Raising Funds for your Venture
Mergers & Acquisitions,
Starting up a new venture? The first thumb rule to be successful is to avoid dying. And there are only two ways to avoid it. You have to either make money or take money! In the last 9 years, I have observed that making money has been getting from hard to harder, dynamics of the business world are changing at the speed of thought and it is indeed becoming more outlier. In fact, extremely outlier in most recent cases, especially for new age ventures.
Hence, taking money is increasingly becoming all the more important for startups, especially to survive and grow. In a lot of cases, even to begin. Fund raising has been glorified magnanimously by the global media and the venture backed entrepreneurs have been basking in glory, making the investors look “God-like”. Fund raising is really simple but not easy. And it is never a fun activity. It takes time, distracts you from building the product, is fraught with a lot emotional ups and downs, and never has a guaranteed outcome, no matter what. Ever since, I have been seeing that entrepreneurs would rather take a jump in the icy lake than another fund raising meeting, where they are just not sure of what to “say” to convince an already hesitant investor to open the purse and write the cheque. However, it need not be so dreadful if you do the right things, though the results are never guaranteed.
Most first time entrepreneurs tend to make the same mistakes. Money has its own law. “Build a good business, and it will chase you!” The argument here is, “Oh! I need the money to even build my product!” In such a scenario, you best bet to take it from people who believe in you already or expect nothing out of you, your friends and families. Whether it is out of belief or sympathy, you will surely end up raising some money to set things rolling. That’s your first step. Of course, beyond that using that money wisely is solely upon you and that’s where the real test begins.
I would test this stage with 2 most important metrics.
1. How easy/fast is it to sell your product?
2. How cheap/easy is it to service your customer?
These are two most important metrics by way of which you can show the world that you have an awesome, fast-growing, high-margin business. This is the proof. Nothing else. If these are validated in the right sense, you will know for sure, if you are fundable or not. Caution is to keep emotions aside and being true to your own self while answering this one. Understand, the huge gap between you and the market is only growing wider by the day! This gap is the ultimate threat to detail your plan of making your venture successful.
Once these are taken care of, let’s try to answer, “How to raise VC Funding?”
Like I said in the beginning, it is simple but not easy and never has a guaranteed outcome. Hence, it is important to be wise and cautious both. Here, it is important to understand the VCs business really well, which most entrepreneurs fail to do. VCs business is that of investing someone else’s money and sharing returns. This makes it imperative for them to invest only in those businesses that meet critical parameters. SCALE and EXIT are the 2 most important of those parameters and everything else is a derivative or a source of these two.
SCALE: Can your business become a 100 USD venture in the next 4-5 years? Which means do you have an awesome product that will sell fast and easy? Will you break even quick enough, which means is it cheap and easy to service your customer? If the answer is big “YES”, check the box.
EXIT: This one is dependent on the first one! A visible exit for the investors, basically means, is your venture worthy enough to raise several rounds of funding or is your profitability so high that you can pay them off from the system? The basis to these answers is your business model and your own capability of executing the same. So, here you will never have a big YES. Try harder each time! And let the VC make his own judgement beyond a point.
So how to go about the journey of fund raising?
Obviously, you know you will need a pitch deck, financial model, etc. and there are tons of guides for the same. My advice is to stick to a 2 page MS Word version of your pitch and a detailed financial plan. These are enough in reality since no one has the time to read a 50 slide presentation, especially when they have to go through 20,000 plans a year. So don’t waste too much time on this. Instead, demonstrate your product and how your customers are using it! This will lead to more positives secretions in the VC’s mind and will also raise your credibility.
Second important thing is, not to spam all the VCs at once. Do your homework. At least, make sure they have already funded at least 1 startup in your industry or they are aligned to invest in your industry. Pitching a Mobile App to a VC with a Manufacturing mandate is only wasting your time and theirs, and that doesn’t go too well with them.
Social proof is an increasingly important element of this journey. It has never been more important. There is a lot of weight to who introduces you! Make the right connections or pay a premium to hire the right banker!
All of these will lead you to the meeting! What happens in the meeting is of utmost importance obviously. Introductions, a short pitch on the product and the team, etc. is something you will be prepared with fairly well, anyways. The dilemma is on painting the dream. Even if you appear like a small venture, being honest and upfront is better than painting fabricated dreams to a VC, no matter how big they are! Stay rooted, chart a plan and have a clear roadmap for the discussion. Having goals within the realm of practicality is immensely important, because it shows that you are prepared and also someone who is credible. Positive communication is the key, not exaggeration! As they say Humility is more important than Capability. Integrity is critical, since the VC needs to trust you with someone else’s money, for which they hold fiduciary responsibility.
Last but not the least, most startups don’t use media effectively for the fear of backfiring. The piece of advice here is to learn from the politicians. Accept both positive and negative outcomes with equal aplomb. Using media creates curiosity amongst customers and raises credibility, which can be built upon. And hey, it also helps funders find you!!!
I will conclude this journal with the most basic advice of all. Get out of the building and start talking to real customers as soon as you can, even while your product is not perfect. This will set off the chain reaction for good.
Gaurav Shah - Managing Partner
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