How does funding really work? We are here to explain!
Eureka! That incandescent bulb just lighted up above your head and there’s idea in your head.
BUT…the reality is that every entrepreneur finds his/her idea to be solving real world problem and thus considers it as the best thing in the world. The excitement of setting out on an entrepreneurial journey is enormous and many times it doesn’t let one plan the journey from idea to business.
Funding is an integral part of the journey from startup to making it big. Google about funding and Voila! Things like bootstrapping, seed funding and a series of alphabets A, B, C, D and so on pops on your screen.
The most appreciable thing about the present era is that – help is available and is accessible too but we have to filter it according to our needs. So, using the same analogy for startups and funding, let’s explore which funding one should seek for, at which particular moment of time.
How funding works?
The primitive phase of a startup usually starts with your savings or with the money you borrow from your friends and relatives. With time the idea starts growing from seed to plant and subsequently becomes a tree. The needs also increase and you start searching for someone who believes in your capabilities and in future of your idea. In return of the investment, you offer some stake i.e. shares of your company. Going with the most used example of pie, seeking fund increases the size of the pie, while the number of slices also increase. You offer the investor a piece of the pie. This results in percentage decrease in your share in your company but remembers it becomes a slice of big pie, which is eventually a benefit everyone seeks for.
Rounds of funding
Let’s explore the funding hierarchy and get acquainted with the modus-operandi funding works. The following section will take you through the details of different rounds of funding, stay tuned 🙂
After idea stage comes the time to convert the value into a prototype. You sit day in and day out working with Co-founder to build the prototype of the service or product, you want to offer. After spending some time working and preparing the prototype of your product you realise that the moment to pitch has arrived.
Bootstrapping is seeking monetary help from your relatives or an investor you know. As you don’t have anything else to offer, you offer a cut of your company. This makes your relative an investor in your company. And his investment ensures you both, another 6 months of noodles and coffee:)
- Seed Round
It is the most naive state of startup funding stages. You approach angel investors or work with incubators. The product is still in infant stage, seed funding ensures all strength the idea needs to overcome the phase of dilemma. It helps you to format the way ahead in a structured way. Seed funding paves the path for other rounds of funding. Generally, the range of seed funding is from $25,000 to $1 million.
- Round A, B, C and so on
Round A of funding focus on refining and optimising the business plan. This round takes the product to the higher level and helps to build user-base too. The succeeding round of funding, i.e. Round B. This funding takes the company ahead in the development phase. The money invested in this round helps the firm to expand market reach and a team as well.
Series A funding is in the $2 million to $5 million range, while Series B funding is in the $5 million to $10 million range.
- Debt Financing
Debt financing occurs when a company sells bonds, bills and notes to individuals and institutional investors. The people buying the working capital become creditors to the firm. They expect the firm to return the principal amount and interest to be paid back in some time.
Apart from selling bonds and bills, there is another way to raise money as debt financing. It is termed as equity financing. Under this category, people are offered shares instead of working capital.
IPO stands for Initial Public Offering. It is the first sale of stock to the public by the company. Companies sell their stock to raise money by either issuing equity or debt. It’s very difficult to become an investor in a privately held company as all rights are with the owners only. Opting for IPO makes a firm public and thus it opens up the door for common people to invest and earn.
It’s next to impossible to learn how to swim by reading books, similar is the take for entrepreneurial journey. Everyone starts with an idea, exploring his way and refining his/ her business as the time passes by.
Summarising the different rounds of funding is an attempt to make entrepreneurs aware how things work.I hope the summary of different rounds of funding helps aspiring entrepreneurs to decide the correct time to go for funding and how funding works in detail.