Startup Funding: Requirement and Importance of Funding for Startups
Created on 24 Sep 2020
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There’s a very popular saying, ‘Time is Money,’ and it is especially true in today’s time and age. With the rise of startups and the rise of options available for funding, entrepreneurs should be certain of when they want to start trying to raise funds.
The question of when can only be answered after the question of why that is why the entrepreneurs want to raise funds. The answer to this includes many factors that are listed down below.
Necessity of Funding for Startups
Startup owners, just like any other business owners, need additional funding to enhance, expand, grow, or start their business. This is known as 'startup funding'. Let us now understand the factors which create the need for startup funding.
Resources, Raw Materials, and Equipment
Any business organization needs basic resources regardless of whether they are in their developmental stage or in an expansion phase. In order to operate, the company has to incur certain fixed costs and certain variable costs.
Under fixed cost, the company can expect expenses like machinery and equipment, while under variable costs, expenses include any raw materials that the company needs for its production process.
For example, in the case of production of a notebook, the fixed cost would be the machines required to produce it and the vehicle for transportation, while the variable cost would include the paper, binding costs, etc.
Now, the startup may manage to pay for the working capital expenses from its internal funds, but it may require a large amount for the purchase of equipment and other raw materials. For this reason, the owners may have to look for external sources of funding as their internal sources may not suffice. The owners can use external funds for expansion as well as during their initial phase. This is why the owners require startup funding.
In order to function properly, every business organization requires working capital. Working capital is simply the difference between the current assets and the current liabilities of a business organization. So, it is something that is needed for the proper functioning of the organization. This includes raising funds for work like recruiting staff, purchasing stock, etc.
Not having enough working capital can severely impact the business. Hence, startup funding is also often needed to acquire working capital.
For this type of funding for startups, they could use sources like bank loans or borrow from family and friends. Due to this, any unforeseen expenses will also be covered. This would also help the startup to, thus, keep their own resources free for any opportunity that comes their way.
Product and Website Development
Startups that are just in their ideation phase sometimes require funding for the process of product development and prototype collection. Some products require prototypes that involve a lot of funds to be raised.
Further product development may also require a lot of resources, and it might require a team, and for that purpose, the startup may have to arrange funds as sometimes it can be quite a huge amount.
Startup funding may also be needed for any application or website that the company may have to develop. These tasks do tend to eat a lot into the costs of the firm as it requires a good team and platform as well as a good and efficient team.
So, sometimes funding for startups is needed when the startup wants to launch its product or service in the market. It is needed in the seed funding stage or the pre-seed funding stage. For this reason, owners can use the technique of crowdfunding or funding from family and friends or even taking a bank loan.
Office Space and Other Expenses
One major expense of starting any business is the fixed costs involved, and the most expensive of all the fixed costs is the one for the offices, warehouses, or factories. Startup owners might have to rent these spaces or even choose to purchase these spaces. Business owners try to raise external funds to cover these costs as well.
Nowadays, a good source for startups is approaching a business incubator or a business accelerator. These do not necessarily provide direct funding for startups, but they help by offering a shared workspace to the enterprises. Business owners can take advantage of this shared space, which would help them save costs to a large extent.
Hiring a Team
Startups also have to invest quite a lot in hiring a good and efficient team. The team would include different departments like accounting and finance, marketing, a legal and a consulting team, HR team, etc.
Considerable costs can be involved in the recruiting and selection process. Even after that, the services of such teams also include a lot of costs. Instead of having a different team for each department, some firms opt to hire a team or even outsource some services. This, too, could be covered by raising their startup funds from different sources.
Marketing, Sales, and Advertising
After launching a product or service, firms need to incur a lot of costs in trying to promote the product or service. Marketing involves everything, right from the product creation to customer feedback. Marketing activities tend to be quite expensive and require huge cost commitments.
Advertising requires hiring an advertising team, and sales promotion activities also require a dedicated sales team.
Hence, for these activities of business promotions, startup funding is often sought out by its owners. For these activities, owners can approach angel investors or even venture capitalists.
For Expansion and Development
Startup funding is also needed when they are looking to either develop their product or service or maybe expand into a new product category or expand into a new geography.
For this purpose, owners might have to reorganize their operations and expand their scope of administration as well. Scaling up could also involve setting up new factories or warehouses, hiring a new team, moving to newer facilities, etc.
This type of startup funding mainly happens in Series C of the funding process. Funds can be raised through venture capitalist firms or late venture capitalist firms, and startup owners could even approach angel investors for such funding.
New ventures or startups do not just have to deal with a variety of processes like gaining traction, ideation, expansion, etc. All these processes require money, and that money should be something that should be provided to them at the right time so that the growth of the startup is not halted.
This is why startups opt for ‘startup funding.’ After acquiring the right amount of funds, business owners must ensure that the money raised goes to the right place and is used for just the right purpose.
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