Startups beware. You do not need money. You need ‘smart money’

Funding is a big deal in the startup world, and no discussion is complete unless the issue of money is debated. Should one raise money or bootstrap? When should you raise money and from whom? (how much is your dilution after first round? and here is an example)

In India, there is certainly a shortage of capital, even more so of 'smart' money. Our data from last year shows that there were about 150 seed-stage investments that happened out of which 25% went on to raise a series A. But how many companies are actually looking for funding? Sharad Sharma, one of the foremost angel investors, tells us that angel networks alone see about 3000 applications for funding each year. Yes, all these companies are not 'fundable' but with a fast maturing startup ecosystem, there is a sizeable chunk of entrepreneurs who deserve funding, but don't manage to get it.

The glamour quotient

Startup news has now become mainstream, and there is hardly a day when newspapers don't carry news about funding. “I'm apprehensive of this trend because it gets more people attracted to startups for the wrong reasons,” says Sharad. What needs to be understood is that most of the news one reads is recycled, hence you see more of the same thing. But the data will clearly show numbers that don't look very encouraging. If you look at the US, there were more than 100 active seed stage investment funds alone! India does not need that kind of inflow but the larger picture is a bit gloomy because exits are taking their sweet time in coming.

This year, we're on our way to touch 200 seed investments, but the number of series A rounds are the same as previous year -- about 40. What this means is that there has been a growth in the availability for seed money. But does it count?

"Who invests in you matters more than how much they invest in you."

— 初心 (@krisnair) November 12, 2014

This rise in focus on startups have made HNIs interested in startups but that doesn't necessarily mean good news for startups. For instance, most of the angel networks have investors who've made their money in real estate or other non-tech businesses. There are very few angels who understand internet companies and for an entrepreneur, it is of utmost importance to raise money from people who understand the business. Why?

-> Investing in startups is a gamble as 80% of startups die in the first three years. The investor really needs to understand what he or she is investing in.

-> More than the money, network and guidance are critical for an entrepreneur. The right introductions and a good direction increase the chances of success.

Here is a list of some prolific angel investors we made last year, watch this space for the new list this year:

 Positive signs

India doesn't really have enough success stories or entrepreneurs who've made it big in the technology world. There are a handful of companies in the league of MMT, Flipkart, redBus, and inMobi, etc. but it is only now that we're seeing founders put money in young startups.

Earlier in June, we saw Binny Bansal and other angels invest in Roposo. Pallav Nadhani and Abhishek Rungta have been funding via Seeders. Recently, Snapdeal founders and others invested in Tripoto. These are promising signs of a maturing ecosystem. Powai Lake Ventures is a newly formed group of founders (Zishaan Hayath from Toppr, Avlesh Singh of WebEngage, etc) who've seen success with their ventures and are now investing in younger startups.

This does not take anything away from the early stage seed funds but more founders turning angles is a great sign for the ecosystem. Here’s a pointer for entrepreneurs raising money: Do not take whatever money that comes your way in return for valuable equity. The idea is to get money along with mentorship that'll help in forming more successful companies, faster.

What do you think? Do share your fund raising experiences with us.