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Growth in Various Sources of Funding

Posted in Finance Articles, Total Reads: 1347 , Published on November 07, 2015

Since my childhood I have heard many stories about my grandparents and parents venturing into an altogether new city with just a few hundred rupees in their pockets, setting up business by taking a loan of a few hundreds from their near and dear ones or banks and exceling in that field. Such were the limited aspects and such were the narrow opportunities. However after nations started opening their doors for other countries things became topsy turvy. For greater good ofcourse. After the advent of liberalisation and globalisation new expert players entered into the market and gone were the days when few hundred rupees from relatives could keep the businesses surviving.

It is very famously said that ‘Invention is the mother of necessity’. This same theory even applies to sources of funding. Banks and personal loans are the most traditional sources of finance and hence were most sought after but then as competition increased and as companies and industries expanded it became clear that these institutions cannot be relied upon alone. This then gave birth to various new sources of funding.

For analysing the sources of funding the first and foremost step should be to assess its compatibility with the internal environment of the company. Factors such as growth potential of the company, size and requirements should be considered.

Image: pixabay

One of the important sources of funding is VENTURE CAPITAL. It has been realised that getting finance from banks is not at all easy. It requires fulfilling their credit requirements, keeping mortgages and the list goes on and on. For established businesses this is extremely easy but for new startups this can be a nightmare. At such times, venture capitalists enter into their lives as their saviours. Venture capital refers to the money that investors provide to startup firms and small businesses with perceived long term growth potential. It serves as capital markets to the firms wherein capital markets are a distant dream. Also it is very much true that 90 out of 100 startups fail which makes this sector as highly risky. Inspite of this investors are attracted towards this due to the potential of high returns. The unique selling point of venture capital is that it not only provides money but also provides managerial and technical expertise along with it which makes it highly valuable and attractive. There are various sources from where a company can procure funds but very few sources which can show the right path to ignorant and naïve startups. It also plays an important role in job creation (accounts for 2% of US GDP). It generally comes from a pool of wealthy investors and investments. This source comes with a huge baggage of goodies, isn’t it but then along with all such good good things comes a downside also which is that the investors get a say in the management of the company which appears fair to some extent. After all when the investors are investing so much of their time, money and expertise in the startups, shouldn’t they be given this much of a chance??

Another newly popular method for raising funds is CROWD FUNDING. It refers to the practice of funding a project or venture by raising monetary contributions from a large number of people mostly via the internet. It generally consists of three types of actors:-

1) Project initiator- one who proposes the idea to be funded

2) Individuals or groups who support the idea

3) Moderating organisation which brings the parties together.

Crowd Funding gives an opportunity to each and everyone to invest in startups. Earlier this used to be restricted only to angel investors and investment banks. This opportunity has changed the face of the industries and companies and has opened the doors to the public into the world of exciting, innovative and dynamic firms. One most important aspect in this is that the time taken to procure funds is minimal. Earlier firms used to spend weeks and months endlessly searching for investors but now using the internet funds can be obtained in a matter of a few hours or days. This method was introduced just a few years ago however today companies such as SeedInvest and KickStarter are heavily dependent upon this source. An astonishing yet amazing fact is that KickStarter is able to reach 12 million people monthly which is tremendous. First such programmes were launched in 2003 and since then this source has never ever looked back. It has been growing by leaps and bounds and has been attracting participants from around the globe. Generally it has been said that this method is very much similar to venture capital, however there is a minute difference. In crowd funding thanks to the platforms inventors can pool in money from around the globe. Again even in this the chances of failures are huge still its just the 10% of success that makes 90% of failures worth it..!!! Some of the successful firms in crowd funding are Pebble time and Ouya. It is very much true that crowd funding offers opportunities to the investors to be a part of the change in the world through the corporate sector and startups still we must not forget that it is not as perfect as it looks. There are various loopholes and lack of any regulatory body makes it a risky avenue. It is definitely going to evolve by leaps and bounds in the long term and provide a great potential.

One of the most promising yet lesser known method is INCUBATORS. It is a university or organisation that provides resources such as laboratories, office space and marketing to the new startups which are most vulnerable.

We have often heard that the name says a lot about any company or entity or person. Same is the case with ANGEL INVESTORS. In times of dire need and problems, it’s the angels that save the startups from shortage of funds. They enter their lives as angels and drive away their paucity of funds. It is generally used for funds of $25,000 to $2,50,000.

Who would disagree with the statement that 2 plus 2 is not 4 but something more than 4. We all know that on bringing together different things the synergy benefits are huge. Hence forming partnerships is a great idea to procure funds. Different people coming from different backgrounds and with different sets of skill sets have amazing potential to take the firms to topmost heights. The big four auditing and taxation firms in India such as PwC, Deloitte etc started the same way and now have carved a niche for themselves.

These are some of the methods that have come up in changing times and they have the potential to change the face of the funding sector of the world and take it to altogether new heights. What we need to do is to give it some time and enthusiasm and its going to pay us back huge dividends. So lets sit back, enjoy a glass of juice and watch as these new sources take over the world and help in creating legends and huge companies capable of making a difference.

This article has been authored by Juhi Agrawal from SIBM Pune

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