Bootstrapping and crowd-sourcing for funds to support your startup’s growth can only get you so far. Want to know your options for sources of capital?
Here is a beginner’s guide to startup funding.
Seed and Angel Funding
This is when you are in the early stages of your business plan. A solid idea backed by a credible team of individuals can lead to interest from Angel Investors, who will use their own money to provide you with the capital to see your product grow.
The common investors for this round of funding tend to be Venture Capital (VC) firms who will provide capital upon valuation of the startup, usually in exchange for ownership of the company in the form of stock. The amount given is determined by a combination of factors including
Growth of revenue – this would indicate that the product your startup has introduced is a good fit for the market and able to both attract new customers and increase sales from existing ones
Market size – is there room for your idea to grow within the market? Is it possible that with time, you will be able to build and capture market share?
Your team – having a group of capable individuals adds to the credibility of your startup, as external investors believe that this capability will translate into growth of the business
The common investors for this round tend to be VC firms. In this round, the startup must be able to show that they can scale up their business. This could be done through expanding into different markets or segments of a market and creating alternative sources of revenue. For funding to be obtained at this stage, the external investors would look at revenue forecasts of the startup and its current performance against other firms within the same industry. Ultimately with the funding obtained in this round, the startup should be able to go beyond generating revenue to break even but rather having a net profit instead.
The common investors for this round can include hedge funds and private equity firms, as well as late-stage VCs. This round is raised to obtain funding for large scale expansion through product development or acquisitions of other companies. This is done in order to grow market share.
A case in point would be that of Singapore-based platform Carousell, which acts as a consumer-to-consumer marketplace primarily in the sale of secondhand goods. It managed to raise about US$85 million in Series C funding in May 2018, co-led by its existing investors Rakuten Ventures and EDBI. It plans to use this investment for Artificial Intelligence (AI) development and expansion of product categories within which it operates.
While there is technically no limit to the number of rounds of funding that can be raised in this manner (meaning Series D, E and further is possible!), for most startups these are the more common rounds they will go through.
Obtaining funding for your startup is in no way a guarantee of success. The example of California-based Beepi illustrates this point. A platform for peer-to-peer buying, selling and leasing of used cars, it obtained close to US$150 million in funding across various rounds, before it shuttered its operations in February of 2017.
Ultimately, if you are confident of your big idea, and have the data to support its potential profitability, it becomes a matter of building your network and communicating this across in order to obtain the funding you need to grow your startup further.
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