Fund Raising Strategies

Raising funds is a crucial step in turning a business idea into reality or scaling an existing venture. Whether you're a startup founder or a small business owner, securing the right funding can determine your success. With various options like bootstrapping, loans, venture capital, and crowdfunding, it’s essential to understand the best approach for your business.

However, fundraising is more than just pitching your idea and securing capital. It involves thorough planning, building strong relationships with investors, and having a solid business model to back your financial needs. Investors and lenders look for businesses with growth potential, a clear vision, and financial stability before committing their resources.

In this blog, we’ll explore effective strategies for fundraising

1. SME IPO (Small and Medium Enterprises Initial Public Offering)

The SME IPO is a specialized fundraising tool designed to help smaller enterprises access public capital markets without the stringent requirements of a mainboard IPO. India has a significant SME sector, contributing around 30% to the country's GDP. With over 7,500 SMEs listed on SME exchanges as of 2023, these IPOs provide an excellent platform for growth.

• Target Audience: SMEs that are looking to raise funds by selling shares to the public.

• Key Features:

  • Specially designed for smaller companies with lower capitalization.

  • Listed on separate SME platforms within stock exchanges (like NSE Emerge, BSE SME).

  • Less stringent regulatory requirements compared to mainboard IPOs.

  • Helps in gaining visibility and credibility.

  • Attracts institutional and retail investors.

• Eligibility: Companies must meet specific criteria, such as minimum post-issue paid-up capital and profitability requirements. As per SEBI guidelines, an SME must have a minimum post-issue paid-up capital of ₹1 crore and cannot exceed ₹25 crores.

• Listing Platforms: BSE SME and NSE Emerge are dedicated platforms for SME listings.

• Regulation Source: SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

• Data Point: In FY2023, over 120 SMEs raised ₹2,125 crores through IPOs, a 30% increase from FY2022 (Source: SEBI Annual Report 2023).

• Purpose: Access to capital for business expansion, diversification, and increasing market visibility.

2. Mainboard IPO (Initial Public Offering)

A mainboard IPO allows larger companies to raise significant capital from public markets. As of 2023, India’s mainboard IPO market is valued at approximately ₹58,000 crores, with several high-profile companies like Zomato and LIC going public in recent years.

• Target Audience: Larger companies that want to raise capital by offering shares to the public.

• Key Features:

  • The company lists its shares on a major stock exchange (e.g., NSE, BSE).

  • Follows rigorous regulatory and disclosure norms by SEBI.

  • Attracts institutional investors like mutual funds and retail investors.

  • Helps businesses raise large amounts of capital for expansion, debt repayment, or diversification.

• Eligibility:

  • High regulatory scrutiny, including profitability and net worth thresholds.

  • Companies must adhere to the stringent listing and compliance guidelines.

  • The company must have a minimum net worth of ₹3 crores and be profitable for at least three out of the last five years.

• Listing Platforms: National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

• Regulation Source: SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

• Data Point: India saw 37 mainboard IPOs in 2023, collectively raising ₹52,116 crores. The largest IPO was LIC's, raising ₹21,008 crores (Source: SEBI, BSE).

• Purpose: Primarily for large-scale capital infusion.

3. Startup Funding

a. Seed Funding:

Seed funding is the first formal investment round for startups. In India, seed funding accounts for 15-20% of total startup investments.

• Key Data Points: In 2023, Indian startups raised over $500 million in seed funding (Source: Tracxn). Government programs like the Startup India Seed Fund Scheme provide up to ₹5 crore per startup.

• Target Audience: Early-stage startups in the idea or prototype phase.

• Key Features:

  • The first official round of funding for startups.

  • Provided by angel investors, friends, family, or early-stage venture capitalists.

  • Used for product development, market research, or initial hiring.

• Purpose: Helps validate the business idea and get initial traction.

b. Angel Funding:

Angel investors, often high-net-worth individuals, provide early-stage capital in exchange for equity. In 2023, the Indian angel investment market grew by 12%, with investments totalling $1.1 billion.

• Key Data Points: Notable platforms: Indian Angel Network (IAN) and LetsVenture. The government offers tax incentives under Section 56(2)(viib) of the Income Tax Act, 1961.

• Target Audience: Early-stage startups.

• Key Features:

  • Angel investors provide capital in exchange for equity.

  • Typically individuals with high net worth who invest in high-potential startups.

