In running a business, investment is one of the strategies to develop and grow the business. An investment can be obtained even if the business has not made any profit. So, it is not strictly for well-established business that can get the investment but the new one too.
For people who wants to jump into the startup industry, there many things to understand, one of it is funding. This includes how to obtain investments, criteria of the investors, and various types of funding.
The Development of Startup in Indonesia
In simple term, a startup can be defined as an early and newly developed business. A start up is usually established by one or more person to develop certain products or services. Nowadays, startups are commonly related to technology and the internet. This can be seen from startup businesses that are currently growing in the market.
A startup is a company that has been established for less than three years with a capital or funding under US $100.000 each year. A startup whose main business function is supported by digital services requires more funding in order to be more developed.
In Indonesia, startup businesses are growing rapidly. According to Daily Social, currently, there is around 1.500 local startup in Indonesia. There are new startup founders each year who are ready to enter the market and grow their business.
The development of technology and the growing number of internet usage in Indonesia result in the increasing number of startup business from year to year. Start from startup business education apps, games, to e-commerce growing fast in Indonesia.
For startup companies, funding can be obtained through seed funding, series A funding, series B funding, series C funding, and Initial Public Offering (IPO). Here are the stages of funding in Indonesia for startup companies:
1. Seed Funding
Seed funding is an early stage equity-based funding. In the seed funding stage, the investor invests capital into a company in the early stage in exchange for equity stake. Seed funding aims to find the potential product and identification of potential users that are appropriate with the product plan.
Seed funding for startup is usually not too difficult to be obtained because there are a big number of both foreign and local investors, who is always looking for the opportunity to invest in growing startup companies. Considering there are many successful Indonesian startups, this allows for easier access to interested investors.
One of the investors who are actively investing seed funding in Indonesia’s startups is Alpha JWC Ventures. Alpha JWC Ventures is a venture capital company that focuses on investing in several technology-based startups in Indonesia. As of now there are 36 startup companies that are members of the Alpha JWC Ventures group with the total asset values up to US $ 193M.
2. Series A Funding
At this stage, it is important to have a business model development plan that will yield sustainable benefits. Oftentimes, founder of the company has great ideas that catch the customer’s attention, but they often do not know how they will monetize their business.
In Series A Funding, investors are not only looking for good business ideas, but they are looking for companies with strong business strategies that is able compete and gain profit. Companies that are able to get Series A funding typically raise up to US $15 million.
3. Series B Funding
In this stage, the startup company is two to four years old. The financial statement of the company will be audited by the public auditors before the funds come in by investors. There is a possibility that investors will direct an external Chief Financial Officer (CFO) to monitor the health of startup cashflow.
4. Series C Funding
This stage shows that the company has matured. In Series C Funding, investors inject capital into a company, in an attempt to receive more than double the amount invested. Series C funding is focused on companies that can grow fast and scale their businesses.
5. Initial Public Offering (IPO)
An IPO is the stage when a company offers its shares to the public for the first time. An IPO is a big step for companies by providing access to be able to collect more profits. Typically, this stage of growth will occur when the company is valued at US$1 billion, or also known as a unicorn.
The Ways to Get the Seed Funding
Seed funding for a startup can be obtained through close relatives such as the colleagues, family, angel investors, or crowdfunding as an early investor. The investment may be in other forms other than funds such as in the form of assets that will be valued at a certain price.
In order to obtain seed funding, there are a number of things that must be prepared by a company, such as the investment pitch deck, market research and the company’s legalities.
1. Investment Pitch Deck
The founders have to prepare ideas, team, market, and budget. After creating a good concept, the founder will summarize it in a presentation called the investment pitch deck. This pitch deck aims to explain the summary of the company and its objectives in order to get funding from investors.
A good investment pitch deck will follow these three criteria:
– Clear and easy to understand
In addition, there are several things that need to be included when making an investment pitch deck:
The founder describes the problem that startup wants to solve. Investors must feel confident that the problem is important and that the solutions offered by the company are effective.
After explaining the problem, present the solution that company will provide. This is one of the most important because it influences investors to invest.
The market is important so the investors can determine their respective exit strategies. Investors will choose startups that have a market moving in a large area than market in a small area.
Traction is an explanation of the business growth from month to month. If the startup being built is still in its early stages, it is not required to include traction on the pitch deck.
Team is also the most important thing that is included in the pitch deck. In the business world, the progress of a company depends on execution rather than ideas.
This point explains to investors about the differences between the startups and competitors. Investors will be happy since founders know all about competing companies.
The financial points will explain the projections of the business over the next few years. Investors want to know the goals of the startup. In addition, this point will also explain the amount of funds needed to achieve these projections.
2. Market Research
For market research, it is necessary to know the product identification offered by startup so can determine individual or institutional investors. Other than that, mapping market orientation and target demographics are also needed.
A startup company must know its competitors, the value of the company compared to other companies, the target market, and ways to predict the growth of the company in the next few years.
3. Company’s Legalities
For the legal aspect, things that need to be prepared are whether the legality of the company is complete and appropriate, whether there are legal or financial issues that challenge the company’s reputation, and others.
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After investors funds, they will usually see the development of the product after the business got the investment. At this stage, the product and company will get the spotlight from the public and the media.
Thus, the company’s reputation and the quality of the product must be maintained, even after obtaining investors. The reason is, the public and consumers will assess the products and companies that will determine the sustainability of the business.