Funding Explained for Startup Business
A startup business is a lot more than just an idea. It consists of time, effort, dedication, focus, and important investment. Today, due to technological advancement, most startup businesses require funding to develop a platform. Such platform costs are expensive and are not affordable for most startup businesses. Furthermore, funding is also essential as startup businesses need to purchase furniture, rent office space, and hire staff for smooth business operation. More importantly, startup businesses require capital to grow. There is a high chance for the startups to fail if it is unable to raise the right amount of funding. To raise the capital, startup businesses first need to understand the difference between various funding rounds and types of investment.
Startup Business Funding Rounds
Startup businesses cannot have a huge amount of funding or investment at the first attempt. Entrepreneurs must go through several funding rounds and prove that the idea is feasible to deserve the capital. Each round is intended to generate enough capital to expand further. Funding rounds can take as long as a year. However, it can come down to a 6 or even 3-month timeframe.
There are three stages of startup funding rounds:
- Series A, B & C
In this funding round, the startup business will try to give their idea the initial push and spend their own money. After that, the entrepreneurs can attract angel investors for the seed stage capital. The startup business can use the funding for further research, market testing, hiring, and many more. A successful startup business from the pre-seed funding can receive additional capital from the investor.
Series A, B, & C Funding
The series funding consists of rounds A, B & C. Firstly, the round A funding focuses on startup businesses that have a proven business model, decent customer base, and are generating profit. In this funding round, the investor will go through the real data and progress reports. Investors expect the business to turn into a valuable money-making machine and scale up to the next stage.
Secondly, round B funding assists to turn the startup business into an enterprise. The business that will receive round B funding are mature, have a huge customer base, and expect venture capitalist level participation. In this stage, the startup business will scale up the team and explore new markets.
Lastly, the round C funding assists the business to move towards a higher level of expansion. It is the final funding stage of the series funding. In this stage, the business will invest in the development of a new product or service along with expanding the current project capabilities. The startup business works with the largest VC firms and corporate-level investors in this final stage of funding.
The Initial Public Offering (IPO) is the procedure of allowing a private company’s share to the public. Here, the business will gather a vast amount of funding available on the public market. However, it adds additional difficulty as the businesses deal with shareholders along with the investors.
Context of Nepal
In recent years, it has been quite eventful for Nepalese startup businesses. A food delivery platform was able to secure its second-round funding from a private equity (PE) firm. Other healthcare platforms and e-commerce sites have also been successful to secure their first round of funding from PE firms. This illustrates that the Nepalese startup business ecosystem is growing from its infancy to an opportunity for investment. The energetic youth entrepreneurs with various innovative ideas and solutions are emerging. This can be seen in the last 7-8 years’ timeframe.
Finally, it is always a risk to establish a startup business without appropriate funding. To summarize, the entrepreneurs can focus on the right investor and right team that will assist to go through various funding rounds and become successful startup businesses.