UNIT

06 Funding

Names of Sub-Units

Visioning the Venture, Access to Funding, Key Elements of Raising Funding, Which Model is Right for
you Bootstrapping, Angels, VCs, Banks and Institutions

Overview

This unit starts by explaining the meaning of funding and what are the sources. Also, this unit
discusses what is visioning the venture and access to funding. Next, this unit explains the key elements
of raising funds and right model.

Learning Objectives

In this unit, you will learn to:

 Elucidate the meaning of funding and the sources
 Discuss meaning of visioning the venture
 Describe the concept of key elements of raising funding
 Explain the various models of funding
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Learning Outcomes

At the end of this unit, you would:

 Discuss the concept of funding
 Analyse the various models of funding like bootstrapping, venture capitalists and banks and their
advantages and disadvantages
 Appraise visioning the venture

Pre-Unit Preparatory Material

 https://www.entrepreneur.com/article/38290
 https://www.tutor2u.net/business/reference/business-planning-introduction

6.1 INTRODUCTION
The money that investors contribute to a firm is referred to as funding. Generally, a corporation can get
two types of financing: equity (stock) and debt (bonds/loans). When a corporation receives it, they use
the money to fund its operations. Stake holders expect to see a return on their investment in the form of
stock appreciation, dividends, and interest as a result of this funding. Which sort of company funding is
best in the end will be determined by the company’s growth and revenue potential.

Investors can receive a return on investment (ROI) by efficiently managing the company’s resources to
improve the value of the shares or by simply paying dividends. However, there is a disadvantage to using
this method to raise funds: issuing additional shares diminishes the present shareholders’ holdings. In
other words, these shareholders’ voting rights and ownership of the corporation would be reduced.

Another option for raising funds is to sell company bonds to investors. The amount borrowed from
investors as semi-annual coupon payments until the bond is fully paid off becomes effective as soon as
the bond is issued.

6.2 VISIONING THE VENTURE

The entrepreneur establishes a super aim as his mission. To describe a vision is crucial for a venture’s
success since it acts as a lighthouse, guiding entrepreneurs and their associates in the proper direction,
indicating where they should go and what would be regarded a success.

A vision statement is a broad picture you have in your mind of what the company will become in the
coming times: how it will develop. Be mindful, however, that the recognised vision at the start of the
enterprise often evolves into something else.

An entrepreneurial vision is something wished by entrepreneurs that how their business would appear
in the future, what will become of it, what is the driving factor for it, values and work culture it should

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adopt. Each entrepreneur has their own ambitions regarding their business. Kevin F. Adler has the
desire of aiding the homeless. He discovered Miracle Messages; a volunteer-based organisation aimed
at reconnecting homeless people with their loved ones. The organisation focuses on gathering a large
number of volunteers and partnerships so as to eradicate the issue of someone not having a home.
Therefore, bringing people together. This vision stresses upon creating communities, helping each other
and bolstering them. The business idea is to request homeless people to create short Miracle Messages
using video, audio or text that are then shared on social media and other platforms with the hope that
they can find their loved ones.

6.3 ACCESS TO FUNDING

Finance is available. Individuals and businesses can access financial services such as credit, deposit,
payment, insurance, and other risk management services through access to finance.

There are five types of finance that every small business should be aware of:
⚫ Family and friends - small enterprises should reach out to their closest connections for funding
⚫ Government funding
⚫ Bootstrapping
⚫ Credit unions
⚫ Angel investors
⚫ Venture capitalists

Public loans or government-subsidised loans for businesses are referred to as “access to finance”. These
loans are designed to promote and stimulate economic growth by giving funding to businesses where
the market fails to do so.

Policies affecting access to finance are meant to have an impact on company growth, productivity, and
employment. In an ideal world, any assessment of access to finance would aim to comprehend these
effects as well as assess the impact on corporate financing.

