The Three Funding Types (Quick Overview)

Option 1: Equity Funding (The Classic VC Route)

How It Works

You sell a percentage of your company in exchange for capital. The investor becomes a shareholder, usually with board seats and governance rights.

Examples: Seed round, Series A, Series B (¥1Cr to ₹50Cr+)

Pros of Equity Funding:

• No repayment pressure: You don't have to pay back the capital, so you can focus on growth.
• Large cheques: VCs write big cheques. ₹1-5Cr rounds are typical for seed.
• Value beyond capital: Good VCs bring mentorship, customer intros, hiring help, and strategic advice.
• Signaling: VC backing signals credibility to customers, partners, and talent.
• Tax efficiency: Capital raised doesn't count as taxable income.
• Future fundraising: Dilution from prior rounds makes future rounds easier (post-money from round N becomes valuation floor for round N+1).

Cons of Equity Funding:

• Dilution: Founders typically own 15-20% by the time a company exits. That means 80%+ dilution across all rounds^[1].
• Loss of control: Board members and investors can overrule your decisions on hiring, spending, exit timing, strategy.
• Pressure to scale: VCs expect 10x+ returns. That forces aggressive growth (which may not be optimal for your business).
• Long-term dilution cost: A ₹1Cr investment at a ₹5Cr valuation (20% dilution) costs you ₹3Cr if the company exits at ₹15Cr^[2].
• Governance complexity: Board meetings, voting rights, liquidation preferences—lots of legal overhead.
• Not ideal for profitable businesses: If you're already profitable or close, equity dilution is wasteful.

When to Use Equity Funding:

• You need ₹1Cr+.
• You need to scale fast (unit economics are strong; you just need to acquire fast).
• You value mentorship and network from VCs.
• Your market is winner-take-most (you need to be the big player).
• You're optimizing for exit value, not profitability.

Option 2: Debt Funding (The Often-Overlooked Option)

How It Works

You borrow money and pay it back (plus interest) over time. The lender has no ownership or control.

Types: Bank loans, venture debt, revenue-based financing (RBF), lines of credit

Pros of Debt Funding:

• No dilution: You keep 100% ownership. Lenders have no say in business decisions.
• Lower cost of capital: Interest rates (12-20% for startups) are lower than dilution costs over 7-10 years.
• Tax benefits: Interest is tax-deductible. This reduces your effective borrowing cost.
• Predictable terms: Unlike equity investors, lenders won't surprise you with governance demands. You know your obligations upfront.
• Preserves upside: If your exit is ₹100Cr, all upside is yours (minus interest).
• Easier than equity: No need for governance, board meetings, or complex negotiations.

Cons of Debt Funding:

• Repayment pressure: You have to pay interest monthly, regardless of whether you're profitable. This can drain cash.
• Smaller cheques: Lenders typically offer ₹50L-₹2Cr. Hard to get more than that.
• Requires cash flow or collateral: Lenders want proof you can repay. For startups, this often means personal guarantees or collateral.
• Covenant restrictions: Lenders may restrict your ability to raise future debt or equity, or mandate certain financial ratios.
• Limited support: Lenders aren't mentors. They want your money back, not to help you build.
• Risky in downturns: If growth slows and cash runs out, you can't pay back debt. This leads to bankruptcy.

Types of Startup Debt:

When to Use Debt Funding:

• You have predictable revenue (SaaS, marketplace, D2C with repeat customers).
• You're between VC rounds and need to extend runway ₹50L-₹1Cr.
• You're already profitable or close to it.
• You want to preserve ownership.
• Interest rates are low (current environment: 12-15% for well-run startups).

Pro tip: Venture debt is most attractive 3-6 months before your next VC round. Lenders know VCs will help you pay it back.

Option 3: Grants (The Free Money)

How It Works

Government agencies, foundations, or corporate programs give you capital with no repayment and usually no equity. Sounds too good to be true, right? The catch: very competitive and slow^[3].

Examples: DPIIT startup scheme, IIM NASSCOM fellowship, ICICI Bank startup accelerator, Startup India program

Pros of Grants:

• Free money: No repayment. No dilution. True free capital.
• Credibility: Government grants signal credibility to investors.
• No obligations: Unlike VC investors, grant-givers usually don't demand governance or board seats.
• Tax benefits: May have tax implications (check with your accountant).

Cons of Grants:

• Super competitive: Thousands apply. Acceptance rate: 1-5%.
• Slow process: Applications take 2-4 months. Funding takes another 2-6 months. Total: 6-12 months to see money.
• Small cheques: Most grants are ₹25L-₹1Cr. Rarely more than ₹2Cr.
• Reporting burden: Grant-givers want proof you used the money as promised. Heavy reporting requirements.
• Restrictions: Some grants restrict how you can spend money (e.g., "must hire 10 Indian engineers" or "50% must go to R&D").
• Not ideal for scaling: Grant money is rarely enough to scale fast. It's more for proof-of-concept.

