5 Key Points to Remember Before Seeking Funding
The desire for getting funded and getting access to investors is a key trait among entrepreneurs. Just as nutritious food help a baby build a strong constitution, so do funding can give your start-up a strong financial footing, in a competitive scenario.
To find your space in a crowded investment space, though, it would be wise to take into account the dynamics behind getting your venture funded.
Funding: Is ‘it’ necessary while starting up?
- Do I need funding at all?
- Is funding essential to my new business?
Many entrepreneurs ask these questions.
If you are one among them, it would be worth checking your entrepreneurial quotient around some specific criteria. It is worth mentioning here that not all entrepreneurs are driven by the same intent while they start up.
There are, for instance, three types of entrepreneurs:
- Those who are driven by the desire to be their own boss.
- Those who own business for a lifestyle reason—for flexibility in work hours and to give more time to family etc.
- Those filled with an ambition to make a difference. They are desirous of seeing their business scaling up.
Whether you seek funding or not, hence, is interlinked to the intent behind your starting a venture. And if you fall in the third category, the need for funding can’t be overlooked.
Getting the basics right: Five key points to remember
Getting the basics in place is vital in all affairs of life. The same rule applies to the exercise of seeking funding.
Here are five key points that you need to remember before seeking funding.
Point 1: Is my idea truly scalable/sellable?
A major determinant in the funding story is scalability of your business idea/plan.
Do reflect on the following three questions for an accurate presentation of your business’ scalability:
What is my go to market strategy?
A ‘Go to Market Strategy’ entails aspects such as your customer segments, your geography, and your product segment. Other aspects include your market base, pricing strategy and cost.
Be it a start-up or a growth-phase company, a neat and trim ‘Go to Market Strategy’ is essential for seeking funding.
Flipkart, for instance, had a clear-cut objective of capturing a captive online audience who went to buy things online.
Is there a proof of concept?
A financial investor invests in a business when he/she sees a certain percentage of return over a certain period of time. Clearly, most new-age business do not have an established or successful operating model in India.
It is imperative then that investors see a proof of concept elsewhere—be it within an existing Indian company or an overseas firm.
Now, it might boggle you if your start-up would turn into a me-too type of company if your idea is already existent.
But practically viewed, chances of your start-up getting funded are higher when you approach an investor either with an established proof of concept in the form of some success of your idea in an existing company.
Other way is to prove the validity of your business proposition within a certain period of time.
Is this ahead of time?
Many entrepreneurs are faced with the question “what if my concept is too unique and ahead of time”?
Remember that doing business in India is different from doing it in other countries.
Indeed, even if you may have an operative model in India similar to that operating in other countries, you may find it difficult to make it successful in India.
It is advisable that you wait till your idea reaches a certain level of maturity before you approach investors.
Funding, after all, is not the end objective in your business story!
The focus should be on testing the efficacy of your idea for a couple of months before taking it to investors.
Point 2: What kind of team should I build?
Your team is the life-force of your venture and team potential is something that investors look at while deciding to invest in your venture.
Here are some aspects to reflect on in your team- building efforts.
What is the right time to build my team?
Until five years ago, there was less scope to find people with the same mission, vision and chemistry.
Things stand better today, with a myriad platforms to find people for your start-up–including co-founders and advisors.
Whether you are aiming to be an entrepreneur or you are already one, the right time to start building your time is right now.
You may definitely expect challenges in attracting the right quality of talent, in that talent do not come cheap!
But if you strongly believe in the fruition of your idea and that you are here to stay, it would serve you well to start building your team right now.
All said, build the right ecosystem and right infrastructure before you approach investors.
Is my current team good enough?
If you are the third category of entrepreneur who wants to scale your business and institutionalize it, then having the right set of people with you is imperative.
Advisory Board/Support Groups/Platforms
The people in your advisory group would comprise individuals who had “been there and done that”. They are the ones who come with a wealth of experience to mentor you at different stage of your entrepreneurship.
They are the people who could manage to scale up their business to a certain level. Aim to have a good mix of advisors of successful entrepreneurs and of people in the corporate realm.
