The Art and Science of Fund Raise
Updated: Nov 27, 2022
If you want to establish a business in India, there has never been a finer moment in the country's history. The start-up ecosystem is booming like it's never been before, and the conditions are ideal for entrepreneurs to thrive. A mix of preparation, vision, and finding the appropriate group of investors is the key to every startup's success. To begin with, successful companies must have a long-term business plan. Entrepreneurship requires cash to thrive, and several sources of company finance may be employed to accomplish various goals.
It's critical to have a thorough grasp of your financial requirements before approaching investors. You must choose the kind of investment that will aid in the growth of your company. The financing source should be selected based on the nature of your firm, the risks that investors face, the pressure of payback, investor rewards, and their participation in the decision-making process.
Where can you get finance for your business?
The method of seeking for money must be tailored to the company's requirements. Where and how you hunt for money is determined by your organization and the kind of money you need. A high-growth internet-related firm seeking second-round venture capital and a local retail shop trying to finance a second location, for example, are vastly different.
We'll look at six distinct sorts of investing and financing possibilities in the sections that follow. This should assist you in determining which finance choices are realistic for your company and which investment opportunities to explore initially.
1. The use of venture capital
The venture capital industry is commonly misunderstood. Many startup businesses lament the failure of venture capital firms to invest in innovative or riskier initiatives.
People refer to venture capitalists as sharks or sheep, depending on whether they are predatory in their business methods or think like a flock, all looking for the same opportunities.
This isn't the case at all. Entrepreneurs who are tasked with investing other people's money are known as venture capitalists. They have a professional obligation to minimize risk to the greatest extent feasible. They should only assume as much risk as is absolutely required to achieve the risk/return ratios that their funding sources demand.
2. An investment from an angel
Angel financing is significantly more widespread than venture money, and it is often accessible to firms at a far earlier stage of development.
Although angel investment resembles venture capital (and is sometimes mistaken with it), there are key differences. First and foremost, angel investors are people or organizations that invest their own funds. Second, angel investors like to invest in startups while they are still in the early phases of development, whereas venture capital prefers to wait until after a few years of development, when businesses have more experience.
After starting with angel financing, businesses that get venture capital often do so as they develop and mature. Angel investors, like venture capitalists, usually target high-growth enterprises in their early phases of development. They aren't a good source of capital for established, steady, low-growth enterprises.
3. Lenders to businesses
Banks are considerably less likely to invest in or lend money to startups than venture capitalists. However, for established small enterprises, they are the most probable source of startup funding.
Small company owners and entrepreneurs are all too eager to blame banks and financial institutions for failing to fund new ventures. Banks are not allowed to invest in enterprises, and their ability to do so is closely regulated by federal banking legislation.
The government forbids banks from engaging in companies because society as a whole does not want banks to take depositors' money and invest it in dangerous business operations; when (and if) such business enterprises fail, bank depositors' money is at risk. Would you want your bank to put money into new firms (apart from your own)?
4. The Small Business Administration is number four (SBA)
The Small Business Administration (SBA) provides loan guarantees to small enterprises, including start-ups. The SBA does not issue loans directly; instead, it guarantees them so that commercial banks may make them securely. Local banks are usually the ones that apply for them and manage them. When applying for an SBA loan, you will most likely work with a local bank.
For startup funding, the SBA usually requires that the new company owner provide at least one-third of the needed capital. Furthermore, the remaining funds must be backed up by a suitable quantity of corporate or personal assets.
5. Non-traditional lenders
Aside from traditional bank loans, an established small firm may borrow against its accounts receivables from accounts receivable experts.
When working capital is tied up in accounts receivable, the most frequent accounts receivable financing is employed to sustain cash flow.
For example, if your firm sells to wholesalers that require 60 days to pay and you have $100,000 in outstanding bills that aren't late, you may undoubtedly borrow more than $50,000.
Despite the high interest rates and fees, this is typically a useful source of small company finance. In most circumstances, the lender does not accept the risk of non-payment—you must repay the money even if your consumer does not pay you. These lenders will often examine your debtors and decide to finance part or all of the overdue bills.
6. Funding from friends and relatives
If I could only offer one message to aspiring entrepreneurs, it would be that you should know how much money you need and that it is in jeopardy. Know how much you're wagering and never risk more than you can afford to lose.
When you're in a bind, don't turn to your friends and family for startup funding.
It's important to remember that asking friends and relatives for money isn't always a smart idea. When your company is in crisis, the last thing you need is for friends and relatives to abandon you. You run the risk of losing friends, family, and your company all at once.
