What you need to know while raising funds for your start-up
Funding is always a complex issue to navigate for any start-up. Here's some advice that will help you decide when you should raise money, and how much
November 08, 2013 / 11:19 IST
Ajeet Khurana
After that one big idea, which is the raison d'etre of your start-up, there's another big concern that you need to tackle sooner or later. And that's finding the juice that will run your venture. In plain and simple terms, I am referring to the 'F' word -- funding.I have been an angel investor for 15 years and, over the last few years, have worked with a large number of angels. I have screened over 3,000 business plans and attended countless guru sessions on start-ups.Apart helping you keep your finger on the pulse of the start-up ecosystem, these sessions can be very entertaining, especially when they come packed with free advice. One of my greatest learnings is that there are too many 'formulae' for start-up success, and most of them are just nonsense.Guru DoublespeakSample the wisdom doled out so generously by self-styled gurus. Also notice how they all seem to contradict each other, thereby ensuring that at least one of them is always right! Of course, their intention is not to entertain but to sound, er, profound.
For instance, I have heard some gurus say, "Raise as much money from investors as possible, as soon as possible. This will help you remain liquid and scale up rapidly. You want proof? See what Flipkart did." On another platform, the same speaker will turn around and say, "Raise as little money from investors as possible, as late as possible. This will help you avoid diluting your ownership or you might regret it later. You want proof? See how Phani diluted himself in Redbus.in"As if this was not entertaining enough, some gurus will say, with a straight face, "The best time to raise money is when you don't need it."OK, So When SHOULD One Raise Money?The moment I answer this question, I seem to join the ranks of those profound gurus whose primary purpose in the start-up ecosystem is to provide comic relief. That is not to say the question is invalid or that a prudent response is not possible. What I want to point out is that there is no 'one size fits all' answer. Also, you do not want to immediately jump to the 'when' question. The first question you want to deal with is the 'why' You need to ask yourself, 'Why do I need to raise money?' When you have a convincing response to that question, you move to the 'when', and finally to the 'how'.Based on the 'why', if you have determined that raising money is the best way forward, you should start the fund-raising process as soon as possible. It is ambitious to expect to raise money in 3 months; 6 months is more like it. But even with a 6-month horizon, the individual driving the fund-raising will have little bandwidth to take up any other project. I would recommend a 6-8 month timeline.How Much Money Should You Raise?The knee-jerk response is usually, "As much as possible." But raising a lot of money has two serious drawbacks:1) Today, you would command a significantly lower valuation than you would get a year or two later, assuming you grow rapidly.2) If you dilute your ownership too much today, you will quite likely hesitate to dilute it further during future rounds. Even if you are not hesitant, investors will worry about your commitment to a business where you do not have a significant ownership stake.Raise Money for 18 Months of OperationsA good rule of thumb is to raise money for 18 months of operations. There is a well-meaning paradox in this prescription. If you are able to demonstrate a fast growth trajectory with your fund raising, you will probably get ready for another round as quickly as 12 months later. But you should not bank on another rapid round. Hence plan on raising money for 18 months.Who Do You Raise Money From?This question assumes you have several choices. If that is true, congratulations, you've done well! Just like there is no such thing as a perfect investee, there is no such thing as a perfect investor either. But here are some pointers you can keep in mind when choosing an investor:• If you continue to grow, can the investor fund you during future rounds? If not, do they seem to be well connected with later-stage investors to help you get funded?• Will the investor help you grow your business? For instance, can the investor make any valuable customer introductions?• Does the investor have an understanding of your space? Don't fall for the 'sector-agnostic' slogan. Sure, there are investors who work in multiple sectors. But the number of sectors they are good at is always finite.• And, most importantly, do you share chemistry with the investor? You are going to spend a lot of time with the investor, and things don't always work out well. At such times, would you be able to work with the investor and take the business forward?
The author, Ajeet Khurana mentors start-ups. An angel investor, trainer, author, entrepreneur and digital marketer, Khurana is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. In addition, he is a technology enthusiast and runs a technology blog called TechnoZeast.com. 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 Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
