What do Airbnb, Ubеr, and Spotify havе in common? They arе all succеssful startups that have revolutionized their rеspеctivе industriеs. But thеy arе also еxamplеs of startups that facеd significant challеngеs in raising capital to launch and grow thеir businеssеs. Airbnb had to sеll cеrеal boxеs to fund thеir initial opеrations. Ubеr had to pitch to ovеr 100 invеstors bеforе getting their first yеs. Spotify had to dеal with thе complеx and costly licеnsing fееs of thе music industry.

Thеse storiеs show that gеtting startup capital is not еasy, but it is also essential for any еntrеprеnеur who wants to turn their idea into rеality. Startup capital is thе monеy that entrepreneurs nееd to fund their initial еxpеnsеs, such as product dеvеlopmеnt, markеt rеsеarch, invеntory, officе spacе, hiring, and markеting. Without еnough startup capital, a businеss may fail bеforе it even launches.

According to a rеcеnt report by Startup Genome, 90% of startups fail within the first thrее yеars of opеration. One of the main rеasons for this high failurе ratе is thе lack of sufficiеnt funding.

So, how do startups gеt capital? Thеrе arе different sourcеs and mеthods of raising monеy for a nеw vеnturе, еach with its own advantagеs and disadvantagеs. In this articlе, wе will еxplorе some of the most common ways of gеtting startup capital, such as bootstrapping, crowdfunding, angеl invеstors, vеnturе capitalists, and loans. Wе will also provide best practices for еntrеprеnеurs who want to sеcurе funding for their startups.

What is Start-up Capital & Why do you need it ?

Startup Capital is thе monеy that you nееd to launch and run your nеw business until it becomes profitablе. It can cover operational  expenses such as Research and dеvеlopmеnt, Product development and manufacturing, Invеntory and suppliеs, officе spacе and еquipmеnt, markеting and advеrtising, working capital. 

Startup Capital is essential for any nеw businеss bеcausе it allows you to tеst your idea, validatе your markеt, build your tеam and grow your customеr basе. Without еnough startup capital, you may run out of cash before you can generate еnough rеvеnuе to sustain your business. This can lеad to missеd opportunitiеs, customеr dissatisfaction and ultimatеly businеss failure. 

Some of the following sources of funding are :

Bootstrapping

Bootstrapping is the process of funding a business with personal savings, credit cards, or other sources of income. This is the most common way of starting a business, as it does not require any external approval or involvement. Bootstrapping allows entrepreneurs to retain full ownership and control of their business, and avoid paying interest or giving up equity to investors.

However, bootstrapping also has its limitations. It may not provide enough capital to cover all the costs of launching and growing a business, especially in capital-intensive industries. It also exposes the entrepreneur to personal financial risk, as they may lose their savings or incur debt if the business fails. Bootstrapping may also limit the growth potential of the business, as it may not be able to access the resources, expertise, and networks that investors can provide.

For Example, One of the most remarkable examples of bootstrapping in India is Zerodha, an online discount broking company that offers retail stock brokerage facilities at low costs. Zerodha was founded in 2010 by brothers Nithin and Nikhil Kamath, who used their personal savings and income from their previous trading business to start the company. Zerodha did not raise any external funding, and relied on its innovative technology, customer service, and word-of-mouth marketing to grow its client base and revenue. Zerodha became profitable in its first year of operation, and has maintained its profitability and growth ever since. In 2020, Zerodha achieved a self-assessed valuation of over $1 billion, making it one of the rare profitable and bootstrapped unicorns in the country. Zerodha’s success story shows that bootstrapping can be a viable and rewarding way of funding a startup, if done with the right vision, strategy, and execution.

Friends and family

This is the money that entrepreneurs borrow or receive as gifts from their relatives and close friends. It is a convenient and flexible way to fund a startup, as it usually involves low or no interest rates and minimal paperwork. However, it also carries the risk of damaging personal relationships and losing trust in case of failure.

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According to the report- Investor landscape 2023,  The chart represents the number of deals made by family offices and funds in India between 2015 to Q1-2023. There were 200+ deals made during this period and the CAGR of funding deals was 18%. 

There are many ways to get capital for your startup, but they can be broadly categorized into three types: equity financing, debt financing, and grants.

1. Equity Financing

Equity financing involves selling a portion of your company's ownership (equity) in exchange for capital. This means that you will have to share your profits and decision-making power with your investors, who will become your shareholders. Equity financing can come from various sources, such as:

• Angel Investors

Angel investors are wealthy individuals who invest their own money in early-stage startups, usually in exchange for equity or convertible debt. Angel investors typically invest smaller amounts than venture capitalists, ranging from a few thousand to a few million dollars. Angel investors can provide valuable mentorship, advice, and connections to entrepreneurs, as they often have experience and expertise in the industry or market. Angel investors can also help entrepreneurs access other sources of funding, such as venture capital or grants.

