Overview
Embarking upon a new venture or even gaining an insight into the mechanics and the know-hows of the business world can oftentimes be quite distressing. Myriad websites and organisations exist to facilitate the knowledge of the prevailing business environment. Seldom does a write up in a coherent and comprehensive way that tries to explain the complexities and intricacies of funding opportunities, the business and market environment a company operates in and also the risks that come with a new venture. The premise of this blog rests mainly upon throwing some light upon funding models of companies, especially start-ups , assessing their incurring costs and their financing. Our talk lays stress upon the fuel of business that is money and its various utilitarian implications. A financial layout with a robust analysis of funding sources along with their investment motives, risk assessment, the company’s profitability have all been commented upon extensively. Systematic presentation along with clear, demonstrable and rigorous interpretation of terms have been provided for your gain. Emphasis on understanding has been placed seriously with due diligence. So let’s delve into it hoping that we can clear some of your doubts about these things.
The Need for Funds
The paucity of funds even in case of a brilliant idea can result in closure of the company. Many times it has been observed that the financial overburden on the creator of a business idea does not mitigate easily. The operation both short term and long term along with the realisation of financial goals takes up a toll on the budding entrepreneur. A relief comes in handy when the venture seems promising especially to the lenders and the investors. The worthiness of the idea and its possible profitability are rigorously assessed by these experienced financial players.
Let’s talk about some of the main points related to the growth of the start-ups and the financial pump they need initially.
A frequent case of bankruptcy is under capitalization (a severe case financial deficiency) . Most of these firms don’t have access to a sum of money that is at least equal to the projected revenue for the first year of business.
These firms also have to be mindful of contribution margin (Sales revenue). To break even the business must be able to reach a level of sales where the contribution margin is relatively high.
Miscellaneous costs incurred upon these firms constitute the insurance costs, energy costs, taxes and tax compliance evidence documents and the usual overhead costs plus the inventory costs.
Marketing and advertising costs these days incur heavily upon these fragile start-ups. Social media marketing that utilises certain keywords and rely heavily upon niche websites and word of mouth advertising is in vogue nowadays. Results of poor marketing are felt heavily by the companies. Yellow page directories, Television promotions, radio and outdoor ads(roadside billboards) also incur a huge cost on their shoestring funds.
Comes with all these things is the security costs especially incurred due to instances of cybercrime and online fraud. Security software and multi-layered, specialised security systems have to be installed in lieu of these dangers. The advancement of a good idea can also be forestalled by the presence of a few big companies where the market share of the product you are related to is captured in a big way by them. This event requires a lot of money to deal with and to in fact create a niche market for yourself and increase your visibility.
Lastly, the processes of modernization , upscaling and diversification with substantial Research and Development (R&D) obligations demand a great deal of money which the start-ups don’t usually have and so they resort to these financial borrowings which we are going to talk about in the next segment.
Phases of Funding
Balancing the innovative possibilities of the nascent company with the added responsibility of smooth day to day functioning requires a very well thought approach when it comes to planning and availability of funds at various stages of start-up launch. The uniqueness and problem solving factors especially concerned with software , pharmaceuticals and healthcare and other cutting edge technologies often comes with additional risks posed to the investors. These problems can be effectively tackled by solidly planned funding programs as in the extent and availability of funds when the company needs it. From the initial seed capital up to its various advanced stages of a complete sell-out, myriad problems exist which can hamper the progress of these companies.
The stages of funding have been elucidated in this part of the blog. They are as follows:-
Pre-seed capital – This is the first funding stage. This sort of funding comes in from the savings of the entrepreneurs, friends and family connections or whatever sources that are not in any way institutional or relates to organisational procedures
Seed capital – Value proposition and a robust valuation by the investors and lenders happens in this phase of initial funding round .This initial seed fund is mainly premised upon valuation. Here Value=Benefits-Costs. It describes in clear and exact terms about the worthiness of its models and products along with the possibility of a high profitability function. Various stakeholders and investors take into consideration various factors ultimately deciding up on them. The scalability of their products along with inputs of product design and cost minimizations are also carefully assessed in this round.
Series A round – It is the first significant round of Venture capital financing Series A rounds are traditionally a critical stage in the founding up of a company.
Series B round – 2nd round of funding for a business through investment and other post development finance networks.
Series C round – This sort of funding happens only to a quite successful company or start-up . Additional funding requirements are met through it.
We will discuss these funding models in detail in a later part of the blog.
Funding Sources
Money works as a fuel for any economic enterprise and also as a lubricant for its proper growth and functioning. So in this part of the blog we will lay stress upon the various financial networks or models from which funds can be derived. Also are mentioned financial tools which can help run a fledgling organisational setup.
Debt Financing – In this form of financing , the firm raises money for working capital by selling debt instruments (procedures promising money in future for current lending of money at a determined interest rate) to individual investors.
