Startups that already set previous records, like Go-Jek and Tokopedia, continued to raise impressive boosts in capital, as the funding gap between top players and the mid-field is widening.
In the nascent stage of the business, every entrepreneur wonders about these questions:
When to raise money
There is no specific period after which a business needs to raise funds. The founders need to have set foot on the ground, figured out their plans and its feasibility, and spent some time in the market, studying trends and profiles. They should have a clear picture of the position of their product and identified their set of customers.
What is most important to raise funds is to be able to persuade the investors and convince them about the market fit and show actual growth.
Whom to raise money from
A company can raise finance in two forms – debt or equity.
Debt (convertible) – This kind of financing protects the investor. It is like a loan offered to the business with a principal amount, interest rate, and a maturity date at which principal and interest have to be repaid. The intention of this kind of funding is that it converts into equity when company does equity financing.
Equity – This kind of financing includes evaluating the company and fixing a share price and selling these shares to investors. This kind of financing involves more legal complexities and is thus not very popular in the initial rounds of funding.
Financing methods can be
Angel investors – Angel investors provide funding at initial stages of business. These investors operate in a friendlier way and provide smaller amount of funding. They would mostly not get very technical, and invest in the business if they have a good gut-feeling about it.
Venture capitalists – These investors come in when business grows beyond the innocent startup phase and starts generating revenues. These investors fund in huge amounts if convinced by business models, valuations and growth trends.
They come with expertise and vast industry knowledge and mostly invest for smaller windows with expectations of high returns.
Business incubators and accelerators – These programmes assist hundreds of startup businesses every year, giving a platform to make good connections with mentors, investors and other fellow startups. Incubators nurture the business, providing shelter tools and training and network to a business. Accelerators helps a stagnant business to run or take a giant leap.
Friends and family – This is the most reliable and least troublesome source of financing. If friends and family have spare cash, it can be taken at a low or no-interest-rate loan or even equity. This source of financing allows freedom of operation.
Crowdfunding – This type of funding is gaining popularity wherein the website allows businesses to pool small investments from a number of investors instead of forcing companies to look for a single investment.
SME lending – Businesses can opt for unsecured or secured working capital loan offered by numerous micro-financing firms in market today. However, this option comes with a fixed monthly obligation and relatively higher interest rates.
Grants – Businesses in certain lines of operation such as research and development should approach and inquire for government grants or aids. Various schemes are run by the government to promote these industries.