Raising capital for your Startup? Here’s my Advice
Date : June 7, 2018 By
‘Ideas’ are at the core of any startup; they are akin to the spark. Sparks can lit up a fire. They also have the potential to grow it.
However, ideas are easy to come by. Each of us are ideators. But, only a few of us go on to execute ideas to see them come alive. The implementation of an idea is always a hard task. Yet, very few become successful in executing their ideas in the real world. So, how do you implement / execute an idea ? You have to invest time, efforts, and resources to be able to execute an idea. Though limited, time can be managed; if you are passionate about solving a problem, you will find time and put efforts to work on it. However, what is beyond our control is capital / money needed to execute ideas. Capital is usually sourced via personal savings, loan and other kinds of credit instruments available in our banking system, internal accruals of the company or from funds raised from investors.
We will focus on a few of these fund raising mechanisms here.
Internal accruals take time to accumulate. So, if in dire need with no patience to gradually scale up via revenues, fund raise is the only option. Not everyone can have meaningful savings. But, if you do have it, it’s a good news. However, one needs to be extremely careful how you use your heard earned savings in venturing out because early-stage ventures are risky asset class.
By the way, lack of capital / cash is cited as the second highest reason for startups to shut down. That is also because we have been doped fund from VCs and peddled that it is the only way for companies to grow. It is not. We will discuss that at some other place.
However, the fact remains that money is the bloodline nurturing businesses at all stages of a venture, irrespective of where it comes from: revenues or investors or banks or savings. No wonder entrepreneurs are often pondering, “How to raise capital for the Startup?”
Before coming to answering the ‘how’, let’s take a quick detour to discuss broad stages of development in a startup and when should one think about raising funds. Conventionally, startups have five stages of development:
Stage 1:Seed and Development or soul-searching:
It’s where you consider the feasibility of your business idea and ask yourself if you have what it takes to make the startup a success. And, whether you know the answer to the question, ‘who am i?’. We have discussed about this in our first post.
Stage 2: Startupor launch stage:
It is where you officially launch your startup. This can be considered the most important stage of a startup as any mistake (ideation, legal, team building, etc.) made here can impact your company in the long run.
Stage 3: Growth and Establishment:
This stage begins when the startup starts to generate revenues at an increasing rate.
Stage 4: Expansion:
At this stage, entrepreneurs focus on capitalizing on a certain level of stability by broadening their horizons, wider offerings, and entry into new geographies etc.
Stage 5: Maturity and Possible Exit:
The company at this stage is no longer a startup and sees stable profits year-on-year. Entrepreneurs at this stage are often perplexed whether they should push for further expansion or exit the business.
For easy comprehension, we will merge these stages into three and deep dive into the fund requirement and various fundraising options, most suited for the three stages. The first stage is the nascent stage, in which entrepreneurs do soul searching and launch their startup venture. The second stage is the middle stage, comprising of growth, establishment and expansion stages. Lastly, in the sustenance stage, the business may up-scale toward higher growth or is bought out.
NASCENT STAGE FUNDRAISING
We have written in detail about this stage here https://bit.ly/2JOnkzC
The nascent stage is in which the founder mulls over the feasibility of his or her “idea” becoming a startup. Reid Hoffman righty said that, “Before dreaming about the future or making plans, you need to articulate what you already have going for you – as entrepreneurs do.” One needs to have deep understanding of the market and what consumers want. A lot of time and energy is spent in networking, comprehension of legal processes, technology/product/service development, team building, and answering the question, ‘who am I?’, etc. For a startup in a service industry, requiring higher intellectual inputs, a small initial investment may suffice. However, a new entrant in industry, like ceramics and tile manufacturing, would need huge initial capital investment. In the end, the requirement of initial capital is inevitable. At this stage of startup development, the following fundraising options could be explored:
Bootstrapping, a.k.a self-funding, means investing one’s own saving in the startup and / or relying on contributions from family and friends. First-time entrepreneur should stay self-funded as long as possible. This form of capital raising is considered beneficial as in later stages while raising additional capital, investors consider this as founder’s conviction, which we discussed here , in his / her idea / startup.
• Self-funding is most suitable for first-time entrepreneurs as it is sometimes tough to raise third-party fund without credibility, and / or past success.
• Additionally, it is easy to raise funds from friends / family due to fewer formalities, compliances, flexible or no rate of interest on investments, and low cost of raising.
• For a few innovative and creative startups, keeping the startup idea within the family becomes crucial for success. Additionally, you should become big quietly, so you don’t tip off potential competitors.
• Unsuitable for big businesses with ‘money bleeding’ requirements
Via Business Incubators and Accelerators
Entrepreneurs should pair with like-minded individuals to strengthen their standing in the nascent stage. One should get a mentor in applicable field if one is unsure of what one is looking for. With a slight difference between the incubator (helps/assists/nurtures a business to walk) and the accelerator (helps to run/take a giant leap), both these programmes aim to handhold startups for a shorter duration of time, a year or so. A few of the incubators and accelerators also invest.
• Best for startups in the early stage of business.
The startup, after the initial struggle, becomes stable if it survives the valley of death. A lot happens in a company during this stage: team expansion, market expansion, product line expansion and growth, profits and reinvestment, executing marketing campaign, extensive consumer research for product improvements, strategic tie-up, etc. To realise these milestones, the startup needs to accrue money via its customers and reinvest the proceeds into the venture. The startup also has the following viable fundraising options:
As the name reiterates, it’s when a crowd pools resources for a company. Entrepreneurs collate details like goals, profit projection, the reason for funding, expansion vision, etc. on crowdfunding platforms generating positive images and raising funds for the business. However, crowdfunding is not an easy way to raise funds. Here are the pros and cons of availing this option.
• This approach is like killing two birds with an arrow. Startups initiate product dip stick, implementing prelaunch marketing campaign along with raising funds.
• A startup must have a deep understanding of the market and consumersʼ psychology.
• High chances of negative publicity, as ‘the product does all the talking’.
• An extremely competitive place to earn funding.
Affluent investors investing funds in startups for convertible debt or ownership equity are called angel investors.
• Besides capital, these affluent investors can also fit advisory and monitoring role.
• A suitable option for nascent-stage startups as well.
• Might not suffice the need for larger capital.
FUNDRAISING FOR SUSTENANCE STAGE
In the sustenance stage, the startup turns to mature business and is no longer naive. The business at this stage bears year-on-year profits by utilizing economies of production. As mentioned above, during this stage, founders are faced with the choice of either further expanding or buy/sell-out. For this stage, following are the options for fundraising.
A venture capitalist usually invests against equity. There is a parallel between the mind-sets of the venture capitalists and entrepreneurs. The former wants to maximize ROI (Return on investment) with minimalistic risks, exerting more control on the latter. The secret to a successful inclusion of a venture capitalist resides in ‘balancing the seesaw’ between funding and control.
• Appropriate for small businesses that are beyond the startup phase and already generating revenues.
• Venture capitalists have a short leash—quickly recover money and exit.
• Not for businesses where the products take time to reach the markets.
With minimalist operation interference, banks are a good option for SME finance. If banks are unwilling, one can also approach Microfinance Providers or NBFCs for raising funds.
Don’t be disheartened if the options enumerated above don’t work out for you. Many entrepreneurs have faced rejection while raising fund through the above-mentioned options and yet have survived against the tide. Entering entrepreneur contests can also help you raise funds for your startup along with media buzz. Let me repeat again: the best way to raise money is to make it via your customer.
Keep ideating and enduring till you succeed.