Equity Financing – This comprises selling an ownership interest or selling stocks or shares of your company to finance it. The entitlement to a fixed share herein dilutes the control nevertheless though it is considered as a less risky prospective.
Equipment/Asset Finance – A piece of machinery or inventory is offered as a collateral in return for funding opportunities.
Bootstrapping – In layman terms it is self funding, generally coming from the savings of the entrepreneurs. It is one of the most pervasive non-institutional forms of funding techniques. It is known for its inadequacy and non-operational financial availability.
Venture Capital firms and Angel Investors- The general atmosphere nowadays speaks heavily of these kinds of lending propositions. In return for equity, seed money is offered to the start-ups, especially the risky ventures. The progress has to be demonstrable and the idea valuable.
Miscellaneous sources of getting funds are Crowdsourcing, Start-up studios and other launch pads that take the marketing work in their own hands.
Series A, B, C Funding and its working model
Series A funding is the first critical stage in the founding of a new company. Here it becomes important to describe the term funding round. A funding round is a discrete round of investment by which a business or other enterprise raises money to fund operations, expansion, mergers or acquisition or some other business stunt. 10% to 30 % of the company is purchased in this step only. Series A comes from well established Venture Capital firms or Private equity firms. The potentiality of the company is assessed to be high if it reaches the valuation of about $10 million. Typically the funding ranges between $2 million and $15 million.
Series B funding is the second round of funding through investment. It takes place when it gets past its development stage. Their market worthiness and management success are rigorously assessed. Private equity firms and other high net worth investors and lenders take part in this process. The median Series B fund happens to be about $40 million.
Series C round of funding takes place when the company of yours has shown a consistent successful market performance and has delivered results. Expanding into new markets, acquiring other beneficial business prospects or looking for additional funds is the main concern of this funding round. Hedge funds and other high profile investment banks take part in these sorts of funding. They form their opinions on hard data rather than on expectations of future success.
Series D and E form the last rounds of funding processes. They are more or less similar in their clients and have generally a high profile lending community.
In this segment we tried to explain the various stages of funding in a much more detailed way , the participants and their beneficiaries alike. This revenue raising model moving through these complicated but effective financial tools seems to be the most congenial route for start-ups these days.
In this next segment we will try to focus our attention upon two nouveau -riche unicorns , their stupendous journey, very fresh that owing to the viability of funds have reached new heights.
PhysicsWallah – Until some time ago this name adorned the space of a YouTube Channel but now it has become the latest addition to the exclusive Unicorn Club of India, its 101st. This bootstrapped edtech platform has raised a valuation of about $100million in its maiden funding round. Westbridge Capital and GSV Ventures led the charge in this one. The story of a young engineering dropout to this scintillating success is one that speaks of grit and perseverance.
Founded by Alakh Pandey in 2016and then joined in by Prateek Maheshwari in 2020 PhysicsWallah prepares students for the coveted competitive engineering and medical entrance examinations. Its interactive educational content in the form of lectures and audio-visual media facilitates an easy route for handling baffling questions related to those exams.
Apart from it, the emotional connection that Mr Pandey has for his students is also worth noting. Most of his lectures are also strewn with a lot of inspirational talks. Since motivation is the key here Mr Pandey has plugged it right and success is now at his feet. He hopes to expand but the focus he says would be on the students and on nothing else.
The edtech platform had to battle several odds to reach up to this point. Self funded at the beginning , in 2020 it commenced an app but owing to its mass traffic it collapsed and would not work properly. Then came a massive faceoff with an unnamed coaching institution which started pulling off the staff of PW into itself on the account of Mr Pandey’s refusal to sell his company at the price of 75 crore rupees with a 10% stake. With the support of his devoted student cult he prevented any further problems and fought back hard and reached the point where he is now. This is one of a kind journey with its emblematic ups and downs but it also has the spirit of an underdog who is overwhelmingly carved out his way and defiantly stands on it too.
Polygon – Polygon is a platform for Ethereum scaling and infrastructure development. The company says that it also works upon Web3 services and facilitates other eponymous financial services.
Polygon after 5 funding rounds raised a total valuation of a whopping $450.5 million. Sandeep Naiwal, its co-founder says that he wants to create a bustling market for crypto trading here in India and after this massive success his efforts seem to come to fruition. Sustainability issues he says are also one of the top most priorities of his start-up.
Founded in 2017 it carved out its niche by offering services with a low transactional fees and high scalability. Combined with this also comes a possibility for software developers to create what the company calls as the DApps(Decentralised apps). Its market valuation fluctuated initially amidst criticism but now all that has been laid to rest. Crypto revolution is what the start-up aims to bring and the future turf seems to be green for now.
In this way we carefully sorted out the funding network , their viabilities and risks associated with an emphasis laid upon funding options available to start-up and also the various stages of raising revenue. Finally case studies of start-ups, one of the most important and currently in news , their different funding mechanisms and work they do were commented upon extensively. Hope this lays to rest some of your doubts related to this oft complicated topic.