Funding is an integral part of every business. Be it product development, sales and marketing, manufacturing, business funding is imperative to meet such necessities.

Warm Introductions

Warm introductions add value to your company and deploy the best financial support for your business. Ideally, such introductions include acquainting the company with connections of the founder, like:

  • Friends and family
  • Startup owners
  • PR company
  • Investment firm

Why do Startups require Funding?

A startup requires funding because of the following reasons:

  • Product development
  • Working capital requirements
  • Capital for equipment and raw material
  • Marketing and sale campaigns
  • Prototype creation expenses
  • Hiring team members
  • Legal services
  • License and certifications costs

Types of Startup Funding

Here is a detailed table format to describe the different types of startup funding:

Working CapitalEquity FinancingGrantsDebt Financing
OverviewSelling a share of the company’s equity for capitalFinancial award offered by a company to boost performanceBorrowing money and paying back with interest
RiskFinancier- No guarantee on investment.

Startup- Shareholders take ownership of a portion of the business.
Financier- Risk of not meeting business goals.

Startup- Risk of not getting a share of the grant
Financier – A lender has no authority over business operations.

Startup- Collateral is mandatory.
Return to investorsCapital gain for investorsZero returnInterest payments
Commitment levelsStartups have less pressure to meet repayment deadlines.Startups striving to meet the milestone laid down.Startups strictly adhere to a repayment timeline.
TypeNo reimbursement availableNo reimbursement availableRepayment with interest available within a fixed period
Participation in DecisionsHigh ZeroLess
SourcesFamily and friends, crowd Funding Accelerators, Angel Investors, Venture Capitalists, etc.Grant programs from corporate entities, State Government, Central Government, etc.Non-banking financial institutions, banks, government loan schemes, etc.

Stages of Startups and Source of Funding

There are several sources of funding available for startups based on the stages, like:

Idea Generation

Idea is generated at this stage.

Funding sources:

  • Bootstrapping/Self-financing: Growing your business with individual savings. No outside investment/capital.
  • Friends & Family: Most commonly used funding channel.
  • Business Plan/Pitching Events: Prize money that companies offer during business plan competitions.


A prototype is ready to be tested to determine the demand for the product/service.

Funding sources:

  • Incubators: Helps entrepreneurs launch the startup with value-added services.
  • Government Loan Schemes: SIDBI Fund of Funds and Startup India Seed Fund schemes provide low-cost capital to entrepreneurs.
  • Angel Investors: Investors who invest only in lucrative startups in exchange for equity.
  • Crowdfunding: Entrepreneurs raise money from several small investors via online platforms.

Early Traction

The product or service is launched in the market.

Funding sources:

  • Venture Capital Funds: Take startup equity in exchange for their investment.
  • Banks/Non-Banking Financial Companies (NBFCs): Provides Working capital for startups after reviewing the market traction.
  • Venture Debt Funds: Provide funds in a startup as debts.


The startup has witnessed speedy market growth, fueling the overall revenue.

Funding sources:

  • Venture Capital Funds: Ideal only for late-stage startups with substantial market traction.
  • Private Equity/Investment Firms: Provide funds only for fast-growing startups with a consistent growth record.

Exit Options

Funding sources:

  • Mergers & Acquisitions: The investor can sell the portfolio company to a different organization in the market.
  • Initial Public Offering (IPO): Applicable only for businesses with a consistent growth trajectory.
  • Selling Shares: Investors can sell their shares to other private equity firms.
  • Buybacks: The founders repurchase their shares from the investors to regain company control.

Steps to Startup Fund Raising

Here are the steps to startup fund raising:

  • Assessing Need for Funding: Startups must first determine why the funding is needed.
  • Assessing Investment Readiness: Startups must have a detailed plan of revenue projections, market position, competitive advantage, etc.
  • Preparation of Pitch deck: A detailed presentation pitching investors about all the crucial aspects of your startup is mandatory.
  • Investor Targeting: Using Investment Thesis is crucial to target the right investors.
  • Due Diligence by Interested Investors: Finalizing the funding depends on verifying the startup’s claim on market and growth numbers.
  • Term Sheet: A non-binding list that highlights the primary points of engagement between the startup and the investor.

