Your Gambit

It is a basic fact that money may not buy you happiness but also there’s not one thing in this world that works without it. You want to own a piece of land, you need to buy it first. A basic need like drinking water is also packaged in bottles and sold in shops. So for a startup, once you’ve got an idea the next thing is bringing that idea to life and so funding plays a crucial role in it.

A startup is first funded by the founders/ owners, they may either put their own savings into it or they may borrow it from friends and family. To be more precise if as a founder you put your money in you’re putting in the initial capital to start your business and if you’re the sole person you also own a 100% share in the business. Let’s look at the list of reasons why funding is required in the first place.

1. The Prototype and Product Development

A prototype is a basic and close to finish or a Work In Progress model of your actual product. Making the prototype normally exists in startups that are tech based, Robotics, medical devices, SaaS or similar and the same may have huge cost attached to it depending on the idea and functionality plus the number of prototypes made also depends on the number of improvements required for it. A prototype may also be used for initial testing and research. For people to volunteer and participate in this research for product improvements there would be a requirement of some amount of fee payment or a free product or something similar.

So making and testing the product would require initial capital and depending on the product or idea the cost of putting bright minds to the task will also require some incentives.

2. Hiring

Be it a startup, a business or any company having the right people resources is crucial for any business to survive. The Startups have it harder because they not only need good people with experience they also need to be able to pay them for their time and efforts.

3. Working Capital

Working capital is a short-term indicator of the startups’ financial, it indicates the liquidity levels of the business. Working capital is equal to current assets minus the current liabilities, this difference if positive means the business has sufficient assets to cover its liabilities and can pay off all expenses like debt, salaries, rent, costs etc. There are 4 reasons why a startup may require additional working capital.

1. Survival and seasonal working capital. If the business is dependent on certain seasonal elements then additional WC would be required for gearing up
2. Funding obligations like paying suppliers, employees and government whilst waiting for payments from clients and customers
3. Bulk purchasing to obtain supplier discounts
4. To hire temporary employees

4. Legal and Consulting Fees

Every entrepreneur will at some point require Legal assistance on matter regarding Patent, Trade marks, Copy rights and other business law related reasons. An entrepreneur will be an expert in his product or service but will invariable require consultation in other areas of business. Though most answers are available on Google, it is similar to a multichoice question in your business exam but unlike your school exam you have just one shot at it to make it right and only a consultation with legal experts or industry experts will help.

5. Raw Materials and Equipments

Once your prototype has gone through all possible tests the next step is to increase the supply of your product to meet the demand that you are going to create on some level. Most Startups require funding for their raw materials and the right equipments.

6. Licenses and Certifications

All procedures to obtain a particular license, be it food license (FSSAI), tech, license to sell, shop licenses, and certification have a considerable amount of procedures, rules to follow and fees attached to it. A startup may not raise funds solely for this purpose but it does form part of the pre-seed or seed stage funding requirements.

7. Marketing and Sales

It is not easy to make money without spending money and Marketing is a classic example to match this phrase. Market helps create a demand and product awareness but some marketing campaigns are costly depending on the platform and scale at which the startup intends to disrupt the market. Marketing may not always convert to sale and thus you will require to add product expert or salesmen/women to give your product that extra push. Marketing is one of the top reasons for which startup raise huge amount of funds.

8. Office spaces, Admin Expenses

Though after 2020 and covid case many offices have converted to remote, incase of physical product like that of the fashion industry will require a space where people come together and work because sampling, the material require a physical presence. Office spaces in these days are costly to acquire and not easy to find. Normally a Pre-seed, or Seed stage would be raised for this in addition to one of the above reasons.

Startups as mentioned earlier have a disruptive business model, all the reasons mentioned here are very relevant to the startup business model and strategy.