How does a startup gets its funding
It takes lots of efforts and time to conceptualize an Idea into a business but it needs lots of money too. Many startups do not even see light of day only because they did not have money to start the business. Lets see what are different ways which we can use to get a proper funding for your startup.
Starting your own business seems an attractive Idea to everybody. Everyone likes to have his/her own business and earning a decent livelihood. The modern tradition of starting a "startup" has fascinated millions of youngsters and many youngsters and converted their dreams into the reality.
Let's figure how a startup begins its journey and reach the peak.
A normal startup begins at home. Means you can get money from your family member, friends, colleagues and some person who trust you and support your Idea. Generally, a man can get up to $15,000 - $20,000 from such resources. Later approximately $2,00,000 from any angel Investor, and after some time a whopping 2 million dollars from a VC. If all goes well you will be able to make more than three times of your money.
The exactly opposite of funding is bootstrapping. It is a process in which you fund your startup with your own savings. There are some successful companies which started as bootstrapping until they got a proper funding like MailChimp and AirBnB.
There are two initial funding stages-
1. Idea stage-
At the Idea stage, it is only you and your brilliant Idea. You finally decide to follow it and start working on it. When you start working on it, you are building the skeleton of the whole structure. Your hard work will later help you in increasing your equity but it just the beginning of the business and it is only you in your startup.
2. Co-founder stage-
After making a physical prototype of your Idea you start to search out for a co-founder who believes in your Idea and wants to work with you. You look out for a person who has some technical skills and an enthusiasm which you can mold in your favor. You offer him/her a chance to be your co-founder and join the startup. If you do not have the money to give to him/her. So you offer an equity in exchange for his/her services. Here comes the question that how much equity you want to share, if it is 20%, 30%, and 40% then you must understand that your co-founder is taking a risk and it is your responsibility to make sure that he/she feel safe in financial as well as business terms otherwise they will be demotivated.
Now there are you and your partner in the company and you need money to start it. You cannot directly go to any Investor and ask him to invest into your business. Now there are two ways through which you can get a decent funding-
a. Family and friends-
Yes. It is not wrong to get money from your loved ones. You can tell them about your business Idea and if they support you then you can ask them for some small amount. If necessary you can also share some equity with them. Generally you can get up to $20,000 from your family and friends.
b. Accredited Investors-
People who make more than $2,00,000 annually or have more than one million dollars in their bank account can invest in your business. Generally, they are called "Sophisticated investors" and government considers them smart enough to decide about investment into a risky company.
Register your company-
With some money into your account and an impressive business Idea. You must register your company to further more ahead and start as a legal entity. After registering your company you can start further working on the Idea and build a much suitable prototype to show some big investors and get a much bigger investment.
Now there are some high-end investors who are ready to put a great amount of money into your business and they are of two types-
a. Angel Investors-
Angel Investors are those industrialists who are eager to put their money into different businesses and want the ownership equity or the convertible debt in return. But the problem is that a normal angel investor puts around maximum $6,00,000 and your company must be valued at least 2.5 million dollars.
If you are not valued 2.5 million dollars then here is a chance for you to show him a future plan which has a promising revenue model and much more equity for him.
Here is a small suggestion for you. Do not give him equity before he invests the money but after he has put his money and the valuation of your company has increased. Because if you are ready to give him equity before the money, then it means you are giving him your own money.
If your company was valued at one million dollars and the angel investor has given your $2,00,000 dollars first calculate.
so it becomes $12,00,000 dollars.
SO 2,00,00/12,00,00 = 16.66 percent.
So 16.66 percent is the equity which your investor gets.
b. Incubators or accelerators-
They are some advisors who can help in getting office spaces, manpower and sometimes cash. But sometimes they help you getting some good business deals which can turn the table in your company's favor.
Author Bio: Chief Executive and Technology Officer at E2logy - a web and mobile app development company in India.