Is VC Funding for Your Startup? A Complete Beginner's Guide

Considering VC Funding in India? Start Here!

Over the last three and a half decades, venture capital has been a lynchpin for financing the quick growth of startups across the world. Some of the world’s most renowned companies today, like Apple, Facebook and Amazon, owe their early success to the critical infusion of money they received from big venture capitalists.

Closer to home, some of the big unicorns in India such as Flipkart and MakeMyTrip also got their essential funding dose from VC funding. 

As a startup that’s looking to scale, you may want to approach a venture capitalist to fund your company’s early stage or mid-stage growth. But often, startup founders first need to understand what is VC funding, what the objectives of venture capital in India are, the methods of venture capital funding and the different VC firms in India they could approach.

In this article, we’ll explore some of the facets of VC funding and how it helps startups take off in their journey of growth and market reach. 

Let’s Start With the Basics 

What is VC Funding? 

Have you heard of rocket boosters? They provide the thrust that space crafts need to get off the ground and into orbit. Now, think of venture capital funding as a rocket booster for a startup – it provides the financial launchpad a startup needs to get into its orbit and scale the business. 

In the absence of a rocket booster, a spacecraft will not be able to achieve its maximum escape velocity and reach its destination. Just like that, a startup may have all the essential requirements to succeed, but without financial aid, it could never blossom into its full potential. 

In other words, venture capital is an equity infusion from firms, individuals or other entities that want to invest in a startup’s success journey.

Venture capitalists scout for startups that have high growth potential and seek to invest in it for significant returns. In exchange, they ask for a stake in the company so that they can cash out when things take off. 

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What’s in it For Venture Capitalists? 

In simple terms,  the objectives of venture capital funding in India, or anywhere else in the world, is to make a calculated bet that will earn them big returns on their investment. 

But how do VCs make money? Through profitable exits. 

For instance, Flipkart received significant VC funding in its initial years from some of the biggies like Accel Partners, Tiger Global Management, and SoftBank Group. These investments were pivotal for it to gain a stronghold in the e-commerce market in India. 

In 2018, 11 years after its founding, Walmart acquired a 77% stake in Flipkart for $16 billion, valuing the company at over $20 billion. This acquisition was one of the largest e-commerce deals in history, and it resulted in significant returns for Flipkart's investors, including the VC firms that had backed the company.

For example, Accel Partners, one of Flipkart's early investors, had invested $1 million in the company in 2009 and reportedly made over $3 billion from the Walmart acquisition. This is the kind of payoff that VC firms in India or abroad seek to achieve from their investments. 

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But What’s In It For You? 

VC funding comes with a lot more perks than just cash. Some of the best VC firms in India bring valuable industry expertise and strategic guidance to the table that can help a startup establish its initial network. 

Venture capitalists often work in teams and have a network of industry contacts that they can leverage to help their portfolio companies succeed. They may also collaborate with other investors, such as angel investors or other venture capital firms, to pool resources and diversify their portfolios. A strong VC funding can also open doors to future funding from other sources. 

Despite its advantages, it’s also important to note that there are limitations to venture capital. For one, you will have to part with a significant chunk of equity.

Not only does this limit your creative control over your company, it could also increase demands on your management and put pressure for quick growth. Too many VC exits at once could also put your company in the limelight for the wrong reasons.

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Now, At Which Stage Can a Startup Get VC Funding? 

A startup can get funded by a VC at different stages of operation. Typically, a startup needs to have some foundation in order to get funding from VC firms in India. For instance, at the seed stage, a VC firm will fund a startup that is still in its ideation stage. This is often one of the hardest forms of funding to receive. 

An early stage startup that has a prototype of its product or service has a better chance of securing VC funding. This funding can typically help you take your product to the market. Additionally, you can benefit from a VC’s advice and network at this stage. 

VCs will also fund startups at their growth stage or late stage. However, usually by this time, startups will already have some amount of revenue coming through, so securing funding can be easier. However, you may end up losing a reasonable chunk of your equity, so you should be careful about the deals you close.

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When You Should Consider VC Funding?

Even with its limitations, VC funding has done wonders for numerous startups. As some say, it’s a necessary evil to get your startup to its rightful path. There are other startups that have done just fine without it too, but how to decide if venture capital funding is the right bet for you? Here are some basic things to consider: 

1. Are You Willing to Give Away Equity?

The first thing to consider is whether you’re willing to part with some of your company. The objective of venture capital in India is to make money, so VCs will demand you give them that. Pledging a part of your company for money means you may lose some control over your company. Weigh the pros and cons of VC funding and the advantages that the VC firm in India will bring to you before you decide to take the plunge. 

2. Is Your Business Scalable?

Your startup needs to qualify as a potential “big win” to even qualify for VC funding. Do you think it has the potential to grow 10-15x in the next 5-10 years? If not, then don’t consider going the VC route because it will be super hard to convince for funding. Even if you do manage to get it, you may be under tremendous pressure to perform, which could end up spelling more disaster.

3. Do You REALLY Need the Money?

Unless you absolutely require funding to scale your business, or at least the networking benefits that come with VC funding, don’t consider it. Going in for a VC round just for the PR is not a good idea. It’s like owning a Bentley for social status. Make sure to put your money where your mouth is.

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Which Are the Top VC Firms in India? 

There are many VC firms in India that you can choose from. Here are our top picks: 

1. Accel: Accel has invested in the likes of Flipkart, Swiggy, and Freshworks.

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2. Sequoia Capital: Sequoia Capital is a global venture capital firm that has invested in a number of successful Indian startups, including Oyo, Byju's, and Zomato

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3. Kalaari Capital: Kalaari Capital is a Bangalore-based venture capital firm that invests in early-stage startups in India. 

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4. Nexus Venture Partners: Nexus Venture Partners is a Mumbai-based venture capital firm that focuses on investing in early-stage startups in India and has invested in companies such as Delhivery, Snapdeal, and Unacademy.

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5.SAIF Partners: SAIF Partners is a venture capital firm that has invested in a number of successful Indian startups, including MakeMyTrip, Swiggy, and Paytm.

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So, What Are My Options If Not VC Funding?

If you are wondering how to finance and grow your startup without VC funding, there are numerous alternative financing options you can consider. 

If you cannot bootstrap your business, crowdfunding is a good option to consider. If you do want capital from an external investor, then angel investing is another route to consider. Angel investors also require some equity in exchange for capital, but they may be easier to reach and convert. 

Bank loans and government grants are also viable options, if your business qualifies for these.

Recur Club financing for startups is fast becoming popular. Our financing is based on your recurring revenue streams, such as subscription fees or monthly contracts, with fixed monthly repayments. This makes your outflow more predictable, allowing you to focus on things in your business that really matter. We also process your money a lot sooner than typical RBF models. 

If you would like to know more about recurring revenue financing, please feel free to explore our other blog on the website

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