If an individual wants to start a new business, there is a strict need of funding, whether it’s for office space, licenses, permits, product manufacturing and development, inventory, marketing or such other expense. This type of funding is described as startup funding or seed funding. It’s necessary for an entrepreneur to have an estimate and the way through which funds can be raised.
Relation of Funding with Equity
At the time of startup, when the idea was in your mind, your pie was 100% yours, even if it’s small. When you request funding and your company grows, the pie gets divided into several parts. As the number of investors increase, your slice along with the other investors gets bigger than the initial slice.
Whenever you require funding, you have to sell out a piece of the company in the form of equity and the investor, who provides you the money, becomes a co-owner of your company. It leaves a positive as well as negative impact. Positive impact is that your part percent is getting bigger and the negative impact is losing control on the company. So, to reduce this problem you should request the investment only when necessary.
Several Stages of Funding
- Idea Stage
At the very beginning when you were having several ideas in your head, you select the best among all and start processing to create value. At that time you have had your own 100% of it. You were the only one in your whole company who wants to start a journey of success without having a single thought of equity in your mind.
- Encounter with a Probable Co-Founder
To implement your idea physically it takes time to you alone. Then you need a person to get some help with the new skills bought by that individual. After few days of experience together, you will find increment in values you made. Then, as you are not able to pay to that person, you will find better to offer that person to be co-founder and you have to share equity with the co-founder. It’s up to you both, at what percent your deal gets on. Surely you will keep bigger pie as it’s your idea. And, it might be possible that the share will be 1:1 as per the effort made by the co-founder in providing the physical existence to your idea. It may motivate the co-founder and lead to a better trust and partnerships which will help both of you to work with full strength and attentiveness.
- Family and Friends
After a certain point both of you will feel a need of venture capital. But as it’s a start, you are not having enough to show or attract any of such investor, Family and Friends are the best option to take help from. With the proper discussion and documentation you both can request funding from both of yours families and friends by offering them equities in exchange. It will help you to proceed further and exceed your time limit to find an investor who invests in such startups as yours.
- Government programs Offer Seed Funding
Few of the Government Programs and Government Grants are also offering funding for entrepreneurs to initialize their project. It would be like a bank loan but for a lesser interest rate than the business loan through bank. To raise money from the government programs or grants, entrepreneur need to submit the project plan and once it get approved loan will be granted.
- Bank Loans and Financers as an Option
You can raise fund by applying for the business loan through banks and finance companies as well. It depends as per your project, presentation, pre-value, growth rate and certain other aspects. The same procedure happens with the finance companies too.
- Startup Needs Investors
Now, as you spent sufficient time with your idea to make it physically exist, you will be in a condition to show your project and products strategies, and attract investors to invest in your company. When you will get your desired investor, you have to provide a pie from the company to the investor.
- Venture Capital (VC) Stage
Finally you are having a registered company with employees and all. Now, it’s the time to approach VCs. If your project is found interesting, VCs will invest almost more than half the amount you spent on your project till now. This gives you an opportunity to be a big company.