Different Strategies For Acquiring Funding For Startups
By Indeed Editorial Team
Published 25 April 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Increasing developments in the fields of technology and information are facilitating a rapid increase in the number of startup companies. Startups are key to unique product developments and can be a lucrative income source when successful. As an employee in a startup, it is important for you to understand how funding for startups works and which strategies you may use to get funding. In this article, we explain what a startup is, how startup funding works, what the different strategies for getting funding for startups are and why funding for startups is important.
What is a startup?
A startup is a company that is in the initial stages of development. One or more entrepreneurs start it to address a specific demand for a product or service. Startups are usually high-cost and low-revenue businesses initially, which leads them to seek outside investors for capital until they can make a profit.
How does funding for startups work?
Startup funds go to people or groups of people to raise money for their new business, which allows the company to grow. When investors fund a startup, they do so hoping that they can receive significant revenue from the business in the long term. Depending on how much someone has invested in a company, they may have the right to make business decisions for the company.
8 startup funding strategies
Here are a few different strategies startups may use to obtain funding:
1. Series A funding
The Series A funding stage marks the beginning of venture capitalist investment, and companies offer their shares in exchange for capital. Now, the startup can raise funds for future business growth. This includes:
optimising the business operations
offsetting financial losses or shortfalls
developing your product or service further
creating a scalable blueprint for growth
Example: Umesh has proven his product is an amazing idea. Now he wants to show investors he has a viable strategy for future growth. He decides to go into a new market and start selling to large retailers. The more he demonstrates the ability to generate income, the more investment he may receive.
2. Series B funding
Startups in this stage have dedicated user bases and steady streams of revenue. By now, the business has proven it can scale the idea. Investors can now help to:
employ advanced market reach activities
increase market share
form operational teams such as business development and marketing
Example: Anya's app has done well and now has a consistently high number of active monthly users. She uses this round of investments to open two new departments at her company. Some of those are public relations and diversity and inclusion.
3. Series C funding
Series C funding is for a company that is growing and planning to expand globally. It may be easier to find investors at this stage, as they believe the startup to succeed. Funds at this phase are used to:
build new products
reach new markets
acquire underperforming startups in the same industry
Example: Bharti received Series C cash. She begins development on a product to clean car windshields. She then starts shipping her original product overseas.
4. Series D funding
There are usually two reasons a startup goes past the Series C funding round. They are:
New opportunities: A potentially lucrative opportunity appears that requires the company to act before the initial public offering ( IPO).
Subpar performance: The startup misses the goals set during the Series C round of funding. It then raises more funds in the Series D round to address the issues.
There is no limit to how many funding rounds a startup can go through. If a company has more advanced revenue goals, it may complete as many fundraising series as necessary.
Example: Divya planned to take her business public at the beginning of December. Before she does this, a competitor in her industry comes up for sale in November. Now she may still go for an IPO or work on handling the competitor first. She decides to raise Series D funds to develop another product to increase the market share before the IPO.
5. Pre-seed funding
This is the research phase of beginning a startup. During the pre-seed stage, make sure to answer the following questions:
Is the idea viable?
Has someone already done or tried what you are trying to do?
How costly is your venture?
What kind of business model are you using?
How do you plan to start?
In many situations, much of the business funding during this phase either comes from references or family investors.
Example: Anya has an idea for a new car wheel-washing kit. She researches similar products currently on the market. She then tests her formula to determine its performance, examines the costs associated with producing her product and decides on her business model.
6. Seed funding
By now, the idea is an actual business with some customer traction. Entrepreneurs in this phase provide company equity in return for larger amounts of cash provided by investors. Costs covered by seed funding include:
market research on product-market-fit
Example: During seed funding, Maya receives input to determine her final products and targeted customer demographics. She also hires three new employees.
An IPO is the pinnacle of startup success. It occurs when a company offers its shares up for public purchase for the first time. The IPO helps raise funds for further growth or allows the startup owners to cash out their remaining shares for personal income.
Important events occur in preparation to issue an IPO. They are:
formation of a public offering team comprising SEC experts, lawyers, accountants and underwriters
compilation of the startup's information such as financials and anticipated future operations
preparation of an audit of the company's financial statements
completion of the governmental IPO requirements, which include filing the startup prospectus with the SEC and formalising the offering date
ensuring the company successfully fulfils the guidelines set by the Securities and Exchange Board of India (SEBI)
Example: Jane is ready for her hard work to pay off. She uses an IPO to sell her shares in the company. This will help her amass a huge amount of funds for increasing its bottom line.
8. Mezzanine funding and bridge loans
Fairly mature startups choose these types of loans. A mezzanine loan blends debt and equity for lenders, while bridge loans are short-term financing. They close the financial gap between this phase and the IPO. The funds might be used to buy out the management at another company or acquire a competitor. Loans typically last six to 12 months and companies pay them back with proceeds from the IPO.
Example: Sudha's goal is to issue an IPO for her company. She needs to produce her product on a larger scale before an IPO is feasible. She takes out a bridge loan to buy a competitor, which increases her market share.
Why is funding important for startups?
Funding is important for startups because of the following reasons:
Funding is required for growth
Startups need funding for growth. This growth may be in the form of acquiring new office space or hiring new employees, and these activities are generally capital intensive. These become imperative for startups when the size of the company grows beyond a certain limit.
Funding is required for marketing
Startups may require funding for marketing. Many technology-based startups require heavy spending on marketing activities as the competition is high and thus the cost of customer acquisition also becomes hig h. This is why such startups may require funds to spend on marketing so that they can acquire more customers and increase their market share.
Funding is required for fulfilling purchase orders
Many manufacturing-based startups require funding to fulfil their purchase orders. When such companies receive large purchase orders, they require buying raw materials and spending money on the actual manufacturing before they can ship the products and receive full payment from their clients. In such scenarios, they require funding to infuse more working capital into their business to be able to fulfil their purchase orders.
Funding is required for product development
Certain technology startups work on developing new products for their consumers. Such startups require funding to keep working on research and development so that they can create new and better products. Such research and development activities can be expensive depending on the technology in use.
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