Fundraising from venture capitalists: dos and don'ts for startups

Industry estimates suggest that nearly two startups are born daily in India adding to the already existing pool of strategically placed companies knocking on investors' doors. However, in recent times, the country has seen a tilt, with investors taking interest in startups that have proven product/service profile for ideas gaining ground with Internet-savvy consumers looking for consumer and lifestyle needs.

India has heard of competitive turnarounds in fundraising aspect in recent times, with valuations and adjustments being the buzzwords.

Some notable names have had significant markdown of their valuation before convincing the investors to shell out money. Corrections help the heated markets cool down, thereby making investment scenario little tougher. Nonetheless, the pleasant news is that valuations did not dip as much as to stop the deals altogether. Given the sentiment, the investment community has become further prudent and deals worth their value are still being signed. This has led to a longer gestation period to examine and recheck the values or prospects of a good business idea.

Nonetheless, the winning survival strategy is to keep building the business with profit for all relevant stakeholders. In any case, it becomes more important for startups to really scrutinise the way in which they approach investors. At a time when VCs tighten their purses and examine the expenses closely based on business models adopted and raise questions on self-sustainability, let us revisit the dos and don’ts of approaching a VC investor.

Timing and valuation

The mind of an entrepreneur is always torn between looking after the business and raising funds. Sometimes they wish to first establish themselves a bit and then go for raising money and sometimes it is the other way round. While a proof of concept is important for investors and fundraising, it is really for the entrepreneur to decide what stage he/she believes it to be a concept-ready product. It is a stronger case if one has run a company almost bootstrapped and shown profits or good growth figures with an established set of clientele over a period of time before approaching the investor.

One of the prime reasons widely discussed in the investment corridors is hyped-up valuations. The investor likes the team and approves of the idea but disagreement on higher valuations stalls the talks.

Usually, startups come up with a really big number and go down with their ask for fund raise with time, as they begin to realise that such a number is in fact unrealistic. This obviously indicates that there is a need for startups to consider this number very carefully. The fund raise ask clearly needs to be backed by the financial and operational traction achieved so far and those expected from a realistic future budget.

Homework

It is good to contact investors who have domain experience and deal in the kind of business model to better fit the criteria. Complete homework should be done on the mindset, goals, and track record of the investor to see if he could provide the necessary guidance, network, and funding rather than seek share control in the company. Beyond funding, investor’s business is about helping the business work through its problems. Do keep in mind that an investor coming on board is going to be a partner for a long term – and a very important partner. The entrepreneur would be letting someone share one’s vision and journey, so it is important to do the homework and make sure that there is a convergence of mindset as well.

When approaching the VCs, it is always best to have a presentation deck handy, as they are probably receiving dozens of ideas in a day and it is impossible for them to remember your company the next time they meet you without looking at the presentation. It is better to be prepared with a demo while presenting for the right kind of impact.

Presenting the idea

Beyond the number crunching, investors always look for the motivation and driving force behind a venture. Presenting the passion balanced with required professionalism with clarity and conscious manner is most likely to generate interest among the investors. The entrepreneur should be able to explain the business quickly and accurately for the right impact.

It is often seen that the presentations start with the entrepreneurs citing huge market size figures to create the impression in the minds of the investors that there is definitely a need. This is not a very good idea as the investor is probably someone who has a fairly good idea about the market and has agreed to listen to the entrepreneur with that in mind. The overselling generally does not work well and it is better to even skip that part politely while alluding to the market size briefly.

It is also seen that when preparing the projected financial figures, startups generally tend to become a bit too optimistic. It does not really help and can become a source of projecting over confidence. It is important to have the business model based on market opportunity at present and future, which would grow the company and make it profitable.

A judicious way of making the business and its model explainable to the investor is important rather than keeping things secretive with the fear of someone stealing your idea. It is pertinent to note that the challenge lies in execution. Additionally, the risks need not be downplayed but one should present a plan to mitigate them.

Feedback/rejection

Mostly, the interested investor would give some signal in the first meeting itself. In case of a rejection, you may look to convince the investor again, but that usually does not work. However, the feedback, if any, should be taken seriously to address the flaws for interaction with the next investor or before pitching to the same investor again after some time. Feedback from the investors (even negative) can be extremely valuable to the business as they are the people who really know what's going on in the industry, so it should be taken in a positive manner without being defensive about one’s idea/product.

If the investor gives the nod, it is a long road ahead for the entrepreneur. If the investor has said no, or kept things on a standby for some reason, it is advisable to keep in touch and there is absolutely no harm in keeping them updated about one’s activities/ awards/recognition/new client onboard etc. This helps to remain on their radar and keeps the possibility alive so that they come back if things keep looking good.

India’s startup ecosystem has seen the phase where investment was mostly with the big contenders with potential to become number one in a particular space. The new phase would be about entrepreneurs who could manage the business with lower burns and beat competitors simultaneously. A recent announcement by the government to form a working group to make things easier for startups in the country is a welcome move. The startup policy to be announced in the near future should reflect the Indian government’s commitment to entrepreneurship and take into account delays in incorporation and winding up of business, employee stock options, lack of initial funding, cumbersome foreign exchange documentation and access to external commercial borrowings, and easy compliance norms, among others.

Both entrepreneurs and investors together need to build a sustainable business for the long term and earn profit and respect for all relevant stakeholders. While the entrepreneur needs to judiciously use the money to build a strong and efficient management team and infrastructure to roll out market relevant product/services, the investor’s focus should rest mainly on adequate mentoring of the entrepreneurs, especially the first timers. The startup ecosystem grows when there is adequate coordination between entrepreneurs, investors, employees, and regulators.