Raising capital to back your Fintech calling

You notice a gap, a void, an inconsistency in a financial product or service you have been using for a while now. A thought sparks your imagination and you envision a technological marvel that could seamlessly bridge that gap. The geeky techie in you tumbles out and scribbles thoughts and ideas, mind mapping your way to a fantastic business plan. Eureka! So, you take up the challenge, with a goal in place, find a like minded partner who shares your vision. Great! The next step is putting your business idea out in the market to test the waters. This is where it all begins.

Every step from here on is an organizational decision, from registration – will it be a private limited company or a limited liability partnership (LLP). Technology based businesses in India prefer Private Limited company, which gives them the flexibility to issue shares and stock options, raise investments and launch tech based products. Then there are other legal documentations and contracts, namely website or application terms of use, privacy policies and intellectual property rights like trademarks, copyrights and patents. Not forgetting the multiple rounds of research, development and testing. Each of these steps need ample of funds and investments to keep you afloat. Here is a look at basic stages of business financing.

Stages of Funding:

  • Seed Investment: Initially, new ventures with young entrepreneurs face difficulty in raising funds for first investment to finance their product research or development stage. The reason behind this is lack of trust and inability to prove success potential to seasoned investors. Most entrepreneurs at this point invest their own savings to commence operations termed as Seed Capital.

 

  • Angel Investors and Crowd Sourcing: Seed capital can be limited and sometimes insufficient to carry out advanced activities like research, developments and testing. To enhance their capabilities some entrepreneurs fall-back on family, friends and acquaintances better known as Angel Investors, to grant them an informal loan at a low rate of interests. Crowd sourcing is another method to raise an initial round of funds. It is like taking a loan or investment from more than once person at a time. Here a loan can be taken in exchange for a part of stock or share of the company.

 

  • Venture Capitalist (VC’s): Once business matures and your product has made an appearance in the market with a successful tried and tested round, it is time to revamp business to the next level. VC’s invest on behalf of Venture Capital firms, where they use other people’s money and invest it in promising infant ventures. These type of investors look for a businesses with unique ideas, competent teams and a promising future. Here your venture may not have necessarily reached a stage of profitability yet. In such scenarios, venture capital financing is often used to neutralize this negative effect on business income. The stages in Venture Capital funding are categorised as:
  • Series A: Primarily utilised to at the time of scaling up business to cover costs of advertising, distribution and market penetration.
  • Series B: Post a successful series A round of investment, series B is targeted at expansion in terms of team, infrastructure and extending reach in the market.
  • Series C and more: There are no limits to rounds of funding hereon, depending on business requirement for cash influx. Any further round of VC investments will lead to dilution of stocks held by founders and initial investors and hence must be carefully deliberated upon.

Banking on accelerators and incubators:

Finding investors who have faith in your product and believe in your abilities can be a daunting task. A number of start-ups in the BFSI sector crumble in the first year of launch due to insufficient access to funds. The ability to sustain and grow intermittently depends on your capabilities to network and hobnob with the who’s who of the FinTech domain.

The significant development in connectivity and our ability to interact and exchange ideas with others, has been a strong driver of scientific and technological innovation. Every year, numerous FinTech start-ups in their nascent stages are supported by programs initiated by accelerators and incubators. Incubators are like homes that shelter and train budding ventures to network, while accelerators are similar in nature but help to further speed up the growth process. Here start-ups can seize the opportunities to mingle with mentors, pitch to investors, learn from and network with ventures at similar stages of growth. Another medium to empower FinTech organizations to sprout and develop are through conferences and conclaves. These platforms address vital requisites of networking, brainstorming and deciphering new and innovative solutions.

Start-ups need a flexible and accessible environment to start a business, while investors need easy entry and exit norms. India is still in the process of ironing out these creases that hinder the growth of innovative and pioneering start-up ventures. For now the much needed accelerators and incubators are bridging that gap giving these innovative minds a podium to articulate their presence and assisting them to thrive and flourish.

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