“It is a science and art to raise funds for your startup. Look at some best practices on raising seed capital.”
One of the most important aspects of a startup is funding, especially if you plan on building a product that is already fully developed, or have a functioning prototype. If you are still early on in this process, or have not yet built your product, then the reality could be far more difficult than you imagined.
Starting a new business is not for everyone. However, it can be an exciting journey that has a high chance of success. Below are some helpful ideas on how to decide when and how to start the fundraising process.
How to raise funds for Startup? When & what are the stages to raise Startup funds?
Don’t raise funds for Startup until you have a proof of concept (POC). Often people say, how would someone sustain and reach up to the stage of POC. The obvious answer is to pre-plan and raise it from friends and family.
Reason is simple. If you haven’t made a working half-cooked proof of what you are thinking, you will either get:
a) Peanuts (very low valuation) due to risk averse and defensive nature of the investor with lots of ambiguity
b) Lots of closed doors on your face – as many investors wouldn’t be able to appreciate the idea. Even if they do, they would have doubt on your execution to the tune of 100%
Only exception to this rule in my mind is, when you have a patent-able idea and have moved towards its registration before discussing it with investors.
Best ways for investor outreach
Investors are different, even if on the face of it, they look all the same. You will meet many investors saying they invest in all the sectors (sector agnostic), however, that is to attract opportunities from all the sectors.
However, each investor network or investment fund has a
MandateWhich sectors to invest in and size of the investment
CapabilityTo evaluate applications received from the Startups. Big venture capital firms may hire specialists to conduct “due diligence”, “market survey”, “sector attractiveness”, “founder reputation” among others. However, a small group of Angel Investors at times lack such a vast level of expertise and given the invested money, wouldn’t venture out to spend on specialists. Hence, they tend to prefer to invest in certain sectors faster.
ResearchTo be sure not to get rejections from many investor(s), it is wise to research about them. As Startup doesn’t have that bandwidth, taking help from an incubator / accelerator helps them achieve the goal without burning time and motivation.
Prepare well on basics, such as:
Your value proposition
How would you reach your customers
How would investment help and if it is not available, how would you achieve your goal
Your expected valuation and why
Any specific takeaway for that investor to be specially interested in your venture (past investment to make it complementary for other portfolio company – forward or backward integration)
RehearseMany times investors have been seen to show bias in favor of IIT and IIM graduates. Underlying reason is not only that they would like to play safe, but also those graduates understand the grill and rigor in life (by having entered into these premier institutions), that they eventually be facing in running their Startup too. Your presentation should be practiced, covered for risks it has.
Cheat sheet/key pointers for a great investor pitchI like this one
The Ultimate Cheat Sheet for Your Startup’s Investor Pitch Deck
How to select the right investors?
This is a great question. Many founders don’t even understand the importance of this question and take the money from anyone who agrees to give them money. Suave and mature founders also select their investors just like investors select their Startup. This platform The Startup Board also can get you connected with investors and arrange investment for meritorious ventures.
What should an investor bring?
a. Funds and also capability to invest or bring follow-on funds
b. Lots of connections
c. Strategic thinking and possible gateway to future customers and/or investors
d. Bring pressure but not the tension
It is often said, to know who is a good investor, you must understand which are the traits of a bad investor. Think of situations, when you get the investor and funds.
i) Would you be able to operate if he keeps on giving his advice and interfering in operational matters?
ii) Founder is overpowered by the board of directors and founder loses his say to fulfill his vision
iii) Terms of investment have blocked the way for future investors to come on-board
iv) Miser-in-release of committed funds or strangulation of follow-on funds
v) Too much-in-a hurry (less than 3 years at any stage of funding, for exit)
Avoid investors who give you any hint of making you land-up in dreaded scenarios.
How to structure your fundraising for a startup?
Three golden rules to structure fund-raising for startups are:
a)Estimate the fund requirements
Aggressive, Realistic and Pessimistic with each needing its own target of the amount to be raised. At times, it is better to raise higher investment than you actually need (may be 1.3x).
b)Plan the timing
Start searching at least 6-12 months in advance to your needs. Keep a backup option, even go for pessimistic plan execution, when funds get delayed. It easily takes 3 months to raise funds from angel networks and 6 months from venture capital.
c)Think of funds and leverage
If you are in a growth stage, revenue can replenish fully / partly the need for the growth fund. In case the business case asserts that by infusion of funds, you are likely to get higher returns than servicing the cost of funds (say interest cost), take loan (debt) and not funds against equity. This will keep a balance on the leverage ratio of the company too.
In case you are in product development and/or market launch phase, equity is a better option, as uncertainty of product-market fit is high and thus risk is high, which can better be asked for partners to share with.
Written by: Ashish Jain
Author mentors startup founders on Go-To-Market strategy