How to Raise Funds for Startup Business in India
Introduction
Funding is needed to start a business organization and ramp it up to profitability. If you are ready to get your startup company off the ground and turn a concept or vision into reality, you need that crucial business propeller: financing or capital. The main question is: how do you get access to capital investment to grow your business? Wondering how to raise funds for startup business in India?
You will be pleased to know that there are many funding sources to consider when looking for seed funding or start-up financing, such as business loans and venture capitalists. While there are many avenues for startup fundraising and financing, you should approach this matter with an informed and strategic mindset to engage long-term investors.
You should do your homework before approaching potential investors, including angel investors. For example, you need to determine how much capital you need and when you’ll need it. In this article, we are going to look at how to raise funds for a startup business in India.
Business and Financial Needs
The financial needs and requirements of a business vary according to its size and type. For instance, food processing businesses are often capital-intensive and need large amounts of capital. On the other hand, retail businesses tend to require less capital. Keep in mind that investors and venture capital firms are always looking for the next great opportunity. Also, banks and other financial institutions, such as credit unions, are available to finance startups and business ventures that meet their criteria.
This means that if you run or own an innovative startup firm with one or more business ideas and the potential for success, you’ve a myriad of fundraising opportunities, such as business incubators and government schemes, at your disposal.
However, the trick is to know and understand which of these funding options, whether for working capital or long-term financing needs, is best for your specific situation and what is required to secure the business funding you need.
Did you know that equity and debt financing are the two major sources of start-up financing in India? Government grants and programs to finance certain aspects of your business can be an option as well. Also, financial incentives may be available to locate in particular communities or encourage business activities in certain industries.
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Startup Costs
If you are wondering how to raise funds for a startup business in India, then one of the first questions that you need to answer is about your startup costs. Regardless of the nature and size of your startup company, the first and most important step is to understand how much money you will require to get off the ground. Remember that this exercise is important for startup founders and entrepreneurs, both as a way to understand and appreciate the financial realities and complexities of their new business and also because to raise funds for your startup, you will have to know how much capital your business needs on the very first day as well as after three months or two years.
According to a study, more than 90% of new businesses or startups fail during the first year of operation. You should know that lack of funding is one of the common reasons behind this. Money is the bloodline for any business venture.
Note that at almost every stage or phase of the business, entrepreneurs and business owners find themselves asking – How do I fund my startup? This is why you must be familiar with the numbers. The quickest and easiest way to scare off an investor or a commercial bank loan officer in India is by not being familiar with your own numbers.
It is worth noting that every business venture has different startup capital requirements. For instance, a conventional brick-and-mortar operation may have inventory, licensing, and insurance costs that an online startup company may not.
Business Ideas and Options to Fund your Startup
Bootstrap Your Business
It is the wish of every founder or business owner to have 100 percent ownership of a business. You can achieve this with bootstrapping. Bootstrapping is the practice of self-financing your business. Bootstrapping is the process of starting a company or business from scratch without using any external funding, such as debt financing or venture capital.
However, without the right business connections and networks, you may find it tough to raise funding for your startup.
However, as a first-time entrepreneur, you should invest your savings to show investors and the government that you are seriously interested in the venture. To increase your odds of success, you should make sure there is low cash flow burning, also known as burn rate. And because there are no loans and debt repayment obligations, you can enjoy more flexibility.
In the later phases of business, you may opt for business loans, such as equipment loans. Also, lenders and banks will not have a good reason to deny it, since they will consider the stability of your business, and deem it less risky.
Friends and Relatives
As a founder of a start-up business, you may also look to various private financing sources for your business, such as your parents and friends. This funding can be in the form of equity financing where the friend or close relative receives an ownership interest in your business.
You will be pleased to know that there are many success stories surrounding this option as a formidable and feasible funding opportunity.
However, remember that you are dealing with other people’s hard-earned money once you get these funds, and you’ve a responsibility to handle their funds carefully. You must avoid dangerous spending temptations and careless spending, ensuring that you do not squander the funds entrusted to you.
Also, these business investments should be made with the same professionalism and formality that would be used with external investors, such as banks.
Your friends and family will also like to be apprised of the startup company’s progress and receive frequent financial reporting, including financial statements, so be ready to deliver this transparency.
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Angel Investors
The business world is graced by many high-net-worth individuals and wealthy people with “wings on their backs.” Yes, we are talking about angel investors. These investors are crucial for startups and have the means and resources to provide start-up capital in exchange for ownership equity or convertible debt. You can make the most of this resource if your financial situation necessitates it.
Angel investors, also known as business angels, are individuals and businesses that help small businesses in India survive and grow by providing capital. As a result, their objective might be more than merely focusing on economic returns.
While many angel investors usually have a mission-oriented focus, some are still interested in security and profitability for their investments. This is why they may still make some of the same demands as commercial banks and venture capitalists. With a strong business plan and concept, and a solid pitch, you may secure a considerable amount in start-up funds from angel investors.
However, it is worth noting that angel investors may focus more on earlier-stage business financing and smaller financing amounts compared to venture capital firms.
One of the best ways to contact an angel investor is via a shared connection, such as a colleague or close friend. However, if you don’t have any angel investors in your personal network, you will have to rely on other methods of financing. Also, keep in mind that some angel investors like to remain anonymous, making it particularly challenging and tricky to identify them.
To find the best investor for your startup, consult local angel networks, and sift through reputable and established online resources.