Major Grants Available in India (2025):

• Department for Promotion of Industry and Internal Trade (DPIIT) – Multiple schemes for deep tech, biotech, greentech.
• NASSCOM 10,000 Startups Program – For IT startups. ₹50L-₹1Cr per company.
• ICICI Venture Funds – Early-stage grants for tech startups.
• IIM and IIT Innovation Cells – Grants for alumni and incubated startups.
• Corporate grants (Google, Amazon, Meta) – Tech startups using their ecosystems.
• NGO grants (Ashoka, Villgro) – For social enterprises and impact startups.

When to Use Grants:

• You're building deep tech, biotech, or greentech (more likely to be funded).
• You have runway (6-12 month grant process). Don't apply when you're down to 3 months of cash.
• You're an IIT/IIM graduate or incubated startup (much higher acceptance).
• You're willing to report and comply with restrictions.
• You're not in a rush (grants are slow).

The Optimal Capital Mix Strategy (By Stage)

Pre-Seed (Before First VC Round) – Bootstrap + Maybe Debt

• Strategy: Keep costs low. Raise debt only if you have customers.
• Mix: 80% bootstrapped, 20% friends & family equity (if you want outside capital).
• Why: Preserve equity for future institutional rounds. Prove concept first.

Seed Round (₹50L-₹2Cr) – Equity + Some Debt

• Strategy: Raise equity to fund growth. Use debt to extend runway between rounds.
• Mix: 70% equity, 30% venture debt (if available).
• Why: VCs expect to own 15-25% at seed. Debt bridges the gap and preserves some ownership.
• Timing: Raise equity first. Then get debt after you've proven traction.

Series A (₹2-10Cr) – Equity Primary, Debt for Optimization

• Strategy: Raise equity for growth. Use venture debt to manage cash flow.
• Mix: 80% equity, 20% venture debt.
• Why: You have better data at Series A. Series A VCs expect lower dilution than seed. Debt can help.

Series B+ (₹10Cr+) – Equity Primary, Debt for Cash Flow Management

• Strategy: Raise equity for scaling. Use debt/RBF for working capital management.
• Mix: 80-90% equity, 10-20% debt/RBF.
• Why: At this stage, you're managing cash flows. Debt is less about runway and more about optimization.

Profitable or Late-Stage – Debt + Retained Earnings

• Strategy: Raise equity only if you want strategic partners. Otherwise, use debt for growth.
• Mix: 60% retained earnings, 40% debt/RBF.
• Why: You don't need external capital if you're profitable. Equity dilution doesn't make sense.

Comparison Table: When to Use Each Funding Type

Red Flags: When NOT to Raise a Certain Type

Don't Raise Equity If:

• You're already profitable (dilution is wasteful).
• You're only raising because "everyone else is" (VC money comes with expectations).
• You don't want to scale aggressively (VCs will push you).
• You have 12+ months of runway already.

Don't Raise Debt If:

• You don't have predictable revenue (no way to repay).
• Your runway is less than 18 months (risky to add fixed costs).
• Interest rates are above 20% (too expensive).
• You're in a tournament (winner-take-most market). Debt will slow you down.

Don't Raise Grants If:

• You're down to 3 months of runway (process is too slow).
• You're not in deep tech, biotech, or greentech (acceptance rate is <1% for others).
• You don't have time for reporting/compliance.

How to Combine Funding Types (Real Example)

Company: FinTech SaaS marketplace. 2-year old. ₹50L ARR. ₹30L monthly burn.

Runway at current burn: 20 months.

Optimal capital mix:

• Venture Debt: ₹1Cr (12-month repayment). Cost: ₹15L/year in interest.
• Seed Equity: ₹2Cr (at ₹8Cr valuation, 20% dilution).
• Total raised: ₹3Cr.

Impact:

• New runway: 36 months (with ₹3Cr + current ₹50L ARR revenue).
• Dilution: 20% (instead of 37% if they only raised equity).
• Path to Series A: ₹3Cr gets them to ₹2Cr ARR (if growth continues at 12% MoM). Strong Series A signal.
• Debt repayment: By month 12, company is at ₹1Cr ARR. Can easily repay ₹15L/year interest (15% of revenue).

Conclusion

Equity, debt, and grants each have distinct advantages. The best founders don't choose one—they use all three strategically based on their stage, metrics, and goals.

Start with equity if you're early and need capital + mentorship. Use debt to extend runway and preserve ownership. Use grants if you qualify and have time. And remember: the cheapest capital is the capital you don't need to raise.