Avoidable Mistakes During Fund Raising

By Team YS|24th May 2012
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anil_joshi

Today, there are so many opportunities. Entrepreneurs are popping up left and right, but great ideas don’t automatically translate into great businesses and are not enough to secure venture capital funding. As an entrepreneur, it is necessary to evaluate your venture from an investor’s perspective to ascertain your fundability. A true entrepreneur is someone who can convert a great idea into a great business.a) Is your venture disruptive enough?

A disruptive venture is one that overturns existing business practices and dislodges status-quo technology or products. After the launch and the likely success of a disruptive venture, all other companies in the space are forced to adapt to stay competitive. The inherent differentiating factor(s) of a disruptive venture facilitate sustainable competitive advantage; something investors highly value. Companies whose main value proposition is operating in a hot sector/industry do not excite investors.

Steps to Take:

-Start with a unique idea

-Do your research on potential competition or substitutes

-Investigate on the investor’s willingness to fund your type of idea

-Have some test cases to substantiate your ideas

b) Plan Ahead

Entrepreneurs often reach out to investors at the last minute, expecting investment rounds to close soon. Though exact methodologies vary between investors, the investment process usually involves: business case analysis, use case evaluation, and technical, financial, legal, etc due diligence. Upon a favorable investment decision, investors engage entrepreneurs in deal negotiation provided they are able to find common ground and close the deal and documentation begins, finally culminating in disbursement of funds. Angels and angel groups are generally the fastest investors; Venture Capital and Private Equity firms invest larger amounts and other people’s money and consequently have longer investment cycles. Keep in mind that there is no normal investment time frame. If your venture requires funding to become cash flow positive, take extra special care to start fund raising as early as possible.

Steps to Take:

-Start the fund raising process well ahead of the financial need

-Make contact with investors through references, it helps establish your credibility and can shorten the funding cycle

-Understand term sheets and valuation methodologies

-Be prepared to use friends and family money as bridge capital

c) Proof of concept

A business plan by itself is rarely enough to convince potential investors. The proof of concept or some working prototype or beta version software always helps. Investors appreciate if entrepreneurs have deployed their own resources to test the water or at least have proof of concept.

Steps to Take:

-Built a prototype or have alpha or beta version software ready

-Build the business plan around the proof of concept

-Write the business plan in a way that someone from any industry can read it

-Have some test cases to substantiate your hypothesis

d) Create realistic projections

Investors only fund companies with realistic business plans. Entrepreneurs often mistake the industry/market size with the most useful metric - target market segment.

Steps to Take:

-Ascertain your true target market segment

-Create a comprehensive competitive analysis taking into account substitutes

-Only use validated assumptions for building a business case

-Conduct sensitivity analysis on key revenue drivers

e) Know your requirement

Early stage ventures have unpredictable revenue cycles and as such, entrepreneurs should plan to raise more than enough money to either secure subsequent financing or become cash flow positive using conservative projections. Entrepreneurs assume that their offering will be immediately absorbed into the market and they will be inundated with orders. However, early stage companies often complete several offering iterations before finding success and sometimes have to pivot their entire business model. Entrepreneurs should comprehensively analyze their fund requirement to avoid being trapped in another fund raising cycle too soon, without having made significant progress.

Steps to Take:

-Only use researched figures and information in projections

-Factor in seasonal revenue drivers such as downtime during monsoons

-Factor for lull period or realistic time period for iterations which may be required

-Create comprehensive analysis of costs. Research market salaries for all employees you need to hire, find out the exact price from the manufacturer of all infrastructure costs, etc.

-Entrepreneurs do not require corporate level salaries, their primary compensation comes from the increase in value of their equity position in the company

-During smaller funding rounds all capital should go towards building the business

f)Importance of team

During the early days of a venture the entrepreneur may be doing everything himself and may be stretched thin. If you’re alone, be prepared to find additional co-founders immediately. Investors shy away from one-man teams as they are statistically less likely to succeed than multi-founder groups. If the idea for the venture is good enough, entrepreneurs should be fighting back offers from people wanting to join. A one man team can be an indication to investors that the venture is not very attractive or that the entrepreneur doesn’t work well with others. Post-funding, entrepreneurs should be prepared to immediately hire the additional team members required to run the expanding business.

Steps to Take:

-Have co-founders who share the same vision as you

-Identify people who can join you, once funded

-Have a retention plan for key people

Anil Joshi, Mumbai Angels :

Anil heads operations at MA. Anil’s professional experience includes involvement in corporate management functions in medium and large organizations, Investment in startups, Project management, Joint Ventures & business development and sits on board of 4 portfolio companies. He has worked with B.K. Birla group of companies (Textile div), Business Access India (Scandinavian Consultancy), Transasia Biomedica (leading Diagnostic co) and Artheon Group (diversified group). While at Mumbai Angels, Anil was instrumental in closing over 15 deals in Mumbai Angels Anil has bachelors degree of Engineering, PG in Management (Marketing) & PGDBM in Strategic Finance and Control .

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