A recent economic survey published by The Economic Times showed that there were over 61,500 startups in India, at the beginning of 2022. This makes India the 3rd largest startup ecosystem in the world, behind China and the US. In FY 2021-2011 alone, over 14000 new startups were registered. This is a staggering growth from just 733 new startups 5 years ago. It is no surprise then, that e-commerce startup funding to has seen record figures. Jan 2022, alone, saw an incredible USD 3.5 Bn (approximately) being raised in 130 deals by Indian startups. This was a jump of over 6 times, YoY, from 2021. So, what is this e-commerce startup funding and why is so much attention being paid to it? Let’s find out.
What is e-commerce startup funding?
As an entrepreneur, you must be well aware of the different stages a business goes through. Different phases require various activities to drive the business forward, with varying amounts of capital needed to fund those operations and/or strategic activities. These can include, product development, hiring of staff, raw material, equipment, supply chain logistics, marketing and promotions, office real estate, technology infrastructure, regulatory services et al. E-commerce startup funding is a means of generating the capital to meet all these various expenses.
Depending on the nature of your business and the amount sought, there can be different types of funding that you can look at.
- Grants: The most convenient form of working capital is through financial grants or awards. These are provided by public and private entities to facilitate business growth. While these are the most convenient form of financing since there is no return repayment involved, they are the most difficult to get due to the massive competition, tight criteria, and bureaucratic red tape.
- Debt Financing: A popular form of e-commerce startup funding is debt financing. This involves borrowing money through banks, NBFCs and other lenders, and repaying them over a fixed tenor with a pre-decided interest. Typically, it involves putting up some form of collateral before securing the loan.
- Equity Financing: Equity financing does not involve any repayment. Instead, a portion of your company’s ownership is pledged or sold in return for working capital. In such a case, you may also need to relinquish some control in the decision-making of your business, depending upon the nature of the terms and conditions of the new ownership structure. Most of the startup funding requiring high amounts happens via this mode of financing.
Where to get e-commerce startup funding from?
Just like there are different types of e-commerce startup funding, there are different sources too. Here are a few of the prominent ones.
- Bootstrapping: Self-financing is a very common method of kick-starting your startup. This works well when your business is in the early ideation stages, as the working capital required is usually lower.
- Friends / Family: For slightly higher needs during this stage, borrowing money from friends and family to supplement your own investment may be a good idea as well. There is a higher level of trust in such a case and repayment terms can be more relaxed.
- Incubators / Grants: As you move from the idea to the seed stage, both the scale and the expenses will rise. Taking your business from an idea to an actual reality entails several parallel activities with expenses that cannot be met simply using the first two modes. In such a case you can consider reaching out to incubators or public/private grants commissions to understand their selection criteria for awarding grants or other avenues of financing.
- Crowdfunding: Using the power of social media, several enterprises have raised money through a large number of people. Here, each person has to contribute a small amount that collectively becomes sizable and helps take your business to the next level.
- Banking and Lending Organizations: The most common form of debt financing is via banks and NBFCs. You put up some collateral, borrow the sanctioned amount and repay it over a stipulated time frame along with the predetermined interest.
- Angel Investors: High Net Worth Individuals (HNI), or angel investors are people who invest in businesses for return on investment (RoI) either in the form of interest repayment or through some equity ownership and shareholding.
- Venture Capitalists (VC) and Private Equity Funds: While angel investors are individuals, VCs are organizations and firms that provide working capital in lieu of a portion of company ownership. Unlike banks and traditional lending organizations, VCs and Angel Investors are willing to absorb a higher risk quotient. This form of financing is better suited to businesses that have already generated sufficient market traction and have established their brand name.
In Summation
The E-commerce startup funding guide has multiple uses. It can help take your idea from the drawing board to reality, establish your business, bring it out from debts, and even finance its future growth. Depending on the stage of your startup and the amount of capital that you seek, you can choose one or more of the different ways to finance it.
Do keep in mind that e-commerce startup funding does not happen overnight. It is a process that can take a few months to be achieved. Debt and equity financiers, expect you to have a clear business model backed by solid market research and a plan for the sustained future of your enterprise. Be prepared with a well-documented plan with clear milestones linked to financial forecasts and projections. Investors seek startups with high potential and low risk. Having a visible brand name, high online traffic, good reviews, and healthy financials (sales, cash flow etc.) are all attractive attributes for investors who are likely to be more interested in offering capital to such businesses.
