As a Consultant at Taxadvizer.com, I always get lucky to meet young and passionate guys who are starting a start-up or venture and always are need of fund to support their dream start-ups. As so many capital funding option are there, the entrepreneurs can confuse or sometime it is a very hectic exercise for them.
Further at taxadvizer.com we always suggest that type of funding you should follow will depend on the specific need of your start-up, early expenses and specific cost associated with your venture.
So we are here to explain some common funding options to give you a basic concept so the one can develop and adopt their funding strategy. So here is a small overview of the most common funding options types available at early stage start-ups:
Yes, it is not a type of “Fund raising” actually but some of the entrepreneurs feel that it as best option to not raise the fund from outside. Besides saving you money, bootstrapping also helps you to focus on execution and groom your start-up without any investor obligations and interference. It’s also a means for avoiding dilution and gaining larger profit margins.
#2: Equity Funding
Equity funding is a larger than the people think that refers to any means of funding your Start-up in which you get funds in exchange for issuing shares of your company. There can be numerousapproaches for raising equity capital, but, depending on how you raise this fund, you could be giving up anywhere from 1-100% of your business. Equity types include:
Seed financing, as the name implies, is the comparativelya very small amount of money a start-up needs early on to get started. Usually businesses seeking a seed round are still in the concept stage and need just a small capital infusion to meet expenses until they can start makingreturns. Seed money can also be a supportive tool for attracting future funding from bigger investors. Because seed capital is smaller and more of a high-risk investment, it generally will come from friends and family or smaller angel investors.
It can be easier to raise seed rounds from a smaller angel investor, as opposed to going for the brass ring of VC investment. With an angel investor, you will usually pay less of a premium in the amount of the stock or percentage of your company you give up because angel investors have other means of making money and may not be looking for as specific a level of return as venture capitalists might be.
There are disadvantages to working with angel investors. Often you will need to find numerous investors to give you the nice amount that you need (as opposed to working with just one VC);
Series A. refers to the first round of share offered to investors during early-stage. Usual Series A rounds fall in the range of $1-5M, offer options for 20-40% of the company, and are proposed to backing a start-up through the early stages of building a business.
Series B. refers to second-stage funding. Series B typicallyoccurs after the company has already achieved certain key business development indicators and thus established its potential feasibility as a company. This series is also called a venture round since it is at this point that venture capitalists usually get involved.
Venture capitalists don’t just offer a greater capital investment for a given round; there is also a greater opportunity for going back to this same well for future rounds. Also, experienced VCs can offer the kind of networking opportunities and mentorship that unconnected smaller angel investors may not.
Series C. As companies grow, they might continue to seek additional funds to meet future milestones. Each successive venture round follows alphabetically down the line (e.g. C, D, E...). VCs and private equity investors support these financing rounds as well as future funding rounds that more established companies may have to look forward to such as bridge financing, expansion capital, late-stage capital, and leveraged buyout.
#3: Debt Funding
Debt funding is also a practicablefinancechoice. With debt funding, you borrow funds that you will have to pay back, regardless of whether or not your company is making a profit. While you may choose to incur debt (i.e. borrow cash) from friends and family, there are other kinds of debt funding you could also pursue. The most common are:
Bank Loan. There are many type of bank loans and sometime guaranty by government protection or a security provided by the entrepreneur, usually with a lower interest rate.
Bank can provide many type of loan depending on your requirement and need of start-ups, but bank want some surety which sometime become problem to new young entrepreneurs
Now that you have aelementary understanding of the most common funding types, you’re ready to take your company to the next level. First outline exactly what that “next level” looks like—specifically, what milestones do you hope to achieve? Then use these milestones to create financial projections that you can use to calculate how much funding you will need and what funding type is the best bet for your company.
CA. Kapil Verma is the founder and CEO of www.taxadvizer.com, a consultancy firm providing a complete suite of services to companies at every stage of the development process. He's a tax expert and start-up mentor, whose passion is helping businesses focus on what they do best.