It won’t be an overstatement if I say that it is a dream for many to start-up their own company from scratch and let it run in due course. The recent years have seen a boom of such companies in our eco-system and startups have been raised by people of all ages. Generally, people venture into the start-up’s as it provides a path for them to pursue their passion while helping people by solving their problems that are not addressed by anyone else and while doing so, to make money.

               “Hmm…You talk as if it’s something so new and so revolutionary. This is how the world has been working for ages as BUSINESS mate” could be the comment pondering in your minds.


               Yet there is a distinct difference between a Business and a Start-up. For a company to be classified as a Startup, whatever it is planning to undertake should be mixed with innovation. It should be new, different from what others have been doing, or deal with a problem that is generally not addressed by anyone else. To be more clear, let’s look at an example. If you are planning to start a hotel that has a classical menu, it is a new business. If you plan to start a hotel with a custom innovative menu or let’s say you start a venture where you only provide the furniture for the hotels on a rental basis, it would be a startup.

Having understood what start-ups are, let us come to the main ingredient of it. For any such Startup to succeed, one must first and foremost have an amazing idea. Ideas change the world. Once you have that spark and the light bulb glows over your head, you need to devise out a Business plan. The Business plan consists of various variables which when put out with the right co-efficient ends up as SUCCESS. Among the variables, the most crucial one is the “FINANCE”. Whatever may be the idea, it requires funding at one stage or the other to take it up to the real world. Financing to Start-Ups is the same as watering to plants. A seed (the idea) can be of excellent quality and sowed in a nutrient-rich soil (a nice market with no competitors) yet, unless or otherwise it is watered, it is not going to grow! 


                 This particular area has hindered many aspiring youths from pursuing their idea. It does happen (more than often) that the minds of ideas are not compensated wealthily. They get intimidated easily and never venture into doing business. But little do they know, there is a whole world of firms and organizations that are actively investing in the right ideas. They don’t just come in and say “Here are 1000 dollars, give me back 2000 dollars in 1 year”. But they invest depending upon the nature of the idea, the risk consequent, and the maturity of the company. Let’s take a look at the various series of funding a start-up company undergoes. Every stage will be explained with real-world examples and also a fictional character along with his idea.

SELF FUNDING

               The first and foremost stage is the one that comes from one’s own pockets (plural because you do need to dig into many people). One puts in his savings or borrows from friends or families. This stage is usually referred to as BOOTSTRAPPING wherein the resources come from within and not from external sources. The complexities involved are minimum as it involves people that are close to us.

               Let us introduce you to our SKAJAAM character, Jammy. Jammy aims to solve the ‘last mile connectivity’ problem associated with metropolitan cities and proposes an idea of issuing rental electric-skateboards at corners of high rush to solve this. Using self-financing he could come up with the maximum of a prototype.

               In the real world, there are many companies in the likes of Amazon, Microsoft, Disney, Apple, Google, Harley Davidson, Nike that have started in their own garages completely relying on their own savings and resources in the beginning.

SEED CAPITAL

               This is the preliminary investment made from external resources. Various venture capitalist companies actively invest at early stages in a company given that they find the idea and the solution as feasible and that it can perform successfully on business grounds. The investors are taking a huge risk on funding something that is not yet successful, immature, and could be/could be not successful. But they take the risk owing to the fact that if the company succeeds, its valuation would increase. Right now, they can get a fair share of equity in the company for a relatively much lower price. The funds raised at this stage are used to know your customer, analyze the market, make your product, and maybe enter into the market.

               Jammy is ready with his prototype and an angel investor gives him let’s say 100,000 dollars for a 10% stake in his company. He can use this to build a fair number of products to run the business, hire some people, do the groundwork on his market, come up with possible spots to set up his rental booths, and finally make a move to enter into the market and make sure the customers notice his product.

               The almighty Facebook had raised a $500,000 as it’s seed capital from Peter Theil for a 10.2% equity.

SERIES A

               Once a venture has started gaining a reputation, heads start turning towards monetizing the business. Here, the investors not only look for great ideas but also the ones with good strategies. Many investors could also come together and fund in one company, which is known as crowdfunding. The funding ranges from $2million to $15 million in this stage but it could vary for some off the chart companies. The capital raised through this stage can be used for scaling up the business, by tapping new markets and to improve the product credibility.

               Our Jammy has done well with his seed fund and now through crowdfunding, he has raised $1 million for a further 5% stake of his company. This puts the valuation of the company at $20 million. A look back at our happy seed investor whose investment of $100,000 is now valued at $2 million. With the surge of funding, Jammy plans to venture into new markets like other metropolitan cities, increase the range of products and also provide attractive offers to lure the customers.

               In a similar stage of funding Facebook raised about $12.7 million from Accel in 2005.

SERIES B

               Companies that go to Series B funding are well established and are looking to attain maximum market reach. The average funding in this round is around $33 million. Such funding helps the company that is scaling to hire more staff and technicians and improving the overall infrastructure.

               Jammy wants to attract not only metropolitans but also other major cities in his country. He goes into Series B. The company raises $15 million for a 15% stake of the company valuing it at $100 million. This fund is used to cover all the areas of the metropolitans and to try out the major areas of other cities.

               Facebook had raised $27.5 million in its Series B in the year 2006.

SERIES C

               Depending upon the company and the needs, they may go for any number of funding. In Series C funding the companies are looking at developing some new products, venturing globally, or even acquiring some other firms that would aid them in turn. In this round, investors are paying hefty with the view of harvesting it much faster.

               Jammy plans to take his venture globally. He raises $150 million for 10 percent of his company. He uses $50 million of it to acquire an electric instrumentation company. He uses the remaining to establish himself as a global player.

               In Series C, Microsoft bought a 1.6% stake in Facebook for 240 million valuing it at 15 billion in 2007. Facebook also raised another $120 million from another investor.   


                The companies can opt to go for furthermore Series of investments depending on the profile of business and requirements. The below picture depicts how the Indian e-commerce unicorn, Flipkart has raised its fund over a series of investments.


                Getting that first investor is crucial for any company in any stage, as one proficient anchor investor itself would lure plenty of other firms to invest in the same. On the other hand, one should be careful when accepting the investments too as it always comes with added responsibility and one’s stake at his/her own company. Moreover, the capital is funded in terms of investments and every investor’s aim is to multiply it. For which the investors need to see positive results from the company. Thus, it is also essential to not go extravagant and keep realistic targets with the investors. We hope to have imparted a little wisdom for any aspiring mind reading out there. Keep pushing mankind!