What they lied to you about funding

Ajeet Khurana

Every early-stage entrepreneur is inevitably embroiled in a number-crunching game to arrive at the probability of 'success'. One of these parameters is funding. The all-important question is: what is the probability of getting funding for one's venture? The number that keeps popping up is a ratio of 1:100, that is, one in every 100 business ventures is likely to receive funding from a venture capitalist / angel investor. Regardless of the numbers you've heard, one thing is certain: the likelihood of getting funding at the start-up stage is abysmal. But is it as hopeless as they claim it is? Trust me, they lied to you. They Say 1 in 100 Plans Gets Funded The 1:100 is one of the most common true-lies an early-stage entrepreneur is told. And if the term 'true-lies' is disconcerting, how else can I put it? It is true that for every 100 applications for funding that a venture capitalist, angel, angel network or seed fund receives, only one of them, on average, gets funded. This is the 'true' part. But it takes a poor understanding of probability to state that only 1 in 100 plans gets funded. The truth is more like: 1 in 100 plans gets funded by a single investor or entity. Allow me to explain. Assume that 1,000 founding teams are in the fray for funding in a given year, and on an average, each team applies to 10 different sources for equity investment. If you look at the deal book of Venture Capitalist-1, they will probably fund 10 of those 1,000 businesses. That's how you get the ratio 10 in 1,000 or 1 in 100. But Venture Capitalist-2 will also fund some and so will Venture Capitalist-3, and so forth. If all 10 Venture Capitalists fund 10 businesses each, 100 of the 1,000 businesses will receive funding. That's a ratio of 1:10 or 10 per cent -- not 1:100 or 1 per cent. This is a simplistic view but you get the idea, don't you? For Every 100 Applicants, Barely 40 Expect To Get Funded Here's another interesting fact that might cheer up the serious entrepreneur-in-the-making. I have been a member of screening committees and can say with certainty that a little over half the plans submitted for funding are not even coherent business plans. They exist in a vacuum and have no business activity associated with them. As a screening committee member, it is inevitable that we waste some bandwidth identifying and weeding out 'entrepreneurs' who do not even take themselves seriously! So if you are serious about entrepreneurship, you should know that you are already in the top 40 of every 100 funding applicants. What's the Real Number? I have done some semi-scientific analysis over the last 18 months and my conclusions will startle many in the start-up ecosystem. Let me begin by stating my premise: I am only considering start-ups that actually exist and are not merely a business plan. They could be super-early stage, for all I care. Further, I am only considering start-ups that are willing to persist with fund-raising activity for a prolonged period, say, a year. Now here's the clincher: According to me, something like 1 in every 10 such start-ups gets funded. And if at all I have erred, it is on the side of caution. The real number is something like 1 in 8. Why Should You Care? I have attended many start-up events and read many start-up blogs and I can tell you without a doubt that they are fixated on the 1:100 ratio. I think it is important to know that if you're committed to your venture, you can substantially tilt the odds in your favor. Isn't that a refreshing change? The author, Ajeet Khurana, mentors start-ups. An angel investor, trainer, author, entrepreneur and digital marketer, he is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. When he has nothing better to do, he blogs at StartUp Gang. He is also on the boards of Carve Niche Technologies and Rolocule Games. You can reach him on LinkedIn and Twitter. You can send your feedback on smementor@moneycontrol.com or simply post comments below