Raising Capital for your Venture
In this article, I wanted to share my thoughts on one of the most critical elements of venture success – How to get your venture financed appropriately? Many entrepreneurs struggle with the process of raising financing and either abandon their entrepreneurial pursuit or settle without raising capital to fuel their business growth.
Do you really need to raise venture capital money at this time?
I often find that many entrepreneurs are unclear on why they need money for their start-up. Some businesses are best boot-strapped and served better by having the customers fund the growth of the business. Many service oriented businesses BPO/KPO/IT Services businesses could fall in this category. There is no reason in the world, why you could not find your initial customers and get started with your customers helping you drive your business formation and initial growth. Once you reach a critical mass of revenue and customer base, you would have earned sufficient credibility to then go to the venture firms or private equity firms to seek investment capital to put more acceleration in your business. By this time you seek venture capital money, as an entrepreneur, you would have created really value in your business, and the business venture should have been validated through your initial customer and revenue growth. Typically, from the seed stage to this point may have taken you 3-5 years. In these 3-5 years, you have built a real business perhaps doing $2-$5 MM in revenue and now the timing is appropriate to evaluate if you are indeed ready for Venture Capitalists to help you accelerate your business. For all of us who have raised venture capital, there are always pros and cons of venture financing (like everything else in life!). Of course, you dilute your equity to bring an outside investor and Board member, but it also changes the fundamental control dynamics of the venture. As an entrepreneur you have to be ready to share control with the VCs and be able to adjust your corporate and financial strategies based on their inputs. These adjustments can be difficult for those, who are not truly ready for the changes. It is worth thinking through these issues before you start writing your business plan for raising capital.
I am a big proponent of figuring out how to get your customers to fund your growth for these class of “service-oriented” businesses. Venture Capitalists and Private Equity players have a role to play in these businesses, but perhaps once the businesses are somewhat proven, with at least few million dollars of initial revenues and a profitable business model in place.
Need upfront venture capital for building my products?
In certain other types of businesses – Web 2.0 ventures, Software start-ups, Semiconductors, life sciences, clean tech, technology led businesses etc – You have to first invest to build a great product, before you can think through how to create revenues and customers. In these types of businesses, you are in a bind – you need upfront capital, but you may not have sufficient credibility to go raise the capital from the VC firms at the outset? What should you do? Try friends and family or angel investors? Or go straight to the VCs to raise your initial seed capital to help build your product and start-up?
Over the years, I have personally raised over $100MM in venture, private equity capital for my different product driven ventures. In all of these start-ups, there have been some common themes, which you have to keep in mind:
1. Big Market: To be successful in raising capital, there has to be a “Big Market” ready to explode for the product/market segment that you are targeting? If the market size is not that big, then chances are that the VCs may not be interested. Most VCs get their returns when the companies can get past $100MM valuations, there in lies the conflict with the entrepreneurs, who can enjoy reasonable success in their first venture even if the company gets sold at $20MM value. So, if your product idea is not targeting a “Big untapped market”, you are better off not chasing the VCs.
2. Right Team: You need to demonstrate that you as an entrepreneur can assemble the right team to solve the big problem which you are targeting. Most VCs invest behind great teams, not just individuals. This can be a tricky situation for first time entrepreneurs – So, you have to figure out the right set of partners and key team-members who can lend credibility to your efforts. One of the strategies that works well is to round up genuine advisors to your start-up project. These advisors, may take some nominal stock/equity, but, they can bring domain expertise and credibility to your efforts, early on in the process. Good entrepreneurs are masterful at how they surround themselves with good mentors, advisors, partners and team-members. When VCs see these strong eco-systems forming around the entrepreneur, they get bullish on your ability to rally behind your vision and execute the business to scale. When there is not much momentum of “talent” behind your ideas, VCs get discouraged as much. So, my advise is that as you are thinking about raising capital, try to build a strong momentum around assembling the right team. Even if you not able to hire people yet, due to capital constraints, it is ok to at least identify and use your prospective team as sounding boards with the VCs. With a great team and a “Big market” you are now more likely to attract the venture capital money.
