HOW TO RAISE FUNDS FOR YOUR STARTUP?
Fundraising is one of the key components of any startup. It sits at the core of any startup. It can be done in a number of ways but founders generally prefer two ways, which are capital raising through investors or by taking a loan, there is one another way but in most cases, it is not possible which is through their personal savings.
Shareholders are referred to as the CEO’s CEO because the company is working very hard to make money for the stakeholders, not the CEO. The CEO’s are paid regularly regardless of the performance of the company.
Loans also become necessary when the people holding the equity shares don’t want to sell their position rather they want to stay with the company but on the other hand, the company is in need of cash for obvious reasons then the only option that stays with the company is to take loans.
In my opinion, Bill Gates is one of the greatest investors of all time (with the exception of Warren Buffet) as he has managed to keep himself on the top for 2 decades. Unlike Jeff Bezos and Elon Musk, he has a very diversified portfolio, which has stocks from various industries.
TYPES OF FUNDRAISING
1. Through Investors
This is the most common way for raising capital in startups. Founders usually prefer this method over any other method because it is easily and readily available.
The problem with investor’s capital raising is that you lose a portion of your company as the investors take a stake in your company. At each round of funding, it gets you to lose money in the form of dilution. Generally, investors opt for a 20% to 25% stake. The initial value of the company is calculated and then the investment is done accordingly.
So next time whenever you hear the news of some company that has raised a certain amount of funds then that is a good and bad indication, good as the company is trying to expand its business and bad as the percentage of the equity share is decreasing with the founder, hence the control of the company.
There have been many instances where the founder of the company has been fired from his company itself by the board members. This happens because of the decreasing stake of the founder in the company or having a different ideology than other board members. Legendary Steve Jobs had to leave Apple due to these reasons and Uber’s founder Garrett Camp had to leave too from his own company.
See, fundraising is a wonderful thing but over a period of multiple rounds, it becomes significantly worse as the stake of the previous owners has to be sold in order to secure funding.
There are 2 types of investors:-
1. Angel Investor (one who provides funding along with guidance)
2. Venture Capitalists (one who only provides funding)
This is a good way of raising capital at the start of the company, bad when some company or individual holds more than half the shares because they now become the owners of the company.
2. By Taking Loans
Now comes the second type of fundraising which isby taking loans, it is said that the one who starts his company by taking loans is a moron. I don’t think so because there are certain factors that come into play. Founders usually do this for keeping their stake in the company or if they have a strong idea for which they know it is going to be profitable in the near future or they have previously founded companies for which they are certain they will pay the loans.
The real problem with loans is that your company has to be profitable or it should soon going to be profitable very soon as the debt pile up very fast.
In the fundraised by investors, the capital that the founders get doesn’t need to be returned back as they are exchanged for equity shares but in the case of loans, they have to be paid back which sometimes becomes the sole reason for the closure of the company in the first place because the banks are least interested in your product rather they are interested in getting their money back with interest.
Loans are good at a later stage in a company when the company is profitable and can repay the loans safely, bad when you are starting from scratch then you need to make your product profitable very fast.
3. Through Personal Savings
This type of fundraising is very rare because it involves direct funding from the founder’s pocket. The first place the company is being started is because the founder is low on cash and needs to do something extraordinary.
An example of this kind is the founders of Zerodha (an Indian-based firm used for the trading of stocks, equivalent to Robinhood) who has made the app from his savings of $200,000, and today it is the leading business in India.
It is the best type of funding as it doesn’t involve any dilution of shares or repaying of huge debts.
It is good at the start of the company, bad when the company has become profitable enough to pay its debts completely.
Out of the 3, Which Method is the Best?
Simply put together personal savings> investor investment> loans in that order.
Each fundraising has its pros and cons depending on the situation, if done properly any type can do wonders for the company, founders, and shareholders.
The people whose previous generation didn’t do any startup or any business, those individuals didn’t tend to have a high percentage of equity in the company after well establishment because most of the shares go into fundraising, take Elon Musk, Jeff Bezos, and Bill Gates, for example, they own 20%, 10.6%, and 1.36% respectively. Although Bill donated most of his shares for charitable work.
This isn’t the case with the ones whose previous generation were business owners, as they tend to have a high equity share in the company, take Mukesh Ambani (richest person in Asia) for example, his father was the founder of Reliance (the highest market cap company in India) and as of today, Ambani owns 55% of Reliance.