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Startup Funding Options

Startup needs funding to create the prototype, hire team, pay for infrastructure, working capital, and marketing, to name a few expenses. Funding, which is a combination of equity, debt, and grants has trade-offs in terms of cost-benefit attributes such as ownership, cost of finance, risks, control, leverage mix and expectations of funding source.

In India, the Department for Promotion of Industry and Internal Trade (DPIIT), defines what is a startup business and if qualified there are various benefits such as tax benefits of exemption under section 80-IAC of the Income-tax Act, funding support, and simplification and handholding by government agencies.

For a startup, the source of funding can be reviewed along the life cycle of the startup journey.

a) Ideation (pre-seed stage), where there idea has originated but the startup needs to develop the product. Funding is mainly through informal sources such as bootstrapping or self-funding, tapping friends and family or obtaining grants and prize money through pitching events of the business plan.

b) Validation (seed stage) where a prototype is ready but the product or service needs validation for market potential. Funding is via Incubators (who provide value added services including office space), government loans, Angel investors (high net-worth individuals who invest small amounts but early), and crowdsourcing where the public may support the startup by contributing small amounts.

c) Early Traction Stage (Series A Stage) where the product or services is introduced to the market and performance measures include revenue, customers, application downloads or other growth measures. Funding is needed for marketing and brand recognition or hiring of senior team members that give more bandwidth to the founder. The funding options are typically Venture Capital funds, Venture Debt funds and NBFC (Non-Banking Financial Corporations) who can invest larger amounts by deploying and managing funds from other investors.

d) Scaling the Business (Series B,C, D & E) where the startup is looking for rapid growth in revenue. Funding at this stage includes larger Venture Capital funds and Private Equity/ Investment Funds that provide funding for late stage, growth oriented startups who are looking to exit.

Financing options in either stage include Equity or variants and Debt-based variants. Equity investment variants include Equity shares/warrants, Compulsory Convertible Preference Shares (CCPS) and Compulsory Convertible Debentures (CCD). Debt funding, though difficult to obtain due to the business risk, include Optionally Convertible Debentures (OCD), Optionally Convertible Preference Shares (OCPS), and Non-Convertible Debentures (NCD).

e) Exit Stage where the startup founders and funding firms are looking to cash in on the startup success. This exit can be done via IPO (Initial Public Offering), merger/ acquisition, or some form of equity/share sale. 

The government of India has setup startupindia.gov.in to provide valuable resources to startups including providing names of mentors, incubators and investors.

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