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Understand Different Ways to Fund Your Startup

16, January 2017 | Prashant Mehta

Irrespective ofthe size of business, funds become very crucial for any startup company.Startups not only need funds for running business activities smoothly, but alsofor constant business expansion. Historically, bank loans have been a popularfunding option for startups. However, many formalities, strict paperwork, andother mandatory requirements make bank financing a tricky proposition forstartups.

Over the pastdecade, IPO, VC funding, and PE funding have emerged as interesting, effective,and popular funding options for startups.

Initial Public Offering (IPO)

A startupcompany would generally need funds to expand its capital, its business, or fordiversifying its product/business portfolio. IPO is one ofthe best ways it can generate the required funds by sharing part of theownership in the company with the investors.

It is literallyraining IPOs at the Indian stock markets. IPOs are becoming a very popularoption for entering the stock markets or for adding to one's existingportfolio. An IPO is an initial public offering of shares of a private companyto the public at large.

A startupcan floatan IPO to list and trade its shares publicly on a recognized stock exchangesuch as the BSE (Bombay Stock Exchange) or NSE (National Stock Exchange) forthe first time in its history. In an IPO, a company offers part of theownership to the investors to the extent of shares purchased by the themthrough the IPO. 

A startupcompanymay want to set up more factories, diversify its business, or move into othersectors for which it would need capital. Thus, it can use IPO as an effectiveway to generate that capital. Funds raised through the IPO are used forbusiness expansion, which improves the profitability of the company, makingyour investment lucrative in the long term.  

In some cases, astartup company can use proceeds of the IPO to fund its working capital needs,which leads to better operational efficiency, leading to long-term benefits foryou as an investor. Certain companies float an IPO to repay their debt, whichimproves their overall business profitability leading to long-term benefits foryou the investor.

Venture capital (VC) funding

A very popularfunding option for startups, venture capital (VC) fundingrefers to financesprocured from VC funds. The best part is that these VC fundsoperate on a 'high risk,high return' model. They believe inpicking up aprivate equity stake in various startupswith strong growth potential. Thus, venture capitalists assist budding startupswith equity financing,which enables the startups to raise funds at vitalmomentsof their overall business journey.


 

Private equity (PE) funding

Private equity(PE) funding is another popular funding option that startups could use toprocure finances. Generally, PE funds tend to invest in start up companies thatpossess high growth potential. PE funds tend to have a general or specificinvestment criteria.PE funds with general investment criteria park their fundsindifferent industries.However, PE funds with specific investment criteria tendto park their money in specific industries. Just like VC funds, PE funds arealwayson the lookout for startups with great business prospects, making them anattractive investment option.

To know moreabout different funding options for startups, call us on 91-22-28583333 orwrite to us at [email protected]

+91-22-28583333
Nucleus House, Saki Vihar Road, Andheri (E), Mumbai - 400 072.

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