Start-ups in their early stages may bump into various obstacles, including the financial gap, called ‘valley of death’, which limits their ability to innovate and to scale their business. Post the ‘Seed’ stage, new enterprises or start-ups need capital/investment.

An entrepreneur with an innovative idea may be capable at times of bootstrapping and starting the venture on a limited scale. But for the size and the scale, investment(s) from external sources may become a necessity.

Entrepreneurial Investment Options

The important sources of Capital for entrepreneurs and start-ups are identified as:

1. Boot Strapping – Bootstrapping is building a business without the help of outside capital. Bootstrapping is a situation where an entrepreneur starts a company with little capital, relying on money other than outside investments. An enterprise/individual is said to be boot strapping when they attempt to found and build a company from personal finances or the operating revenues of the new company. This form of financing allows the entrepreneur to maintain more control but it also can increase financial strain. This is in contrast to starting a company by first raising capital through angel investors or venture capital firms. Instead, bootstrapped founders rely on personal savings, sweat equity, lean operations, quick inventory turnover and a cash runway to become successful. For example, a bootstrapped company may take pre-orders for its product, thereby using the funds generated from the orders actually to build and deliver the product itself.

2. Bank Finance – Banks are the financial institutions which act as intermediary to link customers with surplus capital to customers with deficit capital. The two parties never come in direct contact with each other. Banks give loans to the entrepreneur and interest to the investor/depositor. Banks are tightly regulated by the RBI and have legal recourse to the repayment of principal and interest of a loan. Banks are a major source of capital.

3. Crowd Funding – In the case of crowd funding, the current stage of development of the venture is not very relevant and Crowd is the source of financing and not any professional investor or financial institution. Crowd funding does not necessarily involve giving up a percentage of equity or accumulating debt. The entrepreneur decides what the payback in the funding contributed should be. The validation provided to a venture through a successful crowd funding campaign enables it to easily access other forms of financing further down the line.

4. Venture Capital – Venture capital is a type of Capital that is provided by Venture Capital firms or funds to start-ups, early stage and emerging companies that are deemed to have high growth potential. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake. Venture capitalists take the risk of financing risky start-ups in the hope that some of the firms they support will become successful. The typical venture capital investment occurs after an initial “seed funding” round. The first round of institutional venture capital to fund growth is called the Series A round. Venture capitalists provide this financing in the interest of generating a return through an eventual “exit” event, such as the company selling the shares to the public for the first time in an initial public offering (IPO), or disposal of shares happening via a merger, via a sale to another entity such as a financial buyer in the secondary market or via a sale to a trading company such as a competitor. In exchange for the high risk that the venture capitalists assume, by investing in smaller and early-stage companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the companies’ ownership (and consequently value).

5. Private Equity- Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet. A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and have limited liability, and General Partners (GP), who own 1 percent of shares and have full liability. The latter are also responsible for executing and operating the investment.

6. Angel Investment – Finance from traditional sources like banks is time consuming and based on collaterals and cash flows. There may be issues of high risk profile also. This is where the Angel Investing assumes importance for a start-up enterprise because of its less predatory nature. Angel Investors are those investors who have surplus funds available with them and who seek higher returns on their investments than the ones accruing on the traditional forms of investments. Angel Investors help the firms survive the Valley of Death by providing capital and mentoring the entrepreneurs to help them succeed.