MODULE 3
FUNDING OPTIONS FOR START-UP
Boot strapping and Self-Funding
Meaning
Bootstrapping: Starting and growing a business using your own resources
without relying on external investors or large loans.
Self-funding: Financing a business through personal savings, contributions from
family/friends, or reinvesting profits instead of seeking outside capital.
Characteristics
1. No dependence on external investors.
2. Founder retains full ownership and control.
3. Relies on cost-efficiency and innovation.
4. Usually suitable for small-scale or early-stage businesses.
Advantages of Bootstrapping/Self-Funding
• Full Control – No interference from external investors.
• Ownership Retained – Founder keeps 100% equity.
• Financial Discipline – Encourages careful use of money.
• Flexibility – Decisions can be made quickly without investor approval.
• Strong Foundation – Builds resilience and problem-solving skills.
Limitations
• Limited Capital – Growth may be slow due to restricted funds.
• High Personal Risk – Founder’s savings and assets are at stake.
• Scalability Issues – Not suitable for capital-intensive industries.
• Stress and Pressure – Responsibility falls solely on the entrepreneur.
Strategies for Bootstrapping
1. Personal Savings – Using accumulated savings from employment or previous
ventures.
2. Family and Friends Funding – Borrowing money informally with little or no
interest.
3. Reinvestment of Profits – Using early revenues to finance growth.
4. Cost Minimization – Reducing unnecessary expenses (e.g., working from
home instead of renting an office).
5. Pre-Selling/Advance Orders – Collecting payments before delivering the
product or service.
6. Sweat Equity – Putting in personal time and effort instead of hiring paid
employees.
7. Lean Operations – Starting small, scaling gradually.
Self-Funding Options
1. Personal Savings
• Using the entrepreneur’s own savings from salary, past jobs, or other
income.
• Most common and first source of funding.
2. Family and Friends Support
• Borrowing or taking small investments from close relatives or friends.
• Usually easier and less formal than banks.
3. Reinvestment of Profits (Ploughing back)
• Using the profit earned in the business again for expansion.
• Sustainable in the long term.
4. Personal Loans/Assets
• Taking loans against personal property (house, gold, fixed deposits,
insurance policies, etc.).
• Risky because personal assets are pledged.
5. Credit Cards / Overdrafts
• Using credit card limits or overdraft facilities for short-term needs.
• Quick but expensive due to high interest rates.
6. Side Income / Freelancing
• Generating funds through part-time jobs or consulting services.
• Helps to support the start-up in the early stage.
7. Pre-Selling Products / Advance Payments
• Collecting payments from customers before the product/service is
delivered.
• Reduces dependency on external funds.
Angel Investors and Venture Capital
1. Angel Investors
Meaning
• Angel investors are wealthy individuals who invest their personal money
in early-stage start-ups.
• They not only provide capital but also offer mentorship, guidance, and
business connections.
Characteristics
• Usually invest in the seed stage or early stage.
• Amount is relatively small compared to venture capital.
• High risk → since many start-ups fail.
• Expect high returns (equity ownership or convertible debt).
• More flexible and informal than venture capital firms.
Advantages
• Quick funding without much formalities.
• Mentorship and networking support.
• Founders can maintain more independence compared to VCs.
Limitations
• Limited investment capacity.
• May expect high equity in return.
• Risk of conflict if visions differ.
2. Venture Capital (VC)
Meaning
• Venture Capital is funding provided by specialized firms to high-potential
start-ups.
• They pool money from investors, institutions, and corporations to invest
in businesses with strong growth potential.
Stages of Venture Capital Funding
1. Seed Stage – Small investment to test idea/prototype.
2. Early Stage (Series A/B) – Funds to scale operations, marketing, and product
development.
3. Expansion Stage (Series C/D) – Large funds for rapid growth and market
expansion.
4. Exit Stage – VC exits by IPO, merger, or acquisition to realize returns.
Venture Capital Funding Process
1. Deal Origination – Start-up submits business plan.
2. Screening – VC evaluates market potential and risks.
3. Due Diligence – Detailed analysis of financials, product, and team.
4. Investment Decision – Negotiation and signing of Term Sheet.
5. Post-Investment Monitoring – VC often joins the board of directors.
6. Exit – VC recovers money through IPO or selling stake.
Advantages
• Provides large-scale funding for growth.
• Professional guidance and strategic support.
• Boosts credibility of the start-up.
Limitations
• Founders lose partial ownership (equity dilution).
• High expectations for growth and profit.
• Strict monitoring and pressure from investors.
