When should you start raising capital ?

There is no doubt about the wave of entrepreneurship brewing in India. There are several well-respected incubation centers housed in top institutions across the country including IIT-BBITS  PilaniIIMA, and news/information portals focused on startups, giving firms much needed media coverage. Not to mention the numerous Silicon Valley venture capital funds that have setup presence in India.

Despite all the information that is available on the public space regarding raising capital, entrepreneurs are often confused about when to raise capital for their venture. I have been approached several times with the same question, and plan to address it here.

money

Ideas are not worth much on their own

As an entrepreneur, one fundamental question that you should ask yourself is “Will my idea work?” As Derek Sivers, founder of CD baby, puts it: a “brilliant idea” is worth only $20; a “brilliant idea” with brilliant execution can be worth millions or even more. McDonalds is a great example: the company took a simple hamburger and served over 100 billion of them across 119 countries – this is a combination of a “simple idea” and “extraordinary execution.” Hence, great execution is critical to deriving value from the idea, and can sometimes go on to transform the idea itself.

A pilot puts your idea into the real world

The question then becomes “What will the idea look like in reality?” A pilot is a necessary step to transform the idea into reality. It can help answer several critical questions such as: Is the company making money by delivering the product? Who are the typical customers? Are the customers willing to pay for the product? What is the buying behavior? What  pricing strategy works? Which distribution & marketing strategies work well? What should be the company’s differentiators?

While I am not claiming that you will find answers to all of these questions, rather it is more likely that you will find out that some of your assumptions were misplaced, however getting some answers is a strong foot forward. A pilot is a great phase to test out the fundamentals of the idea. Even the some of the best companies insist on having a pilot phase to test and perfect a product, take for example Google – when asked why some of Google’s products seem to stay in the Beta phase for a long time, a Google executive responded, ”We have very high internal metrics our consumer products have to meet before coming out of beta. Our teams continue to work to improve these products and provide users with an even better experience.” This shows the level of importance great organization places on the pilot phase.

Not only does a pilot help you understand the business model better, but also shows the investor that you have put in effort in testing the feasibility of the idea. More importantly, the pilot gives the investor an idea about the unit economics of the business and the confidence in the team to build on the pilot.

Hiring the right team is critical

Another critical aspect of execution is the team. It is surprising how often entrepreneurs attach less importance to this. Even at early stages, when the business model is its formative stages, it is important to attract the right team – a team that believes in the idea and is willing and capable to execute. The team is at the center of success or failure of any business. Again the questions that you should ask are: Does the team have the skill sets and the motivation to make this company successful? Can the team create and sell the product? An investor expects a well-rounded team that has good and relevant experience and works well together.

Raising initial capital from friends and family is important

One last aspect I’d like to highlight is sources of investment. As an entrepreneur, you should try to secure as much funds as possible from friends and family before approaching professional investors. This capital serves two purposes; first, it will help you to move further along on your plans and perhaps, increase the valuation in the next investment round (meaning you have to give up a smaller ownership stake in the company), second, it is a reflection of your confidence in the business.

In summary, I believe a well executed pilot with promising initial unit economics, a team capable of executing the business plan and strong commitment from the entrepreneurs are indicators of a sensible entrepreneur and a promising investment opportunity for an early stage investor.

 

 About the author

srikrishnaSrikrishna Ramamoorthy is partner at Unitus Capital. has over 10 years of experience in impact investing, consulting and implementation. Previously, he was co-founder at Kinara Capital, a pioneering startup in the small business lending sector in India, where he led client sourcing and product development. He was also a member of the founding team at Ujjivan, the leading urban-focused microfinance organization in India, where he setup and managed microfinance branches. Read more here.