  • Flexible terms, less formal than venture capital funding.

  • Angels often provide mentorship alongside capital.

• Purpose: To take the startup from idea to execution and market launch.

c. Series A, B, C Funding:

• Series A:

  • For startups that have a proven business model and need funds for scaling.

  • Focus on product development and market reach.

  • Investors expect a return and influence the company's strategy.

• Series B:

  • For startups that need to expand into new markets, boost marketing efforts, and build stronger teams.

  • This round is often led by venture capitalists.

• Series C and beyond:

  • For mature startups that need capital for large-scale expansion, M&A activities, or international expansion.

  • Involves private equity firms or hedge funds.

Data Points:

• In 2023, Series A funding alone raised $2.5 billion across 120 startups (Source: Tracxn, Inc42).

• Series C and beyond: Byju’s and Unacademy raised significant amounts for international expansion, reaching over $400 million in Series C rounds.

4. Debt Financing

a. Long-Term Bank Loans:

Long-term loans are ideal for businesses needing significant capital for infrastructure or expansion. Indian banks such as SBI offer business loans ranging from ₹10 lakhs to ₹500 crores.

Key Regulations:

• Eligibility: Collateral often required under RBI guidelines.

• Interest Rates: Generally between 8-12% (depending on creditworthiness).

• Regulation Source: RBI guidelines on priority sector lending.

• Data Point: In FY2023, Indian banks disbursed over ₹8 lakh crores in long-term business loans to MSMEs (Source: Ministry of MSME, RBI).

• Target Audience: Established businesses looking for capital for long-term projects.

• Key Features:

  • Usually used for major investments such as infrastructure, plant expansion, or large equipment.

  • Loans are typically repaid over several years (5+ years).

  • Collateral is often required.

• Purpose: Long-term capital investment.

b. Short-Term Bank Loans:

These loans are designed to address immediate liquidity needs. Short-term loans or working capital loans are crucial for businesses dealing with cyclical cash flows.

• Key Data Point: Indian MSMEs received ₹3.9 lakh crores in short-term credit during FY2023 (Source: MSME Annual Report, 2023).

• Target Audience: Companies needing short-term liquidity.

• Key Features:

  • Loans are typically repaid within 1-3 years.

  • Used for working capital needs, inventory, or immediate expenses.

  • Often collateralized by receivables or inventory.

• Purpose: To cover temporary cash flow gaps or short-term operational costs.

c. Convertible Debt:

Convertible debt is a flexible financing tool, allowing businesses to convert debt into equity at a later stage, usually post-Series A funding.

• Key Data Point: Over 35% of Indian startups raise convertible debt during their seed or pre-Series A rounds (Source: Inc42).

• Target Audience: Startups and small businesses.

• Key Features:

  • Debt that converts into equity after a certain milestone (e.g., next funding round).

  • Initially structured as a loan, but the principal and interest convert into shares.

• Purpose: Allows startups to raise funds without immediate dilution of equity.

5. Private Equity (PE)

Private Equity is an investment by private firms in established companies looking to scale or restructure. The Indian PE market saw investments totalling $64.5 billion in 2023, a 20% year-on-year growth.

Key Data Points:

• PE investments in India have grown consistently, especially in sectors like fintech, real estate, and consumer goods.

• Notable funds: Blackstone, Carlyle, and Kedaara Capital.

• Regulation Source: SEBI (Alternative Investment Funds) Regulations, 2012.

• Target Audience: Established companies needing significant capital for expansion or restructuring.

• Key Features:

  • PE firms invest large sums in companies in exchange for significant equity.

  • Investors often take a hands-on role in the business, restructuring, or scaling operations.

  • Usually involves buyouts, restructuring, or significant equity infusion.

  • Often used for late-stage growth or turnaround situations.

• Purpose: Funding for expansion, acquisitions, or to increase operational efficiency.

6. Bank Funding

a. Long-Term Bank Funding:

• Data Point: In India, the banking sector disbursed over ₹9.5 lakh crores in long-term loans to the industrial sector in FY2023 (Source: RBI, Ministry of Finance).

• Target Audience: Larger, established companies looking for growth capital.

• Key Features:

  • Structured as term loans with fixed interest rates.

  • Used for capital-intensive projects, such as infrastructure, research and development, or acquisitions.

  • Typically involves a repayment period of 7-10 years.

