed Funding
This is typically the first round of funding undertaken by the founders.
Seed funding is used to take a startup from idea to the first steps, such as product development or market research. Seed funding may be raised from family and friends, angel investors, incubators, and venture capital firms that focus on early-stage startups.
This funding helps the business grow, like a seed grows into a tree, hence the name.
Series A
After the seed stage, the company moves on to raise funds from a Series A funding round. The company needs to have some sort of proof of concept or traction at this stage.
In a Series A round, startups are expected to have a plan for developing a business model, even if they haven’t proven it yet. They’re also expected to use the money raised to increase revenue.
Series B
The startup is ready to take on a Series B funding round upon finding a product-market fit and it requires expansion.
This money is used to hire more professionals and gain more customers.
Series C
This series is lifted to fund expansion to new markets, acquisition of other businesses, or develop new products.
Commonly, Series C companies are looking to take their product out of their home country and reach an international market. They may also be looking to increase their valuation before going for an Initial Public Offering (IPO) or an acquisition.
Series C is often the last round that a company raises, although some do go on to raise Series D and even Series E round — or beyond.
Series D
There are two reasons a company may seek a Series D funding round.
First, they need just one more boost before going for an IPO, either to increase their valuation or to remain private for a little longer.
Second, the company isn’t doing as well and needs more funds to sustain itself. This is called a “down round,” and it’s when a company raises money at a lower valuation than it raised in its previous round.
Series E
If few companies make it to Series D, even fewer make it to a Series E.
Companies that reach this point may be raising for many of the reasons listed in the Series D round: They’ve failed to meet expectations; they want to stay private longer, or they need a little more help before going public.
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