Continuing with the previous column, let’s review the various sources of which new companies can raise capital. The most common source of financing at the beginning of an adventure is starting. Entrepreneurs must use their own money to develop a product from scratch. This will underline the founder’s passion for the business and will also establish credibility when the founder then approaches external investors to raise money for the company. The other Bootstrapping benefit is that it allows the entrepreneur to retain the complete control of the company.
Once an appearance of the product or service is available for demonstration or screen (which means is not only on paper), entrepreneurs can approach friends and family to invest in this stage prior to row. The logic here is that if an entrepreneur cannot convince close or family friends about the company, then will it be successful to external investors?
The possibilities that the company fails at this stage is quite high at this stage, because there are no income at all and, therefore, the capital invested can go for the drain. This is also the reason why, in the starting ecosystem, this source of financing is sometimes known as 3FS (friends, families and fools). Of course, if the company demands, 3FS can win significantly. Did you know that Jeff Bezos raised $ 250,000 of friends and family in the first days of Amazon?
Angels groups or unions are a good source of small capital in the early stages. Unions generally have people with experience in specific domains such as retail, Fintech, electronic commerce, B2B, SAAS and FMCG, and direct investments in these domains. Some unions are associated with accelerators and incubators, who work in close collaboration with new companies, offering tutoring, infra co-object of co-seal and capital at an early stage.
In socially important domains such as electrical mobility or AI, there is also the possibility of seeking subsidies and government subsidies. There are some starting funds backed by the Government, but the process can be cumbersome.
Bank loans are never a good option because they need a guarantee, which is a bad idea for new companies. Crowdfunding is another way, but not very popular in India.
The most popular source of financing is risk capital. Around the last two decades, the risk capital industry in India has grown significantly, and almost all new popular companies have raised money from the VC. My great complaint with the risk capital is that it is an impatient capital, because the fund has a limited time in which capital has to return to investors. This exerts great growth pressure in new companies, forcing them to ignore solid commercial principles such as profitability and focus on the growth of the unsustainable front line. I think India needs many more Indian funds that can be more understanding and patients with entrepreneurs.
In the next column, we will see how you can make an effective tone mallet.
(The writer is a serial entrepreneur and the best -selling author of the book ‘It is not successful’; publications in x @vaitheek)
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Posted on April 27, 2025