Recently we have seen that there is huge rise in Startups . Every person having a business idea is starting their own business instead of doing a monotonous job. In Shark tank we came across many Startup ideas which encouraged many people, especially youth to start their own business.
It is said that all the Startups are not fundable, generally Venture capitalists invest in those Startups made for certain asset class which are high growth Technology based startups.
A startup in order to grow, require funding in various stages of business. It may either in the initial stage or in the growth stage, a Startup idea in order to develop and become a huge business requires funding. We often come across various technical terms used in Startup funding.
Let’s understand these terms,
Bootstrapping:- Itis generally starting a business with personal Financing. It may be in form of their savings, profits obtained from other business etc. This form of financing allows entrepreneur to maintain more control , but also can increase financial strain. A business that uses bootstrapping is characterized by a high dependence on internal sources of financing, credit cards, mortgages, and loans. In other words, bootstrapping is characterized by limited sources of financing.
Seed Round:- Just like a seed is required to be sowed to grow into a tree, similarly for startups they need money at the initial stages in order to grow and get the help of venture capitalists.This is the first round of funding in a Startup. The money raised in seed round is typically used to finance early stage of startup’s development. This money generally covers essentials a Startup needs such as a business plan and initial operating expenses. This is the first stage of financing and the main goal at this point is to attract more financing by catching the eye of Venture Capitalists. Various ways of seed funding include Crowdfunding, Corporate seed funding, Angel Investor, Incubators, Accelerators etc.
Series funding A, B, C…:- This is first round of funding provided by venture capitalists after founder raised money through seed financing. This stage comes when the person has idea about its revenue model, its number of users, and have an understanding about its key performance indicators. So, first round of financing by Venture capitalists is Series A funding. The money received in this funding is used to increase revenue. It may typically range from 7cr to 25cr. Series B funding can range from 30r to 70cr funding. And Series C funding can range from 70cr to 200r funding. Commonly founder going for series C funding might be looking to take their product out of their home country and reach an international market. This series funding goes on to D, E, F etc basing on the requirement of financing and growth achieved by the startup.
Initial Public Offer:- It means making the company public and listing the shares in stock exchange either in India or other country. A successful IPO spells out success for a company. It generates interest and can be a signal to the top talent in the industry that this company has made it. This can also be a boost to employees’ pride, especially after sticking with a startup through thick and thin.
Pre money and Post money valuation:- Pre money valuation refers to value of the company calculated without including the latest round of funding. Pre-money valuations helps to know the company worth before receiving any external investment, Whereas Post money valuations means the value of the company after the investment has been made. So, the post-money valuation includes investment received by company from outside financing.
Post money valuation – Total amount invested in rupees/ Percentage of Equity investor receives
Pre money valuation- Post money valuation- Investment amount.
Down round and UP round Financing:- Both are effective ways of Financing, if the pre-money valuation increases after the investment made, it is called as UP round financing but if the pre-money valuation decreases after the investment made it is considered as down round financing. An UP round financing indicates that the company is growing, and more likely profitable to the investors whereas down round is an indicator that the company is in trouble and the growth has been slowed down.
Exit Strategies:- This is the stage every Investor and Venture Capitalist will be looking for. Venture capitalists who invest in a startup not only brings financing but also their expertise and connections obtained from other companies they have invested or working on. Every investor who invests will look for making higher returns from what they have invested and exit profitably.
One of the exit strategies include Initial Public offering. There is usually a lock-up period after the initial offering that investors (including venture capitalists) are not allowed to sell their shares. It is to prevent a decline in the stock price as a result of large numbers of shares flooding into the market.
Other way is Shares Buyback, where the investee company buybacks its own shares from the investors like venture capitalists.
Another way of exit strategy is trading the shares in Private Equity secondary market, since all the companies cannot make an IPO or it may take long, investors can sell their shares to new investors. Since the shares are not generally issued to public , trade generally takes place in private equity secondary market.
