Breaking Funding Myths For Start-ups
India stands tall and firm as one of the world’s largest start-up ecosystems. In 2021, India gained several new ‘unicorns’ – start-ups with a valuation of 1 billion USD or more. Needless to say, Indian start-ups have gone ahead to raise sizable funds from sources like venture capital, angel investing, and revenue-based financing.
At the same time, entrepreneurs are often deterred by a plethora of misinformation, or worse – disinformation about funding. So, allow us to break down some myths on funding for start-ups and present a holistic picture of reality.
Myths About Start-Ups Vs Reality
Myth 1: You can raise funding only if you are building a prospective unicorn.
Reality: Investors and fintechs seek out profitable yet innovative businesses outside the quintessential VC-start-up circuit.ly
Venture capitalists are usually on the lookout for soon-to-be unicorns. That being said, there are roughly 40 tech start-ups in India that are unicorns. This implies that many businesses are being overlooked or are deemed underqualified for VC funding.
On the bright side, fintechs have stepped in to offer start-ups the wherewithal to capitalise on opportunities. Moreover, these investors are not particularly keen to build a unicorn but generate adequate risk-weighted returns.
Myth 2: You need a venture-capital partner for funding for start-ups.
Reality: You can choose from a number of funding types, albeit after weighing in their benefits and drawbacks.
Business Loans: Traditional small businesses can avail bank loans to buy equipment or inventory. A business loan is suitable if you have adequate collateral to leverage and the ability to repay the loan lest your start-up fails.
However, this type of financing is not easily available for a business with limited assets, young founders, and/or growth trajectories that outpace a bank’s lending capacity. Moreover, bank loans are not very safe because if your start-up fails, you will be left with practically nothing – neither your business nor your assets.
RBF: Today, many small businesses and early-stage ventures turn to revenue-based financing or RBF. This start-up funding in India allows businesses to raise funds based on their projected revenues. As a result, it does not require any kind of collateral or equity dilution. Additionally, it ensures that founders continue to have complete freedom in terms of managing the affairs of their company.
Invoice discounting: Although it’s not advisable to start as a bootstrapped business, it is wise to keep your liabilities to a minimum during the initial years of operation. And, this is where invoice discounting can be a resourceful funding for start-ups. It allows businesses to fulfil their financial needs by using their unpaid invoices. Therefore, business owners can easily release a lump-sum amount otherwise tied up in their account receivables.
Myth 3: Funding via invoice financing is only for failing businesses.
Reality: You are not availing a loan to keep your firm afloat. Instead, you are seeking the cash flow injection that you are owed to support your business finances.
Having a positive cash flow is imperative for growth, especially during the early years of business. Here, invoice discounting essentially pays a business the money that is already owed to it. In this way, funding for start-ups by way of invoice discounting can effectively push a start-up off the ground.
Myth 4: Fundraising is time-consuming.
Reality: Revenue-based funding and invoice discounting can help companies raise funds faster and more efficiently.
The advent of the digital age has democratised numerous functions that once remained in the hands of a select few, including fundraising. Today, unlike the conventional funding for start-ups, RBF and invoice discounting use automated data analysis, thereby cutting short months of due diligence and a myriad of paperwork. In fact, some integrated cash flow solutions providers like KredX extend funds within 24-72 hours*.
Moreover, entrepreneurs can now cut corners and avoid the traditional start-up roadmap by turning to these financing platforms.
Coupled with an innovative technology product suite, these new-age platforms address working capital as well as growth capital challenges faced by enterprises and entrepreneurs. These have helped Indian companies across the business ecosystem through tailor-made solutions.
Contrary to popular perception, funding for start-ups is not a nerve-racking experience. However, it calls for you to evaluate the ins and outs of various sources of funding so that you can make the right call. And remember, your goal is not mere fundraising. You should also keep an eye out for efficient allocation of these funds towards building a team, developing products, and serving your customers. This way, your business will not only propel but stay afloat in today’s cutthroat competition.