However, angel investors also have their drawbacks. They may have different expectations and interests than the entrepreneurs, and may influence the direction and strategy of the business. They may also demand a high return on their investment, or a large stake in the business, which may dilute the ownership and control of the entrepreneurs. Angel investors may also be difficult to find and attract, as they tend to invest in businesses that they are familiar with or have a personal connection to.

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According to the report- Investor landscape 2023, The chart represents the number of deals made by angel networks in India between 2014 to Q1 2023. There were 600 deals made during this period and the CAGR of funding deals was 22%. This reveals the investors active participation in the Indian startup ecosystem.

• Venture Capital
  

​Venture capital is a form of financing that involves investing in high-growth, high-risk startups, usually in exchange for equity or convertible debt. Venture capitalists are professional investors who manage funds that pool money from various sources, such as institutional investors, corporations, or wealthy individuals. Venture capitalists typically invest larger amounts than angel investors, ranging from a few million to hundreds of millions of dollars. Venture capitalists can provide significant resources, expertise, and networks to entrepreneurs, as they often have access to industry leaders, partners, and customers. Venture capitalists can also help entrepreneurs scale their business and prepare for an exit, such as an acquisition or an IPO.

However, venture capital also has its disadvantages. It is highly competitive and selective, as venture capitalists only invest in a small fraction of the startups that pitch to them. It also involves giving up a substantial amount of equity and control, as venture capitalists usually have a say in the major decisions and operations of the business. Venture capital also comes with a lot of pressure and expectations, as venture capitalists expect a high and fast return on their investment, and may push the entrepreneurs to grow faster than they are ready for.

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According to the report- Investor landscape 2023,  The chart represents the number of deals made by Micro VCs in India between 2015 to Q1 2023. There were 550+ deals made during this period and the CAGR of funding deals was 26%. 

• Corporate Investors
  

Corporate investors play the role of strategic allies. Beyond providing capital, they offer startups access to valuable resources, strategic partnerships, and industry networks. For startups, aligning with corporate investors can be a game-changer, offering support in navigating the complexities of the business world.

• Private Equity

As startups mature, private equity firms step in as significant players. These firms invest substantial funds in exchange for a significant stake in the company. Private equity becomes the fuel for scaling operations, allowing startups to reach new heights and explore uncharted territories.

The choice of the best source of startup capital depends on several factors, such as the type, stage, and potential of the business, the amount and purpose of the funding, the availability and accessibility of the funding options, and the preferences and goals of the entrepreneurs.

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According to the report- Investor landscape 2023, The chart represents the number of deals made by corporates & CVs in India between 2014 to H1 2023. There were 900 deals made during this period and the CAGR of funding deals was 5%. 

2. Debt Financing

Debt financing involves borrowing money and paying it back with interest. This means that you will not have to give up any ownership or control of your business, but you will have to repay your debt on time and in full, regardless of your profitability. Debt financing can come from various sources, such as:

• Banks: These are traditional financial institutions that can provide loans, lines of credit, and other products to startups, usually based on your credit history, collateral, and business plan. Banks can offer lower interest rates and longer repayment terms than other lenders, but they may also have stricter requirements and more paperwork.
  
• ​Non-banking financial institutions (NBFIs): These are alternative lenders that can provide loans, invoice financing, merchant cash advances, and other products to startups, usually based on your revenue, cash flow, and future potential. NBFIs can offer faster and easier access to capital than banks, but they may also charge higher interest rates and fees.
• Government loan schemes: These are programs that are supported or subsidized by the government to provide loans or guarantees to startups, usually based on your industry, location, or social impact. Government loan schemes can offer more favorable terms and conditions than other lenders, but they may also have more eligibility criteria and regulations.

3. Grants

Grants are awards, usually financial, that are given by an entity to a startup to support a specific goal or objective, such as innovation, research, or social good. This means that you will not have to give up any ownership or control of your business, nor repay the money you receive. However, you will have to meet certain milestones and report your progress and outcomes to the grantor. Grants can come from various sources, such as:

• Central government: These are agencies or departments that are part of the national government and can provide grants to startups, usually based on your sector, technology, or problem. Central government grants can offer large amounts of money and prestige, but they may also have high competition and bureaucracy.

• State governments: These are authorities or bodies that are part of the regional or local government and can provide grants to startups, usually based on your location, community, or impact. State government grants can offer more tailored and accessible support, but they may also have limited resources and visibility.

• Corporate challenges: These are contests or competitions that are organized by large companies or organizations and can provide grants to startups, usually based on your solution, innovation, or alignment. Corporate challenges can offer valuable exposure and partnerships, but they may also have specific expectations and conditions.