3. Deal Momentum: Venture capitalists typically invest behind companies, where there is a sense of momentum. How can you create a sense of momentum, when you don't even have a product? You are pretty much at a power point idea stage, how do you create a sense of momentum, so that the VC firms feel compelled to move and fund your venture? Few things that might go a long way in creating a strong sense of momentum is that you start getting your concept validated by your key potential customers and partners. If some of key customers and partners can validate your idea, looking at a “prototype” even, the VCs get lot more enthused about the prospects. Without a prototype, it becomes hard for the venture capitalists to see how your product idea is going to look in the real world. As these potential investors talk to potential customers/partners, they are also able to see for themselves the power of your idea/vision. In their eyes, they see a sense of momentum, which will distinguish you from hundreds of other entrepreneurs who are probably pitching to them for their attention. The other strategy, which most successful entrepreneurs deploy for financing is that they certainly start to play one VCs against the other, there by creating a “buzz” in the investor community around your idea/concept. The fact that investors are seeing the “buzz” and momentum, along with a strong team and a “big market”, will increase your chances of getting the financing. A small mention about your concept or your start-up in leading publication or magazine, can lend momentum and credibility, which helps build the confidence of the VCs to proceed with investing their capital.
4. Relationships: Strong deal momentum, large markets, and great teams are necessary for attracting venture capital, however not sufficient. You still need a strong “personal credibility” and relationship with the right partners within the venture capital community. They ought to know you from the past, they have to believe in you as a professional and trust that you will be able to execute your vision. When potential entrepreneurs come to me, I certainly recommend to them, that they should start their relationship building efforts few years in advance of their entrepreneurial career. It is good to start networking with VCs, CEOs, investors, Board members, early on so that they get to know you, well before you are going to approach them with your business ideas. You can join or volunteer in the organizations, where you are likely to meet/interact with these individuals. TIE or SiiconIndia are great platforms for you to mingle with these individuals. Key is to become active participants early on, so that when you do get ready to launch you “product” start-up, you can tap into your professional networks. This is an absolutely critical element for success in your fund raising process. Investors put money behind people, who they know and trust. It is your job as an entrepreneur to establish your professional network and build the web of trust around you. Many a times, I run into entrepreneurs, who have great ideas, strong teams, and even buzz around them, but, they don't seem to have built the critical relationships with the VCs. That hurts them or in some cases, makes the fund raising process drag out much longer.
How about tapping angel investors as opposed to Venture capital money?
In some scenarios it is better to go to the angel investors early on, as opposed to targeting the venture capitalists for financing your venture. VCs can take much longer in due diligence, and may want to see significant progress before committing capital. On the other hand, angel investors, might be willing to move faster on their instinct to back your venture. In US and now in India, there are many angel investor networks, actively seeking the right entrepreneurs and start-up ideas. So, the process with the angels have to be similar to what I outlined earlier with the VCs. The big difference is going to be in how you approach the angel investors early on. In my experience, if you approach the angels early on, and make them part of your “vision team” -- your venture is as much their idea as it is yours! -- then you have a good shot of having them join your venture with their investment. Typically angels will invest anywhere from $50K - $1MM depending on their net-worth and their risk appetite. So, you have to rope in one or more of the angel investors, to get your initial funding in place. Also, if you attract the right kinds of angel investors, you should seek their commitment on how they might personally want to help you raise venture capital money at the right time. Good angel investors, should be able to help you with the VCs.
So, regardless of whether you currently are fine to bootstrap your venture, or going ahead with the venture capital money or starting of with the angel investors to build your business, one thing is for certain that at some stage, your ability to raise capital will help you gain competitive advantage in the marketplace. Smart entrepreneurs are good at raising capital at the right time, from the right investors at the right price.
Feel free to drop in your thoughts or comments on this subject, at my blog: https://blogs.siliconindia.com/gunjan or through email: gunjan@metricstream.com.
Thank You.
Gunjan Sinha
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