An investment validates your business idea. It gives you the necessary fuel to take your product to market and rev up growth. It also helps you attract talent and reassures your first employees. Your suppliers are more willing to talk to you. In short, it is a game changer. There is only so much a startup team can do with bootstrapping. Most startups end up shutting down in less than 24 months without funding support.
An investor will provide you with the necessary ammunition to pull the growth trigger. However, along with the actual investment, it's equally important to identify the right investor for your business. The right investor can add far more value to your startup than just money. Investors can lend their experience, network, industry expertise, and, at times, a whole ecosystem, which helps the founder accelerate the growth curve.
At the same time, investors come with their own list of terms and conditions. Suddenly, you have one or more board members who will exercise considerable rights over any material decision that you need to take. Bad investors can derail startups. In one instance, investor directors gave the wrong advice to founders, seriously damaging a startup’s prospects. One education startup was pushed by an investor to get into the infra-heavy K-12 business, while the startup promoters were keener on the asset-light coaching business. It took years for this startup to get rid of this mistake.
Some investors affect startups by putting conditions in the shareholder agreement that make further fundraising extremely difficult. There have been cases where the first fund sets an aggressive minimum valuation limit for the next round. The founders later spend several futile months trying to justify a valuation that may be out of sync with reality, particularly when the performance hasn’t been in line with the business plan shown to the first investor. By the time founders and incumbent investors realise they need to change their expectations, it is often too late.
It’s a commonly said axiom in the startup world that divorcing your wife or husband is much easier than divorcing your investor. Therefore, understanding the various steps and stages of raising funds, as well as selecting the right investor for the first funding round, become critical for a founder going for the first fund raise.
As a knowledge banking partner, IDFC First Bank has prepared a kit for startups planning to raise funds. The Fundraise Kit is a handy guide to provide founders with the necessary knowledge across key areas of fundraising, including investor selection, important terms in the Term Sheet/SHA, pre- and post-fundraise compliance checks, regulatory guidelines, and the importance of choosing the right banking partner. This kit equips startup founders with the right knowledge while raising their first round of funds for business growth.
Authored by Sanjay Kumar Maheshka, Partner, Wisdomsmith Advisors LLP, an expert associated with TrainingCentral Solutions
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