A startup may require several rounds of financing before it can generate sufficient cash flow from sales to finance operations. The amounts and sources for each round vary by company and industry. The earliest funding rounds are seed and early-stage funding. So Seed capital is the funding required to get a new business started. This initial funding, supports preliminary activities such as administration and marketing, product research and development and business plan development.
The sources of seed funding include the founders’ personal savings and investments from family and friends. Banks usually do not lend to startup companies because of the high risks, and venture capitalists tend to stay away from seed funding. However, a startup entrepreneur might have more success with angel investors and private equity funds. Angels are former entrepreneurs and other wealthy investors who get involved in some startup companies. Private equity funds pool money from individuals and institutions to invest in high-growth companies. Early-stage funding typically comes from venture capitalists, who may also bring experience and industry contacts that can help a startup rapidly grow its business.
Amounts of Seed Funding:
Seed funding typically ranges from $25,000 to $1 million. A common funding structure is convertible debt, which is debt that is exchangeable for stock within a specified period. The high-risk nature of seed funding increases the cost of capital, which means that investors may demand a larger share of the startup. Therefore, startups should secure only enough seed funding to continue operations and develop a viable prototype, thus preserving enough equity in the company to satisfy the founders and the early investors.
Angel Investors are affluent and wealthy individuals who invest their personal capital in start-up companies (that are typically early-stage) in return for an equity stake.
Most angel investors expect to see a return on their investment of between two and 40 times their investment within three to eight years and some will take an active role in the investee business. This potentially means sitting on your company’s board or acting as an advisor whilst others may want to become sleeping partners and simply provide your business with capital.
What makes angel investment attracting: The decision to bring outside investors into your company will be one of the most important decisions of your life. So how can you prepare your business so that it will be attractive to potentail investors? Here are some suggestions:
1. Have audited, or at least reviewed, financials for the prior three years.
2. Every dollar you add to profit increases value—so eliminate excess costs.
3. Be sure your stated objectives for the sale match your personal objectives.
4. Have in place qualified leadership.
5. Have an actionable strategic plan that shows growth.
6. Hit or exceed your annual budget, particularly prior to and during the fundraising process.
7. Be Patient.
Rajan Anandan has invested in a large number of startups. The Google India MD’s previous experiences include being a Managing Director at Microsoft India for 2 years and working for Dell India from 2006 to 2008. In 2014, he invested in more than 14 startups.
Startups Invested In: StepOut, Capillary Tehnologies, Sourceeasy, 24/7 Techies, TargetingMantra, Instamojo, CultureAlley, Social Cops, MissMalini.com, Socialblood.org, Mobilewalla, POPxo.com.
Industries: Internet, Mobile And Saas Based Startups.
2. Krishnan Ganesh:
Krishnan Ganesh is a business executive who is the Chief Executive Officer of TutorVista, an online tutoring company. He and his wife Meena Ganesh invest in around five startups a year and put in $25-250K in each of the startups.
Startups Invested In: Must See India, SilverPush, HackerEarth, Oximity, Overcart, Browntape, Delyver.com, Onlineprasad.com.
Industries: Consumer Internet, Healthcare, Education And Tech Companies.
3. Ritesh Malik:
Ritesh Malik is a doctor by profession but an investor, an Entrepreneur, an Angel Capitalist, a photographer…. you name it. He is driven by his zeal which made him venture into different sectors of business world. After working for 10 months at Ganga Ram hospital, he has not stopped till date. He founded Woodapple Hospitality and ThinkPot, and co-founded AdStuck Consulting and Harvin Academy. In 2014, he invested in about 8 startups.
Startups Invested In: RH1vision, Mashinga, Asimov Robotics, SectorQube Technolabs, Bisco Labs, Inc42.
Industries: Technology, Hardware.
4. Nikunj Jain:
This young fellow claims to understand consumer internet which is advocated by his two much talked about startups frankly.me and inoXapps. Frankly.me is a platform where questions from celebrites can be asked and they will reply via video. His first startup inoxapps develops games and apps for Android and has managed to rake in a large number of downloads. He invested in about 7 startups in 2014 alone.
Startups Invested In: Gingr, Piquor, Agatsa, Workouttrends.com, Inc42.
Industries: Sector Agnostic.
5. Kunal Bahl:
Kunal Bahl is the co-founder and CEO of Snapdeal.com, which is among India’s leading online marketplaces. He started at Jasper Infotech Ltd in 2007 with a seed amount of INR 40 lakh. After tweaking the business model half a dozen times, he came up with the marketplace model for Snapdeal.com and success followed.
Startups Invested In: Tripoto, Tiny Owl, Bewakoof, Gigstart, Olacabs, Unicommerce.