Everything you need to know about how startup funding works


Every startup business in India begins somewhere small and over time, investment and resources, some of them grow into something much bigger and more profitable. No matter how humble the business idea is, at some point in its journey of growth, it is going to need external investment either from angel investors, venture capitalists or acquaintances or friends. As a startup takes shape, there is going to be a time when opportunities and possibilities are huge but resources are going to be limited. That is about the time when you should begin thinking about infusing the business with some funds. However, it is important to understand how startup funding works in India before venturing into the investment arena and opening your business up to investors.

Pre-Seed Funding: This is also called pre-seed capital and is the beginning of your startup journey. Pre-seed funding is the investment that you will need even before you start your business. This is the smallest amount of investment you will need; from here on it just gets bigger and bigger. This amount can be obtained from family, friends, crowdfunding or even an investor. Pre-seed investors can ask for a stake in your company in return for the funds they are willing to pour into the business. At this stage, it is only the first of the startup funding stages and your startup business hasn’t yet gotten off the ground so this is not considered an actual round of funding. To answer the question of why you may need pre-seed funding you should bear in mind the following:

·  To conduct product research

·  To assist with the initial formation of the business

·  To craft a Minimum Viable Product

·  To prepare for future business operations

·  To identify market opportunities

Seed Funding: This is the startup funding stage where your business actually takes shape and begins. Your research is done, your product or services are ready to make themselves available to customers and your business model is well planned. This is the stage where you need to step out and begin making actual transactions with customers. This is where seed funding, or seed capital will come to your aid. Seed funding is generally raised from an investor who puts in a larger amount of investment in return for equity from your company. Why do you need seed funding you might ask? The following reasons justify your question.

·  To launch your product in the market

·  To build a customer base

·  To hire employees to form a team

·  To market and advertise your product

·  To test the market for product fit

Series A Round: This is the stage where you are eligible to open your business up for venture capitalist investment. You start offering the shares in your company in return for investment that is made. This is the phase when your company starts to grow and is ready for take-off. The research and testing phase of the market is done and now your business is ready to surge ahead. Very few startups actually make it to this point. That is why it is imperative that you have a solid business plan and good financial projections in order to procure Series A funding for your business. The reasons why you need series A investment are:

·  To prepare the business for scaling up

·  To optimize all operations and increase productivity

·  To further develop your product and or services

·  To work on earning profits and reduce the initial loss

·  To take a step up from seed level

Series B Round: Once the business is earning profits and you have proven yourself with amazing products or services, you can step up our game and opt for Series B investment. If you have succeeded in obtaining Series A funding, it means that you have a customer base, solid functionality in terms of business functioning and measurable data in terms of what works and what doesn’t. All this makes it easier for Series B investors to want to invest in your company. They also have a clear idea of how big the company could grow in the future. The Series B funding round is much like the Series A round except that here you have the venture capitalists who might want to make their entrance at this later stage in the business. You need Series B funding for the following reasons:

·  To increase market research

·  To expand your team to include new talent

·  To work on business development

·  To increase budget on marketing and advertising

·  To expand within the business

Series C Round: Only those companies that are really successful get to this stage. This is probably the easiest round of investment to procure as by this time the business is established and is doing well. C Series investment is all about making it big; by this time groups like hedge funds, investment banks and private equity funds want to get into the game as well.  Scaling up happens at a larger level at this stage of the business and a startup sets itself up to become a multinational company. You need C Series funding for the following reasons:

·  Expand business reach to a global market

·  Work on new products or services

·  Acquire smaller companies to expand network

·  Look for ways to bring in additional revenue

·  Boost the valuation and prepare for IPO

Series D and Beyond: Most companies end their external investment journey after Series C. However, there are a few companies who continue with Series D, E etc., in order to meet the criteria for IPO or Initial Public Offering where shares of the company are offered to the public for purchase.

By now the basics of how startup funding works should be clear. If you are a startup business owner or are planning to open up a startup of your own, remember it doesn’t hurt to get expert help. CoffeeMug.ai is an AI-powered networking platform that seamlessly connects individuals, investors, and corporate leaders in the business arena. Besides helping the members on board explore ground-breaking business opportunities, this global network provides 1:1 mentoring for entrepreneurs and assists them in generating funding for startup businesses.


Q. How do startups raise funds?

A. Any startup can raise funds through various methods like crowdfunding, venture capitalists, angel  investments, or through personal contacts like family members, friends etc. 

Q. How hard is it to get startup funding?

A. Securing startup funding can be a difficult task, especially if you are asking for funds from banks or other financial institutions. These traditional money lenders often look for certain prerequisites such as high sales volume, cash reserves, business history, strong credit and other parameters. 

Q. Who can invest in startups in India?

A. Any individual, whether Indian, foreigner, or NRI, is permitted to invest in a VC/debt/private equity fund as long as they meet the eligibility criteria. Individuals investing in any of the following tools must invest a minimum of INR 1 crore.

Q. What are the stages of a startup?

A. Pre-Seed Stage, Seed Stage, Early Stage, Growth Stage, Expansion phase and Exit phase are the common startup stages.

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