When is the right time to raise capital?
Aug 23 2012, 12:31 | By SME Mentor
When you decide to turn entrepreneur and start your own company, obviously you may have to begin your journey with your own capital. But as your company grows, you may have to raise capital at each stage of the business.
Well thought process
There is nothing called "the right time" to raise capital for your business. It differs from business to business and is also need-based. Plus, raising of funds is also linked to the growth of your business. But you should always be ready with your business plan. The key to raising funds lies in your plan. Rather than work on a 'fly by the seat of your pants' way where raising money is concerned, it should be a well-thought out process.
Start working in advance
While preparing your business plan, you must anticipate your fund needs, the stages at which money is required, and then, you should start working to raise capital by approaching investors at least six months before those dates.
"There is no right time as such. You must start working in advance. Otherwise, you will be left in the lurch as fund raising in India takes a lot of time and your company may fold up by the time the money actually starts coming in. You should constantly start evaluating fund raising options, " advises Vinod Keni, CFO & Director, Aavishkaar Venture Capital.
Probable stages when funding could be required
Startup: At the startup stage, funds could be required in the prototype phase. Once the prototype is ready, you may then need funds at the product testing stage. If you have a successful test, you need go to the market to sell the product, and then at the roll out stage. As an entrepreneur, you may require money at all these stages or any one.
Growth stage: The startup stage is then followed by the growth phase. In this stage, you may require funds when you decide to take office space or hire recruits. You may need more money when you also expand to different geographies. "You should think about raising funds whenever you are prepared for long term business. If you think that you cannot grow and achieve your goals without external support, only then go about raising money," says Grover. "You should also think about raising money for short term and long term goals.
3 years is a good time
"Three years is the right time. By then, you know your business' growth trajectory. At this time, investors also can have faith in you and you will have some numbers to justify your goals. You should raise funds whenever you are confident that you can make best use of it," says Aasif Khan, founder and MD, Fabtech Technologies.
Don't over-indulge in raising funds
There is a story about a promoter who could not sell his products and failed to achieve his milestones because he was busy raising money. When his investor asked him as why the company failed to achieve the target, the promoter said, "I was preoccupied in convincing you to get the second rounding in the last six months, that I did not get time to sell."
As an entrepreneur, you should avoid getting into such a situation. Again, your business plan is the key. It is like a roadmap and stops you from doing too much of one thing and too less of the other. Actually, you should go for borrowing or selling stake after three years of starting business. By the time you know whether your plan is fructifying or not.
Here's a quick check list for fund raising:
Prepare well in advance. Approach investors six months before you actually need the funds. Always be ready with your plan. Have both short term and long term fund raising plans. There is no certainty of getting funds, remember, it takes a long time. Raise funds only if you actually need them. Go to investors after three years to get better valuation.
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May 20 2013, 21:04
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