A lot of startup founders struggle with raising money for their ventures. Some of the struggle is caused due to the lack of understanding of what investors are looking for and how they could address the same. Packaging the narrative of the business well is very critical to fund-raising because this causes an instantaneous connect. Once the investor is able to see you your point of view, having the conversation becomes a lot more easier.
We will look at the various questions that often get asked? How do I find my first investor? When do angel investors invest in startups?
Raising money too early is very dangerous for any startup.
When you start out, as we saw in the previous section on ‘Go to market‘, you need to experiment to find the right traction channel to drive growth for the company. With money in hand, these experiments tend to take on a much more expensive flavor and end up in a lot of capital being wasted.
So don’t raise any money till your go to market is clear.
Understandably there are certain types of products and hardware especially in healthcare that require a lot of background work before being introduced in the real world. In such cases, it is best to rely on government or philanthropical grants that can be put to use developing the products.
There are several sources of funds available from various arms of the government through various schemes including but not limited to:
These are all programs that can help you raise between Rs. 10 Lacs and a few Crores for your startup if you are at the prototyping stage.
Further, if you are attempting a hardware consumer facing product, there is the possibility of crowdfunding as well. Sites like Indiegogo from Kickstarter can be used to raise money as well.
I will answer this question in two parts. How do we arrive at the amount?
I am going to dumb this down a bit.
Let us say, your rent, salary and other