Five Ways Entrepreneurs can Prepare Themselves for Raising Institutional Money

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Voltaire once said that god is not on the side of the biggest armies but best shots. But one of the most toxic – and enduring - myths about entrepreneurship is that companies succeed because of the amount of money they raise. I agree with Voltaire but with conditions; money is a necessary but not sufficient condition for success. What finally matters is the opportunity, team and the mysterious alchemy between those two called “fit”.

As an institutional investor I am often asked by entrepreneurs about getting ready for the fund raising process. Of course each idea has a different set of cast, characters and plot – so it is hard to generalise about who gets funding and who gets valuation. But there are five ways for entrepreneurs to prepare for the brutal – and usually humbling – process of raising institutional money:

1) Don’t write a business plan; Re-write it

Of course reality is different from plans; but plan you must. As President Eisenhower quipped “plans are useless but planning is indispensable”. The business plan– defining the problem you are trying to solve, the solution that you have identified; your target consumers/customers, what resources you would need in terms of people and capital etc. – is important because it exposes contradictions, surfaces assumptions and flags uncertainty. You don’t get a second chance to make a first impression.

2) Don’t raise too much money. Or too little

History shows that no amount of money can make a bad business model good. The clock on returns starts ticking the moment you raise funds. So even if the business model is good, raising more money than needed increases the pressure to grow fast because only growth provides returns. This need for growth ahead of refining the business model can lead to poor decisions. But if you raise too little; you risk being constantly in the market for funds and not being able to pursue opportunities. The optimal amount will get you through finding out who are your consumers, where will you find them, how much they will pay, and what your costs will be.

3) Don’t chase Valuation

The market in capital for an unlisted company is not perfect; it is always hard to discover who will invest and at what price. Valuation is important but shouldn’t be the only the criteria for closing funding or choosing one investor over the other. Valuation follows value creation; not the other way around. In fact if you raise money at a very high valuation at an early stage, then the pressure amplifies to provide greater returns. So while high valuations blunt dilution, be mindful that there is no such things as a free ride. Especially in seed or early rounds when the business model is still being refined.

4) The color of money is more important than the quantum

Don’t spray and pray. Make a short list of investors based on their track record, investee companies, investment thesis, and fund size. No point pitching a 10 million dollar fund round to an investor whose fund size is $50 million because most have a single company limit. Do your homework; research the web, research their websites, talk to entrepreneurs and investee companies. Look for chemistry. The investor-company relationship is like a marriage – look for how the investor deals with you during your interactions with them. Does he spend time understanding your business? Does it sound like she will be fair? Will she bat with you or against you? Does he understand the roller-coast ride of an entrepreneurial journey? Is he likely to support you – when the tide turns against you (for no fault of yours)?

5) Don’t take the process personally

Most entrepreneurs – even the successful ones - tell me that the fund raising process is exasperating and humiliating. Don’t take rejection personally. As Colin Powell said, “ Don’t let your ego get too close to your position, so that if your position gets shot down then your ego shouldn’t go with it”. The company and you are two different entities and if an investor chooses not to invest in your company or not value the company the way you would like it, don’t take it personally. Listen to the message. Go back to the drawing board and rethink the plan. Or be successful with another investor and prove him wrong.

Fund raising is simultaneously exasperating (when investors don’t seem to get your idea), humbling (when investors don’t buy into your passion), exhilarating (when an investor does buy into your idea) and enriching (when an investor gives you the money to build your idea). The ultimate decision to fund or not fund by an institutional investor is based on several subjective factors – and will vary from one investor to another. In my experience, the most interesting entrepreneurs recognize that fund raising is part art and part science and often people get lucky being at the right place at the right time. However, even if you are unsuccessful in raising funds – you should use the whole process as a structured opportunity to reflect on your plan, idea, strategy and the team and make improvements.

About the author:

Bharati Jacob is a Co-Founder of Seedfund Advisors, one of India’s leading early stage investors

[The article was originally published on Economic Times]