Understanding startup funding
Updated: Jun 16, 2021
Unicorns are the buzzword right now and valuation is the new black. Indian startups in 2020 received $10.4 billion in funding across 1200 deals despite the COVID crisis. As successful startups get into multiple rounds of funding and scale up, more and more founders are looking to get funded for their ingenious ideas. However, understanding how it works is critical to getting it right.
Most successful founders will tell you to bootstrap as long as possible and only look at funding when you are confident of delivering the returns investors will expect. Most founders after bootstrapping their venture to a point start off with seed funding. Think Ratan Tata who invested Rs.10 lakhs in the early days of Zivame. At this stage, an investor will do a valuation of your business based on your management, track record, the size of the market you are operating in and risks associated with your business.
Once you’ve established your customer base, monetized it successfully and have a plan to generate long term profitability you qualify for Series A funding. The average size of funding here is anywhere between $2 million to $15 million. However, only half of the seed funded ventures reach this stage. Series B is to fund growth. You are well established by now and are a safe bet, then you qualify for this round, which could generate anywhere between $30 million to $60 million. At the scaling stage you will qualify for Series C, where you are either developing a new product or entering a new market. This round can generate upwards of $33 million. At this late stage you can tap into hedge funds, investment banks and private equities also as funding partners. Beyond this point funding can continue to Series J depending on your specific business situation. Swiggy and Zomato are recent examples of this. But this usually is a final fundraise before an IPO.
Although "Unicorn" is a most coveted title in the funding game, where your valuation exceed $1 billion, the real deal is being IPO ready - where valuation is based on track record of overall profitablility. Take a bow Nykaa, who is reportedly going in for an IPO at a $3 billion valuation at the end of this year or early 2021.