• Purpose: Long-term investments like asset purchases, business expansion, or acquisitions.

b. Short-Term Bank Funding:

• Data Point: The Indian banking sector provided ₹4.5 lakh crores in working capital loans in FY2023 (Source: RBI).

• Target Audience: SMEs and startups requiring liquidity for operations.

• Key Features:

  • Includes working capital loans, lines of credit, and short-term loans.

  • Used to meet short-term financial obligations like payroll, inventory purchases, or operational expenses.

  • Repayment usually happens within a year or less.

• Purpose: To meet immediate cash flow requirements.

7. Overseas Funding (Foreign Direct Investment, FDI)

Foreign Direct Investment (FDI) in India reached $84 billion in FY2023, marking a significant increase due to relaxed regulations and government incentives.

Key Regulations:

• Automatic and approval routes, depending on sectors (100% FDI allowed in sectors like e-commerce, while sectors like insurance have caps).

• Regulation Source: Department for Promotion of Industry and Internal Trade (DPIIT).

• Data Point: Key sectors: Software & IT ($7 billion), Telecom ($9.4 billion) (Source: DPIIT, FY2023 report).

• Target Audience: Companies looking to attract foreign investment.

• Key Features:

  • Investments made by foreign entities directly into a company in another country.

  • Can take the form of equity, joint ventures, or strategic alliances.

  • Brings in not just capital, but also expertise, technology, and market access.

  • Often encouraged through government incentives, especially in developing countries.

• Purpose: To access global capital, expand internationally, or bring in foreign expertise.

8. Venture Capital (VC)

India’s VC landscape is growing rapidly, with investments worth $34 billion in 2023. Leading sectors include fintech, healthtech, and SaaS.

• Key Data Points: Early-stage VC funding in India increased by 18% YoY, with over 400 startups receiving backing in 2023. Notable funds: Sequoia Capital India, Accel, and Nexus Venture Partners.

• Target Audience: Startups with high growth potential.

• Key Features:

  • VCs invest in exchange for equity.

  • Typically comes in at the Series A or B stage, when the company has proven its business model.

  • VCs often bring industry expertise, networking opportunities, and guidance.

  • Investors expect a return when the company goes public or gets acquired.

• Purpose: To fuel rapid growth and scale operations.

9. Crowdfunding

Crowdfunding allows startups to raise capital from small investors. While not as widespread in India as in Western markets, platforms like Ketto and Wishberry are gaining popularity.

• Data Point: Crowdfunding in India saw over ₹200 crores raised in 2023, primarily for creative projects and social causes (Source: YourStory).

• Target Audience: Early-stage businesses or product innovators.

• Key Features:

  • Involves raising small amounts of money from a large number of people through platforms like Kickstarter or Indiegogo.

  • Can be equity-based, reward-based, or donation-based.

  • Helps validate products and ideas in the market.

  • Can also serve as a marketing tool.

• Purpose: To raise early-stage capital and engage potential customers.

10. Government Grants and Subsidies

Government initiatives like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) offer financial assistance without the need for collateral.

• Key Data Points: In FY2023, CGTMSE guaranteed loans worth ₹1.3 lakh crores (Source: Ministry of MSME).

• Target Audience: Small businesses, startups in innovation, research, or development sectors.

• Key Features:

  • Governments often offer grants, subsidies, and incentives for businesses working on innovative technologies, green energy, or social initiatives.

  • No equity dilution or debt repayment.

  • Competitive application process.

• Purpose: To fund R&D, technology development, or other specific projects.

11. Mezzanine Financing

• Target Audience: Companies looking for hybrid funding options.

• Key Features:

  • A mix of debt and equity financing.

  • Investors provide loans that convert into equity if the loan isn’t repaid within a certain period.

  • Higher risk for investors, hence higher returns.

• Purpose: To finance growth projects when a company has already taken on considerable debt.

12. Revenue-Based Financing

• Target Audience: Startups or small businesses with predictable revenue streams.

• Key Features:

  • Investors lend capital in exchange for a percentage of future revenues until the loan is repaid.

  • No fixed repayments—based on revenue generation.

  • Often used by SaaS companies or businesses with recurring revenue models.

• Purpose: To fund growth without giving up equity or incurring fixed debt obligations.

Conclusion

Each of these strategies has its advantages and is suited to different stages of business growth and financial needs. The choice of a fundraising strategy depends on factors like the size of the business, the amount of capital needed, the time horizon, and the willingness to give up equity or incur debt.