In the world of start-ups, it’s survival of the fittest. According to the Small Business Administration Office of Advocacy, only 50% of them survive after one year and only one-third can make it up to the 10-year mark.
Start-up funding is a series of investments that raise capital for a business. As a start-up expands each funding round serves as a stepping stone towards the growth.
The different types of funding rounds are explained according to the order.
Self Funding or Bootstrapping:
The term Self Funding means to use your own assets to invest in the company. It is basically the first stage of investment in which a founder invests his or her money to begin the start-up. Bootstrapping is when you completely self-fund your path forward. You don’t take out any loans or provide investors with a stake in your company. Most entrepreneurs use the money in their savings, charge personal credit cards, or budget strategically in order to finance their business. A bootstrap business gives the owner complete control of the company.
Friends and Family:
Often the family and close friends of an owner invest a part of their savings in the business. It helps beginners to start their entrepreneurial journey. It plays a vital role in the entrepreneurial journey.
The seed stage of investing in the first phase of raising outside capital. Seed money sometimes known as seed funding is a form of securities in which an investor invests capital in a start-up company in exchange for an equity stake in the company. Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise. As the business becomes increasingly mature, it tends to advance through the funding rounds; it’s common for a company to begin with a seed round and continue with A, B, and then C funding rounds.
The first round of investments in venture capital. Usually, this begins and ends with series A. The start-up should expect to have a much more formal board and leadership team becomes more “professionalized”. The earliest stage of funding a new company comes so early in the process that it is not generally included among rounds of funding at all. Known as “pre-seed” funding, this stage typically refers to the period in which a company’s founders are first getting their operations off the ground.
Angel investors are the one who invests in the initial stage of a start-up usually in exchange for convertible debt or equity. They usually provide capital at times when other investors are not ready to support the business. Angel investors are often retired entrepreneurs or executives for reasons that go beyond pure monetary form. A small but increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share investment capital, as well as to provide advice to their portfolio companies.
Very few companies can hit up to this stage. The main feature is that the start-up grows month over month and made at least $5 revenue in the last year. It deeply increases the enthusiasm of the owner as the company has started flourishing in this stage.
Mezzanine funding is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of a default, generally after the venture capital companies and other senior lenders are paid. In finance, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company’s assets which is senior only to that of the common shares. Mezzanine financing may result in lenders gaining equity in a business or warrants for purchasing equity at a later date. This round is the final raise before going public. In Mezzanine round companies are valued over several hundred million if not over a billion.
Initial Public Offering (IPO):
IPO or stock market launch is a type of public opening in which shares of a company are sold to institutional investors and retail investors as well. It is usually underwritten by one or more investment bank who also arrange for the shares to be listed on one or more stock. Need for IPO is still a robust demand for the market, a public company has the right to issue more stock. The opening price is set by supply and demand. Few investors can buy an IPO at the offering price, because most shares go to the underwriter’s institutional clients and some are reserved for the company’s friends and family. One can bid for IPO’s through the offline method or online method. In the offline method, a physical form has to be filled up and submitted to the IPO banker or broker. In case of an online application, one can directly login the application directly through the trading interface provided by the broker.
A venture capitalist (VC) is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake.Often Venture Capitalists take the risk of financing startups with the hope that some of the firms may become successful.Typical Venture Capital investment occurs through an initial round called ‘seed funding round’ and then it continues through various seed rounds.Venture capitalists provide capital with an expectation of generating a refund through some exit events like selling the shares of the company to public for the first time called Initial Public Offering.(IPO)
Done by: Suvro Mukherjee & Ayndrila Ghosh