While looking at raising funds, the first and most obvious option is to try and generate funds internally. If internal fund raising is not an option, look into the possibility of grants.

The third option is to bring in debt instruments. Although debt may seem onerous, they are less expensive than equity which is easily the most expensive way of raising money and should be used only as a last alternative, says Mentor Ravi Narayan, a Mentor at MentorSquare.

Equity Investment

All business enterprises go through several stages in their lifecycle, right from the inception stage to the expansion stage.

At each stage, the needs of the business and the risks faced by it are different, as are its financial requirements.

For instance, the technology risks faced by companies in their inception stage are usually so great that the scope for raising funds is limited.

On the other hand, companies might find it easier to raise funds during the expansion stage since they have proven their worth in the roll-out and growth Stages.

Therefore, each stage of the company calls for a different type of investor. Angel investors are those that invest in the company at the inception or prototype stage, while seed investors come in between the prototype and roll-out stages.

Venture capitalists and even banks generally enter the scene after the roll-out stage, with IPO acquisition being the final stage for raising money.

Corporations and partners are the other options available in equity investment.

Companies that do not wish to invest in developing technology internally, choosing instead to focus on customers and quarter revenue targets, may choose to invest in a promising company whose products they could carry themselves in the coming years. This gives companies the chance to test the market without diverting their funds drastically.

Debt

Since debt is a well-understood, well-supported and well-collateralised instrument, it provides entrepreneurs with several options.

While family and friends are one, there are numerous agencies willing to work in this field. Project finance, banks, overdraft facility, State finance corporations, development banks and venture banks are a few options.

When neither equity nor debt is willing to take a chance, the government, through an agency, steps in. The government agency provides grants, subsidies and in-kind investment.

Motive of Investors

A crucial aspect of fund raising is the ability to understand the motives of investors.

Angel investors come in at an early stage with a clear understanding of the industry as well as the risks associated with a start-up.

Many are willing to help out not just financially but with their time as well, doubling up as mentors to entrepreneurs.

Venture capitals are often the best measure of the growth of start-ups. These are institutions that have raised money from someplace else and are charged with investing the same in promising companies to create 10-20 times the original investment.

Venture capitals demand a high growth rate from businesses and should not be confused with an ‘end-all', as they signify the start of ‘high pressure growth'

Private equity, while similar to venture capital, operates on a different mandate.

Milestone-Based Approach

While the milestone-based approach is best suited for equity, it applies to debt as well.

This approach requires that the company be viewed as a series of steps that you are climbing one by one, to get you to your ultimate goal.

Every step is distinctive and represents a different stage of the company with each new step being a transformed version of the previous one.

This approach helps map out the risks that the company will face at each stage while also highlighting its financial requirements, giving entrepreneurs an opportunity to raise only as much capital as is required at that point in time and containing the extent of risk for all the parties involved.

In addition, expectations are clearly set and met, giving the entrepreneur the confidence to move forward decisively.

While funds do play a critical role in the running of a business, it is important to note that if done incorrectly, the bringing in of capital can also kill the company.

Investors tend to have unrealistic expectations from the entrepreneur and often, their expectations and requirements are completely different from those of the entrepreneur.

In such cases, the company may end up facing more conflicts than alignment.

Therefore, keep in mind that while money may solve problems, if the fund raising is not orchestrated in the right way, it could also create problems.

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