6 Ways To Raise Capital For Your Startup In 2023 The fundamental sources of fund-raising for startups isn't likely to witness a major change from previous years
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Fundraising for startups in the first half of 2023 is likely to be a bit more challenging than what many startup founders experienced in 2021 and Q1 and 2 of 2022. The macro environment has become challenging in the past few months and at least the first half of 2023 is expected to see continued moderation in funding activity as compared to the previous two years. However, the fundamental sources of fund-raising for startups isn't likely to witness a major change from previous years. Apart from the type of capital needed, the experience of founders etc. The sources a startup may reach out to is also a function of the stage the startup is at.
1. Finding Angel Investors
Angel investments are a popular funding choice for many startups. Angel investing networks have grown significantly in the past 5 years in the country and have become a strong source for early-stage funding for new-age entrepreneurs. Angel investors are typically high-net-worth individuals who invest their own money into startups that they believe have the potential to be a multibagger in the future. In addition to providing the capital that is needed to grow a business, angel investors often share their business expertise, valuable mentorship and industry connections to help the startup succeed.
2. Venture Capital (VC)
VC money is typically growth stage money which startups a little ahead in their growth journey look for. VCs are the firms or groups of investors that provide funding for the initial stages of a startup in exchange for ownership in the company. This can be a good option for startups that have a strong business plan and a clear path to growth, but may not have the resources or credit to secure traditional forms of financing. VCs also provide mentoring, add immense value to startups by connecting them with relevant people and also support in building the team at startups by helping in key hirings. In recent years, many traditional VC funds have also incorporated micro-VC accelerator programs to be able to catch high potential startups early in their journey.
3. Incentives under Government Schemes
There has been a strong impetus from the Government on strengthening the startup's ecosystem in recent few years. There are several Central as well as State government schemes for young startups to benefit from. The various governments have launched incentives and schemes that aim to benefit startups in raising capital as well as promote the socio-economic growth of rural India, women entrepreneurs, educated youth, small-scale industries (SSIs), people living in rural areas, skilling / upskilling, job creations etc. For example, the government may offer tax credits to businesses that invest in certain types of projects, such as R&D or renewable energy. These credits can help reduce a business's tax bill and free up capital for other uses.
4. Avail Loans from Private and Public Sector Banks
Debt capital is normally one of the primary sources of funding for traditional businesses with steady cash flows and which have collateral to provide to the lending institutions. However, given most startups struggle to make meaningful revenue for the initial few years, this is not a convenient option for many startups to avail funds from. However, at a later stage certain categories of startups may find this as a lucrative option to raise funds from as opposed to VC money in lieu of equity shares. Many traditional banks have now set up startup funding divisions where they are re-evaluating parameters for extending loans.
5. Revenue based financing (RBF)
Early-stage startups may lack the working capital or established credit lines that would allow them to execute their growth roadmaps quickly. Revenue based financing can be accessed by businesses having high growth trajectory, predictable margins but which need funds to achieve growth. Revenue financing is basically focused on businesses short term capital requirements such as working capital, inventory fulfillment, etc. Unlike banks, RBF requires no mortgage as a guarantee and is rather done on the basis of businesses' previous months performances, collectibles, growth etc.
6. Partnerships, accelerators and incubation centres
Partnering with a larger company or joining an incubator or accelerator program can be a good way for startups to access new markets, customers, and resources. These types of partnerships and incubations often involve the exchange of equity or other forms of financial compensation. Many corporations have started their accelerator programs which not only helps foster innovation in the ecosystem with support to early-stage startups but also acts as potential acquisition opportunities for these corporations.
Most renowned academic institutions have initiated incubation programs to promote entrepreneurship amongst their students/alums as well as in their regions. These can become a great source of low-cost funding to very early-stage firms, many of which are not ready for even angel funding.
Each of these options has its own advantages and it is important for startups to carefully consider their options before choosing the best path forward. In addition, it is also important for startups to carefully manage their financial resources and the manner in which they raise funds, and make sure that they are using their funds effectively to maximize their chances of success.