  
  

Let’s look into the current outlook of Indian Startups 

​According to the State of Indian Startup Ecosystem Report 2023 by Inc42, the Indian startup ecosystem has witnessed remarkable growth and resilience in the past years. The report reveals that the Indian startups raised a total of $141 billion in funding across 9,560 deals in 2023, which is a 14% increase from the previous year. The report also shows that the Indian startups attracted a diverse and global pool of investors, with 1,383 unique investors participating in the funding rounds, of which 494 were foreign investors. The report further highlights that the Indian startups have achieved several milestones and innovations in various sectors and domains, such as fintech, edtech, healthtech, agritech, e-commerce, SaaS, and deep tech.

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Indian Startups have raised over $141 Bn since 2014.  Over the span of nine years, both the funding amount and deals have surged 28x and 25x respectively. This graph represents the funding raised by Indian startups.

The report suggests that the Indian startup ecosystem is poised for greater growth and opportunities in the coming years, as the country emerges as a leading hub of innovation and entrepreneurship in the world. The report also provides insights and recommendations for entrepreneurs, investors, policymakers, and other stakeholders to leverage the potential and overcome the challenges of the Indian startup ecosystem.

According to thе rеport Indian Startups funding H1-2023 by Entrackr, This piе chart illustrates the distribution of dеals across diffеrеnt stagеs of funding in H1 2023. Thе majority of thе dеals (218) wеrе іn thе early stages of seed and prе-sееd funding, which togеthеr accountеd for morе than 40% of thе total dеals. Thе nеxt most common stagе was Prе Sеriеs A, with 75 dеals, followеd by Sеriеs A, with 83 dеals. Thе growth stagе dеals, which includеd Sеriеs B, C, and D, had 53 dеals in total. 

How to Choose the Right Type of Capital for Your Startup?

The right type of capital for your startup depends on various factors, such as:

Stage of development: Different types of capital are more suitable for different stages of your startup journey. For example, grants and angel investors are more common for early-stage startups, while VCs and banks are more common for later-stage startups.

Funding needs: Different types of capital can provide different amounts of money and have different costs and risks. For example, equity financing can provide more money and have lower costs and risks than debt financing, but it also requires giving up more ownership and control.

Growth potential: Different types of capital have different expectations and returns on their investment. For example, VCs and corporate challenges are more interested in startups that have high growth potential and can generate large profits or impact, while NBFIs and government loan schemes are more interested in startups that have steady cash flow and can repay their debt.

​Best Practices  for Raising Capital​

Raising capital is not an easy task, and it requires a lot of planning, preparation, and persistence. Here are some of the best practices and tips for raising capital for startups:

​Know your needs and goals:  Before seeking capital, you should have a clear idea of how much money you need, what you need it for, and what you want to achieve with it. You should also have a realistic and detailed budget, timeline, and milestones for your startup. This will help you determine the best source of capital for your startup, and how to pitch and negotiate with potential funders.

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Know your alternatives: You should also research and explore the different sources of capital available for your startup, and compare their pros and cons. You should also consider the trade-offs and implications of each source of capital, such as the cost, risk, control, and value. You should also have a backup plan and a contingency fund in case your primary source of capital fails or falls short.

​Know your market and customers: You should also have a deep and thorough understanding of your market and customers, and how your product or service solves their problem or meets their need. You should also have a clear and compelling value proposition, competitive advantage, and growth strategy for your startup. This will help you demonstrate and validate the potential and viability of your startup, and how you can generate revenue and profit.
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Know your team and partners: You should also have a strong and diverse team and partners for your startup, and how they contribute to your vision and mission. You should also have a clear and effective communication and collaboration system for your startup. This will help you build and maintain trust and credibility with your funders, and how you can execute and deliver your product or service.

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Know your funders and investors: You should also have a targeted and customized approach for each funder or investor you approach, and how you can align your goals and interests with theirs. You should also have a clear and concise pitch deck, business plan, and financial model for your startup, and how you can answer their questions and concerns. You should also have a clear and fair valuation, term sheet, and exit strategy for your startup, and how you can negotiate and close the deal.

Conclusion

Startup capital is essential for launching and growing a new business, but it is not easy to obtain. Entrepreneurs need to consider the different sources and methods of raising money, and weigh the pros and cons of each option. They also need to have a clear and compelling business plan, a realistic and achievable budget, and a strong and convincing pitch. By doing so, they can increase their chances of getting the startup capital they need, and turn their idea into a successful venture.

With a substantial dry powder reserve exceeding $18 billion as of December 2022, investors are treading carefully. This caution stems from the possibility of down rounds, where financings occur at lower valuations than before. The changing fortunes of Indian startups highlight the need for a strategic and resilient approach to fundraising.