What do Investors Look for in Startups?

 Here are the things investors look for in a startup:

  • Objective and Problem Solving: The startup must fix unique customer problems.
  • Management & Team: The skills and experience of the founder and the management team is significant.
  • Market Landscape: Market share, size, historical data, growth rates, etc., of a startup, define its potential for growth.
  • Scalability & Sustainability: Startups must have a sustainable business plan displaying the possibility of scalability.
  • Customers & Suppliers: Proper identification of the suppliers and buyers is crucial.
  • Competitive Analysis: A comprehensive analysis of the competitors offering similar product or services is needed
  • Sales & Marketing: Sales forecast, product mix, retention ratio, etc., are crucial aspects of a startup determining its profit.
  • Financial Assessment: A comprehensive financial business model that highlights annual cash inflows, investments needed, growth rates, etc.
  • Exit Avenues: A startup displaying acquisitions, initial public offerings, etc., adds values to an investor’s decision.

Startup India Funding Support

Here are the two schemes initiated by the Government of India to boost entrepreneurial growth:

  • SIDBI Fund of Funds Scheme: Provides capital to SEBI-registered Alternate Investment funds that invest only in high-potential companies.
  • Startup India Seed Fund Scheme: Offers financial aid to startups for prototype development, market-entry, proof of concept, etc.

Why is it Difficult for Small Businesses to get Loans from Banks?

Acquiring capital is difficult for small businesses from banks, since the latter:

  • Follows long regulations
  • Uses outdated process

Why Might Small Businesses Seek Alternative Financing?

Here are the reasons:

  • Easily qualified- Small businesses often fail to meet the requirements of traditional loans. In such a case, alternate financing helps.
  • Low credit score needed- High credit score is not always needed for alternate financing.
  • Quicker approval- Most alternate business loan provide access in less than one week, unlike traditional loans.

Business Financing Options without a Traditional Bank

Here is a list of the multiple business financing options when you do not qualify for a loan in a traditional bank:

  • Community development finance institutions: Provide funding to small and micro business owners without any collateral.
  • Venture capitalists: Takes a portion of the ownership of startups in exchange for capital, industry knowledge, connections, etc.
  • Partner financing: Investor offers capital in exchange for special access to distribution rights, products, staff, sales, etc.
  • Angel investors: Such investors only fund businesses that have the potential of a profitable future.
  • Invoice financing or factoring: Capital is offered based on your credibility and outstanding accounts receivable invoices.
  • Crowdfunding: Startups pool funds from several investors rather than seeking investment from one source only.
  • Grants: Startup businesses that are focused on science or research get grants from the government.
  • Peer-to-peer or marketplace lending: A financing alternative that introduces borrowers to several lending platforms via different websites.
  • Convertible debt: Business borrows funds from investors or investor groups and agree to convert the debt into equity in future.
  • Merchant cash advances: In such a form of financing, the financial provider offers a lump sum and takes ownership of a portion of the debit and credit card sales.
  • Microloans: Microloans are small business loans offered to promising entrepreneurs who have less or zero collateral.

How to find Business Financing Options?

By engaging with the right investors and drafting an appealing and focused business proposal, you can take a leap towards your company funding. But, it is always recommended to be explicit in your search (for investors) and pitch for a successful outcome.

How to Target a Venture Capitalist for Business Financing?

A venture capitalist (VC) should be secured based on his/her expertise in that stage of your business. Once a VC has been shortlisted, a formal approach should be made.

It is imperative to update the VC firm with the business developments. As a result, you will be able to build a bond with the investors and easily rope in funding when required.

How to Stay Motivated?

One of the key aspects throughout the process is motivation. For any startup, rejection is an integral factor in the journey. It is important to adapt and respond to make things work for you.