The government may facilitate access to funding schemes for a variety of reasons:
⚫ Supporting the growth and development of innovative businesses where social rewards exceed
private profits by helping start-up, micro, small, and medium-sized businesses to expand (e.g.,
because of wider impacts on innovation and knowledge, or other societal gains).
⚫ Schemes can help businesses that couldn’t get private financing by regulating them, providing them
with information.
⚫ Providing lenders with incentives (e.g., tax holidays).
⚫ Providing finance indirectly (e.g., loan guarantees or “funding for lending” schemes).
⚫ Providing funds directly (e.g., loans).

Market failures in getting financing may be reduced by technological advancements and big data. In
the same way, these shifts may have an impact on how governments like to go for finance businesses.

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6.3.1 What does the evidence show about financial access?

Even though there can be found some proof that giving loan guarantees may lead to rising default risk,
access to finance plan is generally effective in expanding debt financing access. The evidence on the
impact on equity financing access is more ambiguous.

Even though these programmed increase access to capital, they may not always result in increased
company performance.

The majority of reviews that look at some component of company performance find that it has a positive
impact. When we take into consideration the particular aspects of firm performance, however, the
results are much more mixed, with only around half of the evaluations reporting a favorable influence
(e.g., employment).

6.4 KEY ELEMENTS OF RAISING FUNDS

The process of requesting and collecting voluntary financial contributions is known as fundraising or
fund-raising. The four main aspects of fundraising are:
1. The project
2. The collaborators
3. The funding
4. The administration

Let’s look at the four main aspects in more detail:

1. The project: What is the purpose of the funds provided by the lender or investor? What specifically
is your business, if it is your business? What distinguishes your company from others in your field?
And what is your company’s competitive advantage that will entice investors to invest? What factors
will determine its success? Maintain a straightforward approach. Keep it short and sweet. Keep it
genuine.
2. The collaborators: Who are the project’s primary collaborators? Who is responsible for putting the
deal altogether? What is the track record of the associates, as well as their experience? To gain some
perspective, put yourself in the investor’s shoes. Which musician’s music project would you be more
likely to support?
3. The funding: What is the total amount of money you are raising? What is the source of the funds?
Is the funding coming from private individuals, traditional lenders, pension funds, or government-
sponsored initiatives? What are the conditions?
What will you do with the funds you’ve raised? What is the purpose of the funds?
4. The administration: “Money follows management,” as the saying goes. However, addressing all
four components, not just management, strengthens your case significantly.
Investors like to know who is in charge of the daily operations. This is critical to any business’s long-
term success. What is the management team’s level of experience? What are their names? What’s
their backstory? What makes them so important to the project’s or company’s success?

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6.5 WHICH FUNDING MODEL IS RIGHT FOR YOU

There are different ways to raise funds for the company. Some of these funding models are:
1. Bootstrapping
2. Angel investment
3. Venture Investment

Funding is important for scaling the business. Let us understand in detail about these funding models.

6.5.1 Bootstrapping
Bootstrapping is a term used to describe any situation where we can find an entrepreneur launches a
business with minimal money and no outside funding. When someone tries to start and build a business
with their own money or the new company’s operating profits, they are said to be bootstrapping.

Bootstrapping is the process of beginning a business with only personal savings, including borrowed or
invested funds from family or friends, as well as initial sales revenue. Traditional financing techniques,
such as investor support, crowdfunding, or bank loans, are not used by self-funded firms.

6.5.2 Stages of Bootstrapping

A bootstrapped business goes through a number of stages:
⚫ Stage 1: Initiation stage: The beginning stage begins with some money that has been saved or
borrowed/invested from friends. For example, the founder of the firm will keep on continuing the
work at their primary employment while also launching a business.
⚫ Stage 2: Customer-funded: When money from consumers or clients is utilised to keep the business
running and flourish.
⚫ Stage 3: Obtaining credit: The entrepreneur focuses on funding certain tasks during the credit stage,
such as employing people, improving equipment, and so on. During the credit stage, the company
takes out loans or looks for venture money. VC (venture capital) is a type of financing that offers
funding to early-stage, high-growth-potential businesses in exchange for stock or a share in the
company. Venture capitalists assume the risk of investing in start-up businesses in the hopes of
making a big profit if the businesses succeed for the sake of expansion.
Why do people choose to bootstrap their businesses?
The entrepreneurs who are in their starting phase frequently choose to bootstrap their businesses.

