Stages of Start-up Funding: Fuel to convert an Idea into Reality

The most popular and acceptable definition of a startup is “An Institution designed to create a new product or service under conditions of extreme uncertainty”. I know too many fancy words put up there. In simple words, it is a young company that has just begun its operations and in the early stages of development. The startup need not to have an innovative idea, it can just implement an existing idea with a better strategy. The “Start-up” term originated with the trade press reference to companies established in the late 1990s during the dotcom bubble when Internet-related technology started growing quickly. With a common vision, two or more people agree to come together for a long, difficult, and demoralizing process, that’s where a company takes its birth.

Raising funds for start-ups is not that “fun”. Despite the rocky and risky journey, some of them emerge as giant companies. This article will focus on that rocky journey which most start-ups go through. I will be putting you in the position of the Founder so that it will be better for you to understand by relating to that role. It all starts with a fun idea with a friend or colleague and things sometimes take a serious turn. So your friend and you decide to co-found a company. First, you will be needing a legal structure and pay registration fees which costs somewhere between Rs.2,500 to Rs.10,000 in India. With a humble beginning, funds will be either raised by you or your partner or sometimes you look for support from the inner circle. Let’s just say your uncle is interested in buying a few shares from your company because he was impressed by your idea. The investment from your uncle is called Seed Investment. It usually involves high risk.

A year has passed after establishing your company beta trial on the customer has passed. You will be requiring more people to work for you and office space. You will be needing the next round of investment called Series A investment. Angel investors and Venture capitalists(VCs) are the people to look for Series A investment. Venture Capitalists are people who have investing firm and take money from the people and invest strategically. Angel investors are professionals who invest their own money in risky businesses like yours. If VCs and angels think your team is competent, impressed by your idea and past achievements then few in many will be interested to invest in your young company. You will be choosing one out of a few considering smart money. Smart money is nothing but investors’ connections and brand value which will increase your company’s brand value. With new investments coming, the shares of your friend, uncle, and you in the company will be diluted. Diluted shares do not mean no of your shares in the company will be reduced rather it is done by issuing new shares just like the central bank issues new currencies out of nowhere. The process of issuing new shares to receive cash is called Capital Raise.

Series A will not be the last investment your company will be receiving. There will be Series B, C, and sometimes D. In this journey from B to D investment, there might be an increase in no of your shares. It has been 6 years since your company started growing and successfully completed 4 rounds of investment. When customers start loving your product and your company gets noticed it is time for the early investors’ exit who have been dreaming about profitsThe exit can be through Initial Public Offering(IPOs) where the company will issue new shares and it will be owned by the public from the stock market. From there on people can sell and buy among themselves. 

Your share price will be decided based on the market price and it feels yesterday when you and your friend had vision about this company.New people will be hired working for your vision and you will be one in million as your company valuation will increase

 

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