The Startup Saga

We’ve all heard of the startup thing that is a hot topic revolving in the country right now. What is all the hype about?

A startup in simple words is building a business. Now, why do people build businesses? To make money, Ofcourse. How do you make money from businesses? Profits.

What do you mean by Profit? and how do you generate revenue?

Profits = (revenue generated in the business) – (cost of running the business). Talking about revenue, you generate revenue when someone pays for your service.

Someone will only pay for your service if it checks one of these three things

1. If they found it truly helpful.
2. If your service increases their status.
3. If your product reduces their stress and makes life of the consumer easier

Now, you might’ve heard on companies getting funded in millions. Who are funding these companies? Angel Investors, VC (Venture Capital) firms.

Who are these Angels and VC’s?

Angel Investors are wealthy individuals who put their money into companies in return of some percentage stake/ holding in the company. This happens usually in the seed level.

Venture Capital Firms : are private equity financing i.e they fund companies in return of the stake/some percentage of the company. They usually fund after the seed funding stages when the company begins their expansion plans.

Then, how do these investors make money?

When the company goes for an IPO (Initial Public Offering) i.e it gets listed in the public market.

Pre-IPO, the investor invests money based on the company valuation. Valuation here is not the revenue of the company, it is an estimate assumption that a third party would pay if the company were to be sold off at the moment of valuating. Valuation is calculated by considering the assets and liabilities of the company. Coming back to the question of investors making money, they can sell-off their stake in the company once the company is listed in the public market.

Funding is highly publicised by the media in our country

The shows like Shark Tank have done a good job of educating people about the startups of the country. But, it has also left an impression of startups being all about funding, which is absolutely not the case. In the race to catch eyeballs of the people, media is celebrating the wrong thing i.e funding. Funding is just a small pie in the cake which startups usually use for employing people, investing in new technology or in the expansion process of the company.

Celebrating Funding of a company is as good as Congratulating a chef for buying vegetables to make his dish. Cool, isn’t it?

Big VC firms fund companies that haven’t made a single penny profit in the entireity of existence. But, it lies in their strategic books that if 1 or 2 of the 100 companies they fund becomes profitable by a huge margin, that in itself would make up for the money that they put into the number of companies combined.

People should rather celebrate the SME’s(Small and Medium Enterprises) of the world.