Simply put, support groups help you connect to a mentor who could help you fast track the process of seeking funding. For example, in India, platforms like TiE (The Indus Entrepreneurs) and NEN (National Entrepreneurship Network) help entrepreneurs with mentoring support, education, networking opportunities and so on.
Point 3: Do I have a business plan?
Ensure that your business plan is not simply an exercise in excel modelling.
While excel sheet models may cover numbers, they may not cover the “how-to” or execution part of your plan.
Notably, investors in India look at over 700 to 800 plans a year and two plans every day.
Do not forget to articulate your thoughts in your business plan in a concise and precise manner hence.
A business plan should ideally have all the components of your thought process.
It should detail aspects such as: what problem your product/service is going to solve; how you plan to enter certain geographies; what is your social media strategy; what product segments your venture would be dealing in, among others.
A question that you should ask yourself is: would I be able to explain and defend my plan?
Defending a plan, however, is not the same as being overly defensive about your plan. Being on the defensive impresses upon your investors that you are not open to modifying your plan.
Point 4: How do I approach an investor?
There are a lot of investors in the Indian investment firmament—large, small and individual investors.
Choosing the right one would require that you reflect on the following areas:
Do I know what kind of investor I should be going to?
There are a lot of private equity and venture capital funds to choose from in India.
But it would be wise to choose those set of investors who have had some past experience in investing in the segment your business falls in.
For instance, if your business is in the e-commerce space, it would be effective to choose an investor who must have invested in enterprises in the e-commerce segment.
Choosing along this criterion helps shorten the otherwise cumbersome process of finding an investor.
Is the chemistry right?
Relationships that are known to have strong foundation centers around a good chemistry between individuals.
A fear lurks in many entrepreneurs’ mind on whether the relationship with the investor would turn sour after entering into it.
While prediction is difficult, it is important that both of you and your investor feel comfortable about your coming together.
See to it that you share the same value system, thought process, passion and vision.
What is the role that the investor will play to help scale my business?
The reason why you get into a relationship with investor is not just to get financial support. An investor could be your sounding board, your advisor, and in some cases, a mentor too.
Having seen the life cycle of many entrepreneurs and sizes of business, investors can help you in varied matters.
Also some of the funds that invest in companies are also global in nature. That helps investors keep track of how their portfolio companies could be faring overseas.
Consequently, such observations could help you steer your ship in the right direction globally.
Moreover, investors with global exposure could help you open doors—be it global expansion, mergers and acquisitions, or a joint venture partnership.
Point 5: How do I value my company?
How you value your company is as much a matter of thought process as about excel sheets!
If your thought process is hazy, the excel sheets will give of fancy numbers.
But most investors are savvy and experienced enough to see through such sheets.
It follows, therefore, that you are clear on how you will present your company’s value proposition before an investor.
A few things to consider in the valuation arena are:
What is my pre-/post-money valuation?
Investors look at the kind of stake you are willing to offload in your company. Pre-money valuation is the value you attach to your company before an investor brings his capital into it.
Post-money valuation would comprise the sum of your pre money valuation and the capital that an investor would bring you.
Do I need to make profits?
A classic question that arises in many entrepreneurs’ mind. Profit making may not be essential in an e-commerce space in the initial two years.
The reason being that many investors are seen to invest in this space because they see a considerate level of internet penetration in the segment.
However, if you are in a non-e-commerce space, it is imperative that you start looking at your profit as an indicator before you approach an investor.
Even if you may not be making profit when you approach your investor, do present a clear picture on two aspects:
- When you would get profitable?
- When you would get cash- flow positive?
Investors are known to seek answers to both these aspects.
How do I defend my valuation?
One way to defend your valuation is your own conviction about the future and scaling of your business.
Do not forget to back your conviction with a justifiable financial template and a business model, though.
In conclusion, if you believe that you have a terrific idea, you have a strong team in place, and that your business has the potential to scale up, you can ready yourself to approach an investor.
And most importantly, trust that you are in the right business.
Meanwhile, do share with us your struggles and victories with getting funded.
This article is written by Sudeshna B Baruah based on a webinar by Deepak Narayanan Founder Director of MyCFO and WealthTree Advisors.