Startup founders with a disruptive idea and/or with good academic pedigree are being chased by VC monies. As a result, we are living in interesting times where startups are raising large sums of money, feeling the high of inflated valuations. But, this is a double edged sword.
Is overfunding good for start-ups?
In some cases, the founders actually are working hard to scale up the businesses and build teams. They drive these valuations to even more insane levels. However, we have seen instances where certain businesses have been asked to run before they can even walk. Sometimes, startup founders who have tasted early success spend time on working to raise one round after another rather than building the business idea of the business. It becomes a case of cart pulling the horse and the valuation driver becomes the raison’de etre of the founders’ existence rather the running a successful business.
How much money an entrepreneur should raise?
Quickest and perhaps, easiest answer that comes to our mind would be “as much as you can”. But more isn’t necessarily better. Primarily, you will be diluting more stake in your company at a lower price and you may develop a wide range of totally avoidable habits like mistaking raising money with running a successful business. One should remember this is expensive money which you have to return with a massive value add back to your investors. While making a plan on how much money should you raise, keep two things in mind – Nature of business and nature of capital. If it is a services led business then ask yourself – Should I stay boot-strapped? Because a service led business may not require a significant Capex upfront. Then comes who should you approach to raise money?
If you are just starting out, then it is advisable to raise capital from friends and family along with your savings. Frankly, no VC would invest in just a business idea. You got to show some revenues, a lot of commitment, skin in the game and a vision for growing the business in order to get investors to loosen their purse strings for you. Once you have asked and answered the questions raised above, the next level of fund raising quiz should consist of questions like – how do you plan to spend the money raised over the next 18-24 months? What is the business plan? Will their be a requirement to raise another round? And most importantly, how much stake are you willing to dilute in the subsequent rounds. The stake dilution even should not be more than 25%. Keep other important factors in mind, like buffer period of at least 6 months, if you have launched a new product before fund raising. The product launched may not start bringing revenues immediately, sometimes it takes longer than even 6 months. During that period, the company should have sufficient internal accruals to take care of its operational expenses. A VC always like to invest in such entrepreneurs who know how to run a tight ship. And are there for a long haul And yes we understand that being an entrepreneur is tough.
a. Overfunding is not always advisable
b. One round should last you at least 18 months
c. Anticipate if you need more rounds
d. Stake dilution with every round
e. Try to raise seed funding from friends and families
f. Vcs don’t invest in just an idea
About the author: Bhaskar Majumdar is a Managing Partner at Unicorn India Ventures. Majumdar is also a seasoned media & technology professional who has been a CXO executive, then an entrepreneur who exited two businesses, a prop investor with over three times returns in six years and now an institutional fund manager.