By Ashna Ambre
Mint, New Delhi.
Incubation happens out of hatcheries and unicorns are found in cities as well. For those involved in the business of raising capital, both are terms attached to different funding stages in the life-cycle of a start-up.
The first stage of a start-up when the idea of the business is still developing. The founders of the start-up may put up money, usually pooled together from relatives and friends, or they are helped by so-called incubators that specialise in helping start-ups.
Angel/seed funding ($250,000-$1 million)
This round of money usually comes from those referred to as angels, who could be wealthy individuals, professional investors with expertise in funding, advising and helping early stage start-ups, or organised networks of professional investors. The funds are used by the start-up to begin operations, launch its product or service, hire a small team of 4-5 people and rent out a small office.
Series A ($2-7 million)
By this stage, several customers have already used the start-up’s product or service. Now, the start-up needs more cash to increase its customer base, improve its technology and hire more people. Typically, venture capital firms lead the Series A rounds of funding.
Series B ($7-15 million)
In this phase, the start-up looks to accelerate its expansion, set up new offices, increase its team strength and hire more accomplished and experienced professionals. Consumer Internet start-ups usually use the new funds to market aggressively while enterprise-focused start-ups build large sales teams to increase their customer base. By this time, it’s not unusual for a start-up to see a churn in its senior management team as new people may be needed to achieve and handle the growth in sales that investors expect.
Funding rounds of over $20 million (Series C, Series D, so on)
Funding rounds after Series B involve more of the same–expansion, more hiring, etc. Start-ups also consider acquisitions to improve their technology or add to their size. However, at this stage, investors typically start asking entrepreneurs to focus seriously on achieving profitability or at least showing a path to profitability, which basically means charting out a detailed plan to become profitable.
The focus on achieving profitability comes chiefly because investors hope to take the start-up public over the next few years, and stock market investors demand margins and profits from their portfolio companies. In the current funding boom, start-ups are jumping from one funding round to another at a much faster rate than ever before. For instance, Grofers, a Delhi-based hyper local delivery company raised Series A, Series B and C rounds in a span of just five months. Earlier, start-ups took much longer, sometimes several years, to raise their next round of funds. A case in point is online furniture vendor Urbanladder.com, which received $50 million this year after its previous raise of $5 million in 2013.
Initial public offer (IPO)
Most start-ups that raise funds don’t end up having an IPO. Some are sold, some shut shop and others carry on as private enterprises. Over the last decade, only a handful of Indian start-ups such as Makemytrip and Just Dial have gone public. The time from incubation to an IPO differs depending on the start-up.
In March this year, Securities and Exchange Board of India (Sebi), India’s capital market regulator, released a paper in which it proposed an easier set of rules that would allow e-commerce firms and software product start-ups to raise capital through listing on stock exchanges. According to the paper, a new alternative capital raising platform of stock exchanges would be part of the existing institutional trading platform, typically used for listing by small and medium enterprises.
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A start-up whose valuation exceeds $1 billion is called a unicorn. Globally, companies such as mobile phone manufacturer Xiaomi Inc., cab aggregrator Uber and messaging app Snapchat are valued collectively at around $103.2 billion as of May 2015, according to The Wall Street Journal.
According Mint’s data and reports, Indian unicorns like Flipkart.com (valued at $14-15 billion), Snapdeal.com ($4.5-5 billion) and cab aggregator Olacabs ($2.5 billion) are collectively valued at almost $19.5 billion.
Flipkart raised $150 million in a round led by Tiger Global in August 2012, making it a billion-dollar company. Snapdeal raised $100 million in May 2014 and Ola raised $210 million in October 2014, making both of them unicorns.
Even though these companies have been successful in raising funds, they are not making profits yet. According to data from VCCEdge.com, a private equity and venture capital database, Flipkart and Snapdeal recorded losses of around Rs.400 crore and Rs.270 crore, respectively, in 2013-14.