Venture Capital
One of the top sources of raising capital if you are wondering how to raise funds for startup business in India, is venture capital. Venture capital means financing and loans that come from individuals or firms in the business of investing funds in young, privately held businesses. These firms and individuals provide capital to early-stage companies and startup businesses in exchange for an ownership stake in the business.
Not surprisingly, many venture capitalists seek investment opportunities in industries with the most efficient returns. This is because they accrue financial compensation in the form of a high percentage – typically around 20%. Some VCs are professionals in specific industries and sectors, such as the healthcare field or the technology arena.
It is worth mentioning that venture capital firms generally don’t want to take part in the initial financing rounds of a business unless the company’s management has a proven track record. In most cases, they prefer to invest in startup companies and business ventures that have received considerable equity investments from their founders and are already stable and profitable.
The best thing about partnering with venture capital firms is that they usually bring a great deal of experience and knowledge to the table, providing business capital, expertise, experience, and valuable industry connections.
Venture capital firms and investors also prefer businesses with a competitive advantage, such as a unique idea, or a strong value proposition in the form of a proven demand for the product, a patent, or a very special idea.
Incubation Programs
You may know that business incubators and accelerators have sprung up all across the nation, especially near colleges and universities with strong business management programs. Some of these spaces and facilities are part communal workspace and part mentorship development centers.
Many government institutions as well as private organizations in India run incubation programs that offer mentoring, networking opportunities, and affordable seed funding for startup companies. Young businesses and companies can get an excellent start here while partnering with visionary and amazing people.
In India, several state governments, social enterprises, and educational institutes provide incubation support to startup companies across fields such as technology, agriculture, and financial inclusion. If you’ve a new and unique solution to an old problem and a persuasive pitch deck, many incubation programs may like to support you.
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Crowdfunding
Do you have a novel idea and are great at social media? If so, crowdfunding may be an option to find funding for your business. When websites, such as Kickstarter and Indiegogo started, there were many businesses and startups that had great success securing funding through their immense reach.
If you’ve a highly effective and creative plan of providing affordable and effective healthcare services in rural India, have a startup idea, and think that people will resonate with your vision, there is no doubt that debt-based or rewards-based crowdfunding are excellent ways to fund your company.
The downside is that many companies aim for crowdfunding. As a result, you will have to generate plenty of buzz and excitement to stand apart from others.
Banks and Commercial Lenders
In India, banks, credit unions, and other commercial lenders and financial institutions are popular sources of startup financing. However, most lenders and banks require a solid and comprehensive business plan, collateral, and a positive track record. In some cases, these are hard to come by for a start-up.
However, once your business is operational and profit and loss statements, balance sheet, and cash flow budgets, are provided, your company may be able to borrow more funds from the bank.
These banks and commercial lenders provide two main kinds of financing for startups in India. The first is a working capital loan, and the second is long-term funding. You should know that working capital is the loan needed to run a single full cycle of revenue-generating operations.
You will be happy to know that almost every bank in India provides SME finance through various loan schemes and programs. For example, leading Indian banks, such as HDFC, Bank Of Baroda, and ICICI have over eight different options offering collateral-free business loans, which is impressive.
Business Loans from Microfinance Providers and NBFCs
What can you do when you cannot qualify for a conventional bank loan? Don’t worry as there is still an option. Microfinance provides access to financial services and loans at suitable interest rates to people who don’t have access to traditional banking services and products. This financing method is increasingly becoming popular for individuals with limited requirements.
Similarly, Non-Banking Financial Corporations (NBFCs) are corporations that offer banking services and loans without meeting the strict legal requirements of a bank. They are ideal for first-time entrepreneurs.
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What to do Before Starting Fundraising
If you believe you are ready to begin fundraising, you should take these steps and follow these tips to set yourself up for success and growth:
Talk to Fellow Business Founders
You should consider reaching out to other business founders who have had success securing capital and reaching their milestones on time. You can ask them what lessons they learned from their raise as well as what they would do differently if they could.
Gather Data
It is important that you’ve the right metrics and KPIs to back up your startup company’s growth, cash flow, and profit potential. You have to show investors why it is beneficial to invest in your company.
Get Advice from Your Business Attorney
Your startup attorney or lawyer may offer guidance and support on what you have to do logistically to prepare for fundraising. For example, you may need to firm up your business idea from a legal standpoint, apply for patents or cross-reference your products or services with competitors.
Prepare Your Pitch
You have to build a compelling and persuasive pitch deck before you can start fundraising. This pitch deck should explain who you are, what problem your startup is solving, and why investors and banks should care.
Target Suitable Investors
Not all investors are alike. To increase your chances of securing funding for your business, you should target investors who have experience and expertise investing in your industry.
Tell a Good and Compelling Story
Investors like to be romanced. Also, they need to feel compelled and persuaded to believe in your business. If they fail to connect with you or your idea, they will not invest in your venture. This is why your pitch presentation should draw people into a unique and compelling story.
Final Thoughts
If you are thinking about how to raise funds for startup business in India, then you need to think about raising the right amount of capital. Capital is a key resource for any business to survive and thrive. If you would like to grow really fast, you will probably need external sources of capital, such as venture capital and angel investing. They fund startups and early-stage companies.
If you self-finance or bootstrap and remain without affordable external funding and loans for long, you might not be able to make the most of the market opportunities that India offers. While the plethora of funding options may make it simpler than ever to get started, as a responsible business owner, you should ask yourself how much financial assistance you really need.
