The most recent and significant contribution in the startup sector for raising seed money was recognized when earlier this year, in April 2021, Government launched the Startup India Seed Fund Scheme (SISFS
It is undeniably true how evidently the startup sector in India has shown massive growth over the years contributing significantly to the Indian economy. Considering the importance of keeping bringing in new ideas and fulfilling customers’ needs in the most innovative way, our economy has been swamped by numerous startups, especially in the past few years. Despite the Covid-19 unrest disturbing the growth of our country, Indian startup space has expanded remarkably. From the education industry to the healthcare sector, every segment of the market is on a serious surge to ramp up the country’s growth more than ever. Millions of millennial individuals are transforming into entrepreneurs, thereby establishing startups by specializing in their own niche. As per the reports and surveys, India stood as the third largest startup market in 2020 at the bulk value of $11.8 billion. Our country is witnessing constant competition in the startup segment with more than 38 startups crossing the market value of $100 million crowning the establishments as Indian unicorns.
With startups emerging from every corner of the country, people are becoming more familiar with the term and how it works. However, what people still get bemused about is Seed funding. The concept of seed funding has existed for as long as the concept of startups has and with more startups stepping ahead in the economy, it is important to know what and how startups raise funds. Well, here is all you need to know:
What is Seed funding?
As apt as the name suggests, Seed funding is an early or seed-stage investment in a startup company which contributes to the growth of the company in its initial stages and helps it generate its initial capital. Seed money (Seed funding) helps a business get started and raise equity shares from the savings invested by either the founders itself or outsiders. When founders become investors by turning their contributed savings into capital, it is known as bootstrapping.
Why do startups raise seed funds?
Starting off fresh with establishing a new business and elevating it from the ground is the most crucial step which gets way easier once the capital investment process is settled. Reasons why startups raise seed funds are:
- Seed funds help the entrepreneurs to kick-start their business before it starts bringing revenue in the entity to keep it functioning. Seed money cushions the startup companies by giving financial support in its ‘seeding’ stage.
- Depending on the requirements of the startup, seed funding can potentially help the company cover its capital costs like infrastructural costs and even other expenses including advertisement cost, development costs, etc. Seed funding is the requisite for starting a business functioning as a startup.
- Seed funding invites more investors to invest in the startup. It gives the impression to the outsiders that the company has sufficient funds to keep the business functioning which builds trust and attracts potential investors to the startup company.
- It fuels the business operations by covering up initial costs and helps accelerate its growth in its initial stage. It also curtails down the risk of business failure as soon as it starts its journey in the startup space.
How do startups raise seed funds?
After researching the investor market and finding the best suited one to invest, startups get themselves ready with all the details, paperwork and other formalities to carry out for the needful transaction. The documents comprise all the required figures and data that investors might be looking for. Once the proposal is approved, investors seal the deal after some negotiations for raising seed funds.
However, raising seed funds is not as simple as described above. Startups raise seed funds from a number of segregated platforms. Let us dive into few of those available platforms and sources through which startup company carries out seed funding:
- Crowdfunding– Crowdfunding is one of the most well-known methods of generating funds which includes raising seed money from a large number of people contributing very small amounts individually, mainly through the internet. Some of the trustworthy crowdfunding companies include GoFundMe, Kickstarter, LendingClub, etc. which helps in providing resources to raise funds. However, Equity crowdfunding is currently illegal in India which restricts the startups to raise funds from numerous people over the internet.
- Corporate Seed funds– Corporate seed funds are perhaps a great opportunity for startups to get exposure in the market and raise bulk capital. The well-established giants look for startups in the market to invest which have potential to bring considerable profits to its investors in future. These market majors invest in startups giving them more recognition and exposure in the market. Companies like Google, Apple, Reliance, Tata, etc. are always in the highlights spurring the investment capital in the startups which are capable of distributing bulk profits in future.
- Incubators– Incubators are one of the most supportive sources when it comes to raising seed funds. Although it provides seed funds of small amounts, it supports the startup companies by offering services like management personnel training and expanding operating space. Some of the incubators in the spotlight in India include Khosla Labs, T-Hub, KSUM, IIT-Bombay’s Society, SINE.
- Angel Investors– You might have this term quite a few times while getting to know any company is raising funds or ipo. Well, angel investors contribute most significantly in raising seed funds for startup companies. These are basically those individuals who are interested in offering capital to the establishments in exchange of equity shares or convertible debentures. These are called ‘angel investors’ as they always step forward in contributing funds in the company, especially during the hiccups or the rough phase of the financial growth of the startups.
- Debt Funding– As the name suggests, debt funding is the process of generating funds through debts and loans from sources like Banks, financial institutions, personal entities including friends and family members, etc. However, many times, the unrecognized startups or the startup companies with non-eligible credit standing fail to raise seed funds through debt financing. That is where angel investors and other interested capitalists step forward on raising loans on behalf of the company.
Who provides seed funding?
Various sources discussed above help in providing seed funds. Various companies like Kickstarter, GoFundMe, LendingClub, etc. serve as a source of raising seed money. Apart from these sources, various giants like Google, Apple, Reliance, Tata, Aditya Birla Inc. also invest in startup companies which have full potential of generating profits in future. Many times, the founders invest their savings for seed funding to kick start the operations. Additionally, banks and other financial institutions also participate in assisting the startups with seed funding.
The most recent and significant contribution in the startup sector for raising seed money was recognized when earlier this year, in April 2021, Government launched the Startup India Seed Fund Scheme (SISFS). Let us look at what SISFS is and how it will contribute to the Indian startup ecosystem.
What is the Startup India Seed Fund Scheme (SISFS)?
Startup India Seed Fund Scheme (SISFS) is an initiative launched by the government of India to provide financial assistance to startup companies for prototype development, product trials and development, market exposure as well as commercialization.
Why is Startup India Seed Fund Scheme launched?
Launched on April 19, 2021, by Piyush Goyal, SISFS was brought in order to cater to the needs of the entrepreneurs who are establishing their startup and require seed funds. We cannot disagree with the fact that many times most businessmen struggle to raise seed money from investors or even through loans from banks as they provide loans only to the credit-worthy recipients. Therefore, in order to spur and inculcate motivation in entrepreneurs, the government has stepped forward with a new project.
Objectives of the SISFS
The government-backed scheme aims at granting financial support to startup companies which will help the startups to become eligible for raising further capital through investors, capitalists or even banks and related financial institutions.
For more details on the SISFS, visit https://seedfund.startupindia.gov.in/