6.5.3 Entrepreneur
An entrepreneur is someone who creates, designs, launches, and manages a new company. Rather than
being an employee who reports to a manager. It enables people to start a business without any prior
experience and attract a potential investor or investors.

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Bootstrapping as a business model is chosen for a variety of reasons. Bootstrapping is used by

entrepreneurs who:
⚫ Lack experience in formulating business plans and entrepreneurship.
⚫ Lack skills for product promotion and contacts with suppliers.
⚫ Lack knowledge of how to raise capital.
⚫ Do not want to share income with investors.
⚫ Do not want to spend time looking for an investor.

6.5.4 Advantages of Bootstrapping

1. The entrepreneur gains valuable experience while only putting his own funds at risk. It implies he
will not be obligated to repay loans or other borrowed amount if the business fails. The entrepreneur
will save money and be able to recruit investors if the idea is successful. As a result, the company will
reach new heights.
2. All kinds of progress, as well as ideas used during the advancement of the firm, are reserved for the
“bootstrapper”.
3. A lack of initial finance forces entrepreneurs to come up with novel solutions to issues, develop new
market offerings, and demonstrate innovative thinking.
4. Freedom from the viewpoints of investors. An entrepreneur has the right to take all of his own
decisions, allowing him to develop something innovative, fulfil a goal, put his strength to the test,
and be free of the investors’ orders.
5. Obtaining external money is difficult, and it can be an energy draining and time-consuming process.
Bootstrapping enables business owners to focus on the crucial domains of the company like sales
and product development.
6. An entrepreneur’s ability to lay the financial groundwork for a business is a huge draw for future
investors. Private individuals, special funds, and venture capital organisations, for example, are
significantly more confident in financing businesses that are already secured and have proved the
owners’ commitments and dedication.
7. Adding value to people’s lives. Delivering a specific value through a product or service is at the heart
of business.

6.5.5 Angels
Individuals or groups known as angel investors make investments in early-stage or startup companies
in exchange for a share of the company’s ownership. To look for an angel investor, on the other hand, is
only half the struggle. Once you’ve made contact, you’ll need to pitch your business successfully in order
to get investment. Angel investors are frequently, but not always, accredited by the Securities Exchange
Commission (SEC). Angel investors must have one of the following qualifications to be accredited:
⚫ Annual earnings of at least $200,000 in the last two years, with projections of similar profits in the
near future. If the angel investor files taxes jointly with their spouse, the yearly wage minimum rises
to $300,000.
⚫ A total net worth of $1 million or more.

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How do you go about getting angel funding?

It’s all about having faith and building relationships when it comes to angel investing. Building
relationships over the internet isn’t impossible, but it can be difficult. You are required to move out and
contact individuals if your wish is to receive the greatest angel investment for your business. The Angel
investors can be found at events like fundraisers and conventions. There are other online platforms
that can assist you in locating the proper folks before meeting in person. You might also seek out angel
investing groups or networks. If you’re pitching angel networks, your chances of success will almost
certainly drop.

Fix up a time to meet with your possible angel investors separately after you’ve found them so they can
hear your pitch. Before your meeting, practise your business pitch. Your pitch should be brief, to-the-
point, and memorable. Someone who knows nothing about you or your company should be able to learn
everything they need to know just by listening to your pitch.

Make a detailed business plan as well. Before you acquire any angel money, your potential investor will
ask for that if you nail your pitch.

You may want to seek investment from angel investors for a variety of reasons, including:
⚫ Angel investors may be willing to take on more risk. Angel investors, unlike traditional debt financiers,
are not bound by banks or other institutions. As a result, they are able to invest their money
considerably more freely. As a result, angel investors may be more willing to accept investment risks
that banks and typical debt finance providers would never consider.
⚫ Your business can absorb lower risks simply because angel investors do not ask for a payback in
case the business does not become successful. This arrangement is significantly less dangerous
than taking out business loans or other forms of debt financing, which require payback regardless
of how well your company does.
⚫ Angel investors are well-informed. Many angel investors didn’t get their huge sums of money by
accident; they had to learn a lot along the way. When an angel investor invests in your business, you
gain access to the expertise that your investor has accumulated and can utilise it to expand your
own. If your company is a startup, this background can be extremely useful; despite the fact that
9 out of 10 companies fail, angel investor knowledge can help your business become the exception.

