Fund Raising Challenges Faced By Start-ups

funding challenges

The first thing you need to remember is that every business is not attractive to a Venture Capitalist (VC) and hence raising capital becomes more complicated. Now, how do you realize that your business is not fit for a VC? Well, the easiest is to ask few VCs. The difficult part is to understand the inherent challenges of scale in your business that makes it less attractive to a VC. The simplest matrix to measure scalability is to assess increase in cost of operations (manpower and others) when servicing 10 clients vs 10,000 clients. If the costs increase proportionately, the company is NOT scalable. E.g. a typical manufacturing company’s costs will increase as sales increase while in a technology enabled company, the costs will not increase proportionately.

I am not suggesting that you only build highly scalable VC oriented business but once you realize that your business is not for a VC, stop knocking their doors. You need to look for alternate platforms, Family Offices, customers, etc. as investors. A typical B2B services company would fall into this category where the company can operationally breakeven after some initial investments. As a corollary, you can also think of starting a company by getting a few corporate customers to get revenues, build relevant product and sustain before taking the next leap of growth.

Once you have achieved initial traction, the next challenge is to identify the “right” investor for your company. It depends on stage, sector and type of company. Stage will determine whether you will approach an angel investor, a VC or a Private Equity (PE) fund. The sector and type of company determines whether you should approach a VC or Family Office or others. We will restrict our discussion to Angel, Family Office and VC only.

Let’s first understand angel investor. The biggest challenge here is to find angel investors who would be interested in your company. Unless you have a strong network, it is extremely difficult to reach these investors, get interest from them and also ensure that they have liquid money to invest at that time. Further, you need to convince at least 5-10 angel investors so that you get some sizable money from them. If you get only one angel investor he would like to get a lot of stake as his bargaining power goes up significantly. You should try to get at least get a few angel investors on your side. The same challenge remain with Family Offices as limited data about them is available so they are difficult to reach. There are platforms like grex.in and others who can help you here.

There is a different challenge with institutional investors. There are more than 400 institutional investors registered with SEBI but few are active. On top of it, institutional investors have their own sector and stage bias which dynamically keeps changing. I recently met a Vice President of one the largest and most active VC firms in India and he told me, “We used to do early stage a year ago but we are not doing it now.” The other challenge is to find the right person in the VC who can understand your value proposition better. Although all VCs claim that they speak to everyone who sends them a mail, the fact remains that if the right person doesn’t see your mail, it can just go to junk. And by their own admission, if a mail comes from a “trusted” reference, the chances that it will be taken seriously and quickly is quite high. So, if you have a reference, use it and if you don’t, find one.

Once you find the right investor, you need to spend time with them. Most entrepreneurs think that they will present to investors once and either they will agree or disagree to invest and the story is over. How I wish this could be true. Investment decisions are taken over a period of time and investors would like to assess tenacity, persuasiveness and relationship building with them. If they like you over a fairly long period, they will eventually invest in you. A typical fund raising exercise takes upwards of 6 months with an institutional investor and at least 3 months with angel investors. During the same time, you need to manage your business as well and it can be quite a task.

Being an entrepreneur, you should be prepared to hear “No” from both customers and investors. But there is no excuse for not doing your homework. If you go to a VC asking for half a million when their minimum ticket size is $ 10 million, not only are you wasting his time but yours too. So, you must read a lot about the VC firm, the person you are meeting, ventures have they funded, their current focus, etc. Even if the VC says No, they generally help entrepreneurs as they also want to build relationship with great entrepreneurs even if they don’t invest.

Further, you also need to be prepared to answer some tough questions. Most entrepreneurs get stumped when asked, “what will they do if they don’t get funding now?” Not only should you have a plan to tell your investors but also for yourself. Investors test your perseverance and survival ability in adversities. You need to have alternate plan (slow growth, internal accruals, family and friends, etc) so that you can sustain before you get your big break. Another typical question asked by VCs is, “How will they get exit?” This is extremely relevant question as VCs also want an exit for their investments. You need to research about potential buy-outs, other exit options for VCs.

Don’t assume that getting investors is panacea for your problems. Instead, I would strongly recommend entrepreneurs to focus on their customers more than investors. If your customers are happy, you will stay in business and investors will come sooner or later. You need to keep building your product and get paying customers. Investors are bound to come if customers are coming. Focus on your customers and keep them happy.

Far too often entrepreneurs feel that if they solve 5 big problems, they should get funding easily. This is far from truth. You need to start from a core problem and solve it better than others. You only plan other additions once your core story is strong. Investors will also invest once there are customers buying your core story. In a limited resources (money and people both) environment, losing focus can be quite costly – both from customer and investor point of you. So, stay focused.

In the end, the success mantra is start small, fail fast, build value and customer loyalty and funding will surely follow you.

About The Author :

The article is contributed by Abhijeet Bhandari, Co-founder & Head-Market Development, GREXGREX is a startup which has developed an exchange like transaction platform for fund raising for startups and unlisted companies. GREX brings together private eligible investors and high growth startups and unlisted companies for information exchange and securities transactions.

(Disclaimer: This is a guest article posted on Techstory. Techstory is not responsible or liable for any content in this article.)

Send this to friend