Startup Entrepreneurs: Are you prepared for the Glam show called Fund Raising?

You probably face the biggest market dynamics at business day-in and day-out - the great leveler called ‘competition’ – well this entity can be your biggest ally as you flirt (important to note that I use flirt and not woo here – more on this later though) with investors. Nothing makes people act (and react) as competition does, so no matter how many times an investor tells you “we don’t like being put in a competitive position”, the sad truth of fund raising is that ‘nothing makes them act like competition’.

Easier said than done – so here’s some practical advice on how to put this basic mantra in motion. Never jump into the deep end of the pool unless you have sufficient lifeguards – sounds simple doesn’t it. To extend the analogy to fund raising, keep testing the ‘market’ until you have a healthy number of funds that show a positive interest – beware here that new-age investors have also found collaborative ways of workarounds though – referred to as ‘co-investing’ that mitigates not just risks for them but also turns competition into cooperation. In case you’re pursuing a more formal process of fund raising, then proceed to walk further down the aisle if and only if there is a healthy interest from multiple investors (the side benefit of this is also reducing post investment dissonance … to borrow from Marketing 101 … as you’ll probably come to appreciate and value your investor much more when the ceremonies are over).

Should the above not be the case, step back, retract and fight another day – you can always tell the external world that the current outreach has made you reflect on and refine the business further. Most importantly, listen carefully to the naysayers – their feedback will prove to be the most valuable intel (after your customers, employees, vendors, advisors, family and everyone else) that you ever get to hear – these after all are the ‘experts’.

Dear entrepreneur, do I sense a question from you at this stage – something that goes ‘hah – easy for you to say so boss, I need the money now and not later’, which brings me to my next point ‘Plans B & A and the art of not being desperate’. Before I move on though, a word of caution here, do not (I repeat … do not) overdo the competition bit by running to and fro like a pampered toddler from one investor to another saying, ‘well, the other investor is giving me x chocolates, y candies and z flowers’ – you don’t want to peeve off potential supporters and after all - we all have to live and thrive within the same ecosystem.

The fun of the hunt is in the chase – why deny your potential investors this simple pleasure and also do yourself a favor in the process. And so like every bride-to-be always have a backup plan. Simply put, make one base case business plan without any external funding requirements (Plan B or Base) and a separate one with funding requirements (Plan A or Aggressive). Plan B is the one under which you survive and Plan A the one as per which you thrive. If your Plan B lacks sustainability, then you have a serious problem – one that may have you at the mercy of funders pretty quickly. Going back to theory (courtesy Corporate Finance 101 – heck this makes a lot more sense now), the pecking order for capital funding is internal accruals (I would add promoters’ equity to this), debt and external equity – in that precise order. So basically, for your Plan B, ensure that you items 1 and 2 (though virtually impossible to get for startups) get you by and draw up expansion plans under Plan A contingent to funding amounts you are looking at.

There is one significant (and alarming) change that I’ve noticed in entrepreneurs of late – be it chance encounters at social gatherings or more formal meetings – the tendency to first mention the ‘valuation’ of their ventures. Call me old-fashioned, but I truly believe – ‘focus on the business and the valuation will take care of itself’ (to borrow from Sunil Gavaskar’s mentoring philosophy). Far too often, I see entrepreneurs spending inordinate amounts of time chasing investors, pitching zealously their achievements, goals and dreams. Well, now what about saving some of that time and spending it on growing your topline instead – and you may just find that it’s the investors that chase you and not the other way around.

Well, chances are that if you are reading this, you are planning on (or may already have) embarked on your fund raising journey. Well if all goes well, as per the preceding gyaan, you may soon have a couple of investors showing interest to invest. Now at this stage, take a day off, pour yourself a drink and strip the bag of (promised) cash from the investor’s profile and think about what is by far much more important (and also sometimes overlooked) – ‘Is this the right investor for you?’. You’d be fooling yourself if you think that your business would never see a dull day in the future, or that you’d never have to make difficult decisions as you seek to attain scale – well guess what, once you let an investor in – these decisions will not be your decisions alone, so do take some time out to think about your comfort levels with the fund (and also equally importantly the fund manager/board representative). How do you see them manage future confrontations? What experience do they have in similar/allied sectors? What other value-add do they bring in as an investor? What do other portfolio companies/entrepreneurs have to say about them? Does their investment and exit strategy and holding period provide the runway that you seek? How will they impact future capital raises / M&As?

Some pertinent questions with not so objective answers – but hey, who said that marriage was an easy affair. I was lucky to have worked on one transaction where the entrepreneur floated a questionnaire to prospective investors asking them to fill in the replies to some such questions (the look on some of the fund managers face was a delight to watch) – try this if you must but do seek answers.

The valuation is just the starting point – what is equally important are the hazaar terms and conditions that accompany the proposed cap table. These will also give you some valuable insights into the fund’s investment philosophy and pretty much decide on how much leeway you have as the Founder/Promoter once the investment is a done deal. While some of the terms may look scary, please do understand that it is the fund’s responsibility to protect their investors’ capital – likewise you too have the right to protect your own and the company’s interests, so if something doesn’t make sense, say so – it will vastly reduce the bickering at a later date. Do take time to fully understand the implications of what you’re signing up for (while your legal counsel may run you through all the scenarios, the commercial call, as they will repeatedly tell you, is entirely yours and one that you have to live with for a long time).

Letters of intent (or term sheets as we call them in our parlance) is not the end-all or be-all of your fund raise. Though if you’ve gotten this far, you’ve probably navigated the most excruciating rapids by now. Just two final steps to go, the painful process of due-diligence and the signing of the definitive agreements (share subscription/purchase, shareholders’ and key employees’ agreements). The diligence process can be quite an overwhelming task for entrepreneurs, especially the ones that rank business needs above organizational needs. Well, tedious as this process may be, it serves a very important dual purpose – firstly (explicitly) to provide a clean chit to investors and secondly (implicitly) to provide the company an opportunity to put the house in order. Organizational/compliance/regulatory requirements are as key to your company as business itself so the earlier you put the house in order, the better you will be poised to handle scale. As for the definitive agreements – one must-do suggestion – please ensure that you’ve fleshed out all (or at least most of) the key clauses in the term sheet to ensure minimal disputes or arguments while signing the dotted line finally.

So, waiting to hear the champagne uncorked as you complete your equity raise … may this be the first of many (and there was a definite vested interest there :)). And feel free to add to the survival mantras from your own personal experiences – might end up serving as a much-needed prescription for another entrepreneur out there.

- Gauravjeet Singh