6.5.6 VCs
Venture capital is a form of private equity investment offered by venture capital firms or capital to
start-ups, early-stage or growing business that have showcased tremendous growth prospects.

Most venture capital investments are made through pooled investment entities due to their hazardous
nature. Investors pool their funds into a single fund, which is subsequently utilised to invest in a variety
of businesses. Investors can diversify their portfolio and disperse risk in this way. Venture capitalists bet
that the profits from successful investments would surpass the losses from unsuccessful companies.
Venture investors are picky about who they invest in. They are looking for innovative technologies,
development potential, and a well-developed business concept, among other things. Given the huge risk
a VC firm takes on by investing, growth potential is the most crucial feature.

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High financial rate of returns and a successful exit within three to seven years are the top priorities for
VC firms. Venture capital is best suited for enterprises with significant up-front financial requirements
that cannot be met through debt or other means.
⚫ Advantages: The fundamental benefit of venture capital financing is the capacity to expand a
business in ways that would be impossible to achieve through bank loans or other means. For start-
ups with short operating histories and hefty upfront costs, this is critical. Furthermore, unlike a
bank loan, VC investors are not required to repay their investments. Investors, on the other hand,
are taking on the investment risk because they believe in the company’s long-term success.
Venture capitalists provide valuable knowledge, counsel, and connections in the industry in addition
to financial financing. The appointment of a venture capitalist as a member of the company’s board
of directors is a provision of many VC deals. In this approach, the VC firm has a direct say in the
company’s direction.
Venture capital is also linked to job creation (it accounts for 2% of US GDP), the knowledge economy,
and can be used as a proxy indicator of innovation within a particular industry or region.
⚫ Disadvantages: Due to the accounting and legal expenditures that a company must bear, drafting
a VC agreement can be a challenging procedure. The start-up company must also give up a portion
of its ownership to the venture capital firm that is investing in it. As a result of this partial loss
of autonomy, venture investors are more involved in decision-making processes. Stipulations and
restrictions in the structure of the start-management up’s team, employee remuneration, and
other considerations are also part of VC deals. Furthermore, because the VC firm has a stake in
the company’s success, all business processes will be scrutinised on a regular basis. The amount of
control lost varies based on the VC deal’s parameters.

6.5.7 Banks and Institutions

Commercial banks, investment banks, insurance companies, and brokerage firms are the most frequent
forms of financial institutions. Individual and commercial clients can take use of a comprehensive range
of products and services, including deposits, loans, investments, and currency exchange.

Financial institutions are critical because they serve as a marketplace for money and assets, allowing
capital to be efficiently allocated to the most productive uses. A bank, for example, accepts consumer
deposits and lends the funds to who are in need of it.

Financial institutions assist small and medium-sized businesses in their early stages of operation.
They supply both long-term and short-term capital to these businesses. Long-term funds aid in capital
formation, whereas short-term funds meet their day-to-day working capital requirements.

Even though banks perform a variety of functions, their fundamental function is to collect funds from
people who have money, pool them, and provide them to others who need money. Banks function as
middlemen between lenders/depositors and borrowers, i.e., those to whom banks lend money.

Banks are the main actors in all areas of the financial markets, including credit, cash, securities, foreign
exchange, and derivatives, due to their vast monetary holdings. Commercial banks play an important

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role in the economy’s overall financial health since they lend money for a variety of purposes and for
varying periods of time. Banks charge a premium for taking out a loan.

Commercial banks provide loans to businesses in the form of cash credits, overdrafts, term loans, bill
purchase/discounting, and letter of credit. Banks assist businesses by providing loans to help them
produce commodities, contribute to industrial progress, and create jobs.