Fund raise and Dilemma
The Value Dilemma: It is difficult to arrive at a perfect valuation at an early stage. Though there are several techniques of valuing for early-stage businesses, such as the venture capital approach, the Berkus method, the Scorecard valuation method, the NAV method, and the discounted cash flow method, they do not seem to be the true answers.
A well-articulated and realistic Business Plan or financial predictions, on the other hand, may assist the business in arriving at a value. Because there is no historical data available for a startup, it is often desirable to do a peer-to-peer comparison of a firm with a similar history, delivering comparable goods or services, and examine their value at various phases. As a result, they may arrive at their own value.
An early-stage business may be valued using the Scorecard Method. It is the approach that angel investors choose to utilize. It compares the startup's perspective to that of other businesses, taking into account aspects such as a strong business idea, a strong management team, market size, product/technology, startup funding requirements, and scalability. Although it is very subjective, the startup team of Founders receives the most attention (20% – 30% of the total weightage). The second consideration is how distinctive and revolutionary the company concept is. "When it comes to starting a firm, the quality of the staff is critical to its success. Early product faults will be fixed by a brilliant team, but the opposite is not true."
However, as previously said, early-stage values are difficult to come by and are hence referred to as "guesstimates." A startup lacks historical data to indicate how it has performed in the past. The startups exclusively use EXCEL SHEET NUMBERS to communicate. Because figures cannot be validated, the ideal technique is to create a business plan that is broken down into logical phases or milestones, making it simpler to estimate the amount of money the firm will need to meet each milestone. Working capital, manpower, marketing branding & customer acquisition, technology or product, Capex, and so on should all be included into the budget. Angel investors would be delighted to choose the cost at which they choose to invest based on their mandates / investing thesis.
Dilution Confusion: To prevent any unneeded dilution, it is critical for the founder to comprehend the concepts of PRE-MONEY and POST-MONEY VALUATION. The term "pre-money" refers to a company's value before it obtains an investment, such as external finance or financing. The startup's post-money valuation refers to its worth immediately after obtaining investment from a round of fundraising. The equity stakes those angel investors are entitled to is determined by this.
Fundraising Issues: Even with the finest strategy, 90 percent of companies in India struggle to attract money. This is due to a variety of factors. In comparison to POST–REVENUE stage businesses, the stats demonstrate that PRE–REVENUE stage start-ups have a harder time getting financing. To overcome this, it's important to bootstrap the business until it's profitable and the concept has been demonstrated by a paying client. As a result, it is preferable to bootstrap while simultaneously exploring all other financing options, produce income, stable the company model, and then approach investors for startup funding. The company concept is best articulated with a history of consistent income creation. Surviving the pre-revenue model is sufficient indication that the firm is on its path to attracting customers eager to pay for their product or service.
Another reason why businesses fail to attract investors is because they overstate their startup's worth. The company's worth must be determined and assessed fairly by the creator.
For investors, the magnitude of the opportunity is also a major determining factor. The business's scalability is a crucial consideration. A highly specialised company implies little income, which may or may not interest an investor; this is why B2C firms get more attention from investors.
Another factor that may cause the investor to lose interest in the enterprise is the founder's rigidity. Their entrepreneur should be adaptable and learn to converse with angel investors rather than argue with them. It is critical for the entrepreneur to provide a clear Return on Investment route (ROI). It's critical to explain how the investment will grow revenue, enhance margins, decrease revenue-generating resources, and maintain expanding.
Things to think about before taking out business loans
Unfortunately, finance and investment need money, and money encourages exploitative business practices, frauds, and other forms of deception. So, to assist you avoid the mistakes, here are some pointers.
Be wary of where you acquire your money from.
Don't consider private placement, angel investors, friends, and family to be excellent sources of investment funds simply because they're mentioned here or in another source of information. Some investors are excellent sources of cash, while others are not. These less well-known investing opportunities should be approached with utmost care.
Pitch the Right Numbers
A Pitch is the Founder's business card that establishes the playing field. A good pitch that highlights the product or business with the appropriate figures and value leaves a lasting impression. It should specify the necessity for the entrepreneur to discuss the amount of startup funding necessary and the percentage of equity that the firm will split with the investor.
Get it down on paper.
Never spend someone else's money without first doing thorough legal research. Hire a professional to do the paperwork, and double-check that everything is signed.
Don't spend money until you have it
Never spend money on something that was promised but never delivered. Frequently, businesses get financial pledges and enter into contracts for costs, only to have the start-up funding fall through.
Remember, it's more crucial to get funding from investors to develop your firm and establish solid technology than it is to support your startup's expenditures.