Fundraising – What is the Right Time?

Ruchi Gandhi

10 Jul, 2020

As per Microsoft Ventures, Zinnov, NASSCOM Start-up India Report 2015, India is amongst the top five countries in the world in terms of start-ups. The US ranks number one on the list with 83,000+ start-ups. Further, according to KPMG’s report on the Indian start-up ecosystem, the number of start-ups in the country has gone up from 7,000 in 2008 to 50,000 in 2018.

A start-up is a young company searching for an innovative business idea to challenge existing markets or build new ones.

• Private limited company or a registered partnership firm or LLP incorporated or registered in India, not before 5 years
• Annual turnover not exceeding Rs. 25 crores in any preceding financial year
• Not formed by splitting up of a business already in existence or through the reconstruction of a business already in existence
• Working towards innovation and development
• Deployment or commercialization of new products
• Processes or services driven by technology or intellectual property

Why is ‘fundraising’ necessary?

Start-up fundraising means any initial infusion of capital required to turn an idea into practice (by starting a business). It is indispensable for any start-up to procure funds for its survival. Every start-up needs access to capital, whether it’s to finance product development, acquire machinery and inventory, or pay its employee salaries.

In simple words, fundraising refers to obtaining funds required for starting and running a company. It is a form of financial investment for product creation, production, growth, sales and marketing, office facilities, and inventory within a company.

As an entrepreneur, you must be clear about why you are raising funds. Before you approach the investors, you should have a detailed financial and business plan.

A start-up might need funding for one, a couple, or all of the following purposes:

• The creation of prototypes, product development, website/app development
• Hiring team
• Legal and consulting services for starting your company
• Raw materials, stores and spares, and equipment
• Certifications, Registrations and Permits
• Arrangement of working capital
• Marketing, promotion and commercialization
• Office space, rentals and other administrative costs

The challenge of fundraising

A start-up goes through the following stages:

• Discovery of a potential product/service idea
• Validation by hitting the market and looking for the first clients
• Efficiency by defining the business model and looking for ways to increase customer base
• Scaling through the growth of the business aggressively and in a sustainable manner
• Maintenance, maximizing benefits and giving a global dimension
• Sale to a giant or renewal for the brand to continue growing

Amongst the five essential elements of success, namely, Ideas, Team, Business Model, Funding and Timing, Funding and market exposure are a chronic issue for start-ups. Investors from the government and the private sector have set aside funds through funding platforms which are not sufficient for all modes of business.

The biggest issue for such organizations is now attracting investors and gaining confidence in their mode of operations. Many entrepreneurs chose not to receive capital from third parties and are funded solely by their founders (to avoid leverage and dilution of equity). However, most start-ups do collect capital from external sources, especially as they become larger and scale their operations.

Big lenders like banks, etc. are usually not interested in start-up businesses while they start. The reason is that you are not at the point where a traditional lender or investor would be interested in you when you are just starting.

Many entrepreneurs first expect bank loans to be the primary source of fundraising, only to figure out that banks are the least likely benefactors for start-ups. Start-ups do not receive financing from banks in the initial phase of operations given the firm’s no credit history. Additionally, the number of credit rating companies for small and medium-sized businesses is limited.

Thus, some innovative steps include raising start-up finance from non-bank sources. Examples may be:

Also, few state governments have taken initiatives and launched policies on start-ups for their states. A few of these include West Bengal, Uttar Pradesh, Odisha, Rajasthan, Karnataka, Gujarat, and Jharkhand.

So that leaves one with the option of selling some properties, borrowing against the house, asking for loans from loved ones, i.e. family and friends, etc.

Nevertheless, this entails a lot of risks, including the possibility of bankruptcy and strained relationships with family and friends. This is the hard part behind starting a business — that puts so much in danger. But that is key. This is what separates businessmen from other individuals who earn daily salaries as workers.

Some companies may also be bootstrapped (attempting to create and develop a business out of personal funds or out of the new company’s operating revenues). In this case, they can be built up quickly enough to make money without any assistance from investors who might otherwise get in and start dictating the terms.

A good way to be competitive in the field of entrepreneurship is to speed up initial operations as quickly as possible to get to the point that the business venture can be seen and felt by outside investors, as well as to be recognized by them that an individual took some risk to achieve that stage.

The things which need to be done before fundraising

A good business plan is needed to successfully start a company and get it to the point that large investors are interested in putting their money in. It also needs obtaining guidance from accomplished businessmen and experts — people who might sometime invest in the company in the future.

The right time for fundraising is when you have given your start-up enough time to grow according to its merit. You can raise funds to increase your operations when the company has evolved without outside intervention, recruit a more seasoned staff and refine your product. The business can strike the iron and raise funding when the start-up has found a reliable investor whom the founder can trust, learn from and brainstorm ideas. It will align the founders ‘and investors’ goals and help the company move in the right direction. The following is the checklist of things to do before fundraising:

• Correct legal structure:

Unless you have a legal entity with shares, that is to say, a private limited company, you cannot distribute shares in your business in exchange for investment money.