Conclusion 6.6 CONCLUSION

⚫ Stake holders expect to see a return on their investment in the form of stock appreciation, dividends,
and interest as a result of this funding. Which sort of company funding is best in the end will be
determined by the company’s growth and revenue potential.
⚫ Investors can receive a return on investment (ROI) by efficiently managing the company’s resources
to improve the value of the shares or by simply paying dividends.
⚫ The entrepreneur establishes a super aim as his mission. To describe a vision is crucial for a
venture’s success since it acts as a lighthouse, guiding entrepreneurs and their associates in the
proper direction, indicating where they should go and what would be regarded a success.
⚫ An entrepreneurial vision includes what you desire of your business to become, how it will look,
what its driving factors are, and what values and culture it should have.
⚫ Finance is available. Individuals and businesses can access financial services such as credit, deposit,
payment, insurance, and other risk management services through access to finance.
⚫ Investors like to know who is in charge of the daily operations. This is critical to any business’s long-
term success.
⚫ Bootstrapping is a term used to describe any situation where we find that an entrepreneur launches
a business with minimal money and no outside funding.
⚫ Individuals or groups known as angel investors make investments in early-stage or start-up
companies in exchange for a share of the company’s ownership. To look for an angel investor, on the
other hand, is only half the struggle.
⚫ An entrepreneur is someone who creates, designs, launches, and manages a new company. Rather
than being an employee who reports to a manager.
⚫ Venture capital is a type of private equity investment offered by venture capital firms or funds to
start-ups, early-stage, and developing businesses that have shown great growth potential.
⚫ Most venture capital investments are made through pooled investment entities due to their
hazardous nature. Investors pool their funds into a single fund, which is subsequently utilised to
invest in a variety of businesses.

6.7 GLOSSARY

⚫ Funding: Amount of money provided to the enterprise to run its operations

⚫ Venture capital: A type of private equity investment offered by venture capital firms

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⚫ Entrepreneur: Someone who creates, designs, launches, and manages a new company
⚫ Vision: What you desire of your business to become

6.8 CASE STUDY: WASTE TO WONDERS: T-SHIRT FROM PLASTIC

Case Objective
The case highlights a peculiar situation for a firm ABC Ltd. and how their unconventional product
performed in the market with respect to gathering investments

ABC ltd. had developed an idea to start manufacturing T-shirts from the polybags of milk and spread
a message to households not to throw away the milk polyethene after consuming milk from them.
They estimated that they required a machine which would cost them around Rs 20 lakhs and other
raw materials. Their vision is to provide T-shirts that are of low cost and therefore can be afforded by
the masses. The target is to penetrate in the mass segment and then build up. Their major sources of
funding are somewhat of a concern because the investors are unsure about the success of the business
as it might have sustainable plan but its viability, feasibility and acceptance in the market is a challenge
that they cannot look past. The sources are sceptical and therefore the company has decided to expand
its sources of finance and look for government sources and angel investors that are willing to invest in
the product. Due to unorthodox product choices, certain investors have either asked for high equity and
therefore one crucial option for ABC ltd. is to look for more investors.

Questions
1. Discuss what source of funding they should go for and why?
(Hint: Discuss all the sources of investment that the company can look forward to)
2. What are some unconventional sources of investment?
(Hint: They are hard to find but they exist)

6.9 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. What are the stages of bootstrapping?
2. What are the advantages of venture capital?
3. Why does government facilitate access to funding scheme?

6.10 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hint for Essay Type Questions

1. The entrepreneur gains valuable experience while only putting his own funds at risk. It implies they

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will not be obligated to repay loans or other borrowed amount if the business fails. Refer to Section
Stages of Bootstrapping

2. The fundamental benefit of venture capital financing is the capacity to expand a business in ways
that would be impossible to achieve through bank loans or other means. Refer to Section VCs
3. Supporting the growth and development of innovative businesses where social rewards exceed
private profits by helping start-up, micro, small, and medium-sized businesses to expand (e.g.,
because of wider impacts on innovation and knowledge, or other societal gains). Refer to Section
Access to Funding

@ 6.11 POST-UNIT READING MATERIAL

⚫ https://www.turbostart.co

6.12 TOPICS FOR DISCUSSION FORUMS

⚫ Conduct an online research and discuss with your friends what type of funding (sources) is used by
MSME’s in India.

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