Continuing from the previous column, let’s review the various sources from which startups can raise capital. The most common funding source when starting a venture is bootstrapping. Entrepreneurs must use their own money to develop a product from scratch. This will underscore the founder’s passion for the business and also establish credibility when the founder later approaches external investors to raise money for the venture. The other benefit of bootstrapping is that it allows the entrepreneur to retain complete control of the company.
Once a semblance of the product or service is available for demo or display (which means it is not just on paper), entrepreneurs can approach friends and family to invest at this pre-revenue stage. The logic here is that if an entrepreneur is unable to convince close friends or family members about her venture, then how will she successfully pitch to external investors?
The chances of the venture failing are quite high at this stage, because there are no revenues at all and, hence, the capital invested may all go down the drain. This is also why, in the startup ecosystem, this funding source is sometimes snidely referred to as 3Fs (friends, families and fools). Of course, if the venture succeeds, the 3Fs can gain significantly. Did you know that Jeff Bezos raised $250,000 from friends and family in Amazon’s early days?
Angel investor groups or syndicates are a good source of small capital at the early stages. Syndicates typically have individuals who are experienced in specific domains like retail, fintech, ecommerce, B2B, SaaS, and FMCG, and lead investments into these domains. Some syndicates are associated with accelerators and incubators, who work closely with startups, offering them mentorship, co-working infra and early-stage capital.
In socially important domains like electric mobility or AI, there is also a chance for seeking government grants and subsidies. There are a few government-backed startup funds, but the process can be cumbersome.
Bank loans are never a good option because they need collateral, which is a bad idea for startups. Crowdfunding is another avenue, but not very popular in India.
The most popular funding source is venture capital. Over the past two decades, the venture capital industry in India has grown significantly, and almost all popular startups have raised money from VCs. My big complaint with venture capital is that it is impatient capital, because the fund has limited time in which it has to return capital back to investors. This puts a huge growth pressure on startups, forcing them to ignore sound business principles like profitability and focus on unsustainable top-line growth. I believe India needs many more Indian funds that can be more understanding and patient with entrepreneurs.
In the next column, we will look at how one can make an effective pitch deck.
(The writer is a serial entrepreneur and best-selling author of the book ‘Failing to Succeed’; posts on X @vaitheek)