Start-ups: Vai-Thee-Fuss?. ‘Foolish’ source of funds and other founding sagas

In the previous column, ‘Raising money from customers is the litmus test’, we looked at why entrepreneurs should raise capital. Now, let’s review the possible sources of funds. The first thing to decide is whether to raise equity or debt. Debt funding is typically available from banks or debt funds, but only against collateral like deposits or real estate. For first-time entrepreneurs without a strong economic background, such collateral may be hard to organise and, hence, equity is a more practical option. In any case, unlike traditional old-world businesses, young founders and start-ups prefer equity over debt. Some common sources of equity capital are:

Bootstrapping: Basically an entrepreneur invests his or her own funds, starts a company, grows steadily and turns profitable. From a satisfaction perspective, this is hard to beat. There are millions of entrepreneurs who do this — small businesses, family-owned shops, services offered by individuals like plumbers, carpenters, painters, and pushcarts on the roads are great examples of bootstrapped businesses.

Friends and families: Young people dream of starting up but do not have the capital to power their dreams. For them, the most popular sources of money are friends and families, who invest small amounts, more for the relationship, and then forget about it. In start-up slang, this source is sometimes referred to as ‘Friends, Families and Fools’. In reality, many of these folks have generated serious returns from their “foolish” investments and, hence, the term “fools” is more an endearment than abuse.

Syndicates and angels: This is a more recent phenomenon. High-networth individuals (HNIs) who are keen to gain from the exciting start-up ecosystem, but lack individual expertise to manage angel investments, come together and invest as a group. Several individuals bring to the table their professional expertise across domains and industries, and the group or syndicate relies on their judgements for specific investments.

Venture capital/ private equity: Once a start-up establishes proof of concept and is generating revenues with signs of strong future growth, it’s time for venture capital. VC funds invest significant sums in early-stage start-ups, hoping to create future leaders and big financial returns. After a few rounds of VC investments, if the firm still has a big appetite for growth and capital, VC gives way to PE funds, which do more of the same but at a much larger scale.

Also read

‘Cut the flab to attract investors’

Funding sustainability over return ratio

‘We prefer to top up investments till companies go public’

Public funds: This is the holy grail of entrepreneurial success: an initial public offering (IPO). Nowadays, even loss-making firms can list on the stock exchanges through an IPO. This is a progressive step and allows start-ups to access funds directly from the public instead of just private entities. Conversely, it also increases the responsibility of the start-ups to ensure that the investing public gets good returns on their trust.

(The writer is a serial entrepreneur and best-selling author of the book ‘Failing to Succeed’; posts on X @vaitheek)

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