And, if you are presently working as a sole trader, or have not yet begun trading but are preparing to pursue investment in the future, you will need to register as a corporation and move the properties acquired by the ‘company’ into the company name.

• Market analysis:

This shall include brainstorming the threats and opportunities in the market by assessing the target audience, size of users, your business size, B2B or B2C services, and competitor analysis.

• MVP:

The start-up will start with the construction of a first minimum viable product (MVP), a prototype, to validate, evaluate and develop new ideas or business concepts.

• Competition & Growth:

To achieve its goal, the start-up needs to have a clear vision of its mission with a business strategy prepared to clearly distinguish its offers, customer benefits and growth plans from those of the competitors.

• Concrete business plan:

Getting a clear strategic roadmap that outlines business priorities such as where they see themselves a few years down the track, what are their growth plans, shows that they are serious about their long-term ambitions which are crucial to attracting buyers, partners and venture capitalists.

• Prepare budget sheet:

After creating your business model, you would need to set a budget sheet showing the quantum of funds required, resource allocation programs, and the blueprint of estimated expenditures. This will give an idea of how much funds are needed and how such funds will be allocated to different functions of the business.

• Gaining Trust:

Start-ups need to realize that, before affixing prospective investors, they will go through many phases of selling and presenting their brand, but unless they have acquired enough confidence, nothing can be deemed assured.

• Confidence:

Fundraising calls for the art of creativity, storytelling and a clear vision. Moreover, confidence dominates all other tricks of an entrepreneur that he may have. Even a crappy idea, when pitched with poise, gains the potential to impress investors.

• Share capitalization:

You will need to plan a solicitor’s support to better manage your equity capitalization. This will set the pre- and post-investment share structure for your firm.

• Create networks:

Seek to meet contacts within your network that can either introduce you to prospective clients, or who can educate you on the path along the way and check your documents.

• Creating a list of target investors:

Research the investors that you will be approaching and create a list of your ideal investors, and tailor your documentation to their criteria.

Is the timing of fundraising correct?

It is believed that whenever a start-up company can raise money, it should do that. But there are a few things that businessmen should bear in mind to increase their utter chances of getting what they want from who they want. A start-up needs to know first whether or not it is ready for seed-stage fundraising.

The best time for a company to raise funding is when you have a good idea of what you want to do and a clear picture of how much money you need to get to a target that will create a higher valuation for your venture.

If you are going for big investors like venture capitalists, then the business plan or opportunity for growth must be significantly large enough to ensure that a major fund will spend and returns are assured.

Having a marketable product, infrastructure to back it up, and a strong customer base can also provide the perfect basis for raising funds for the company. Without these critical elements, the early-stage investment would only lead to increased involvement and diminished control over the company.

Answering these questions may help you tell the right time for fundraising:

• Is the Right Team in Place with the right human resources?

You must have the right human resources to work on ideas or products. In addition to having the right team, it is essential to treat employees with respect, loyalty and care, so that they are equally invested in the company just as are founders.

• Has the Start-up Worked with Industry Experts and obtained valuable feedback?

Take valuable input from industry experts including advisors, angels investors, and market players. Start-ups can thus improve the product or idea before taking it to the market or investors in the early stages. The network of experts will help founders gain credibility, too.

• Is there a working prototype of your product or service which you want to implement?

If you have a product or program that you would like to introduce, at what stage is it at production? You need to have at least one working prototype in front of potential investors to be showcased. Going to a meeting of investors without a working product dramatically reduces your chances of getting seed-stage funds.

• Have you done enough market research and estimated the size of customers in the industry?

This is a part of market research that should be done before launching a product, which helps entrepreneurs understand: product requirement, numbers to sign up and pre-sale, is there competition in place, how different the commodity is, and so on. If start-ups can replicate the sales process and cycle in the future, then investors will get a better idea of the issues they may face and be able to address them appropriately.

• Have the Potential Investors Been researched?

Once it comes to sitting for an investor conference, it is best to do some homework on potential investors in advance. This would also help to build a pre-pitch relationship with investors. Investors will be more inclined to join the start-up company when they see the work shining, and when they know the start-ups have done their due diligence.

• Is there a Story for Investors about your clear vision and idea?

Investors enjoy getting a good story told. If the founders can emotionally move them with the unique vision, story and concept behind the start-up, it will draw interest from the investors. Yet investors also can see through misleading presentations with ease.

• Has the Product/service Been Tested before planning on raising seed capital?

Testing the product before planning on raising seed capital is always a good option. Getting to know the needs and behaviours of customers will allow start-ups to present a real-world scenario about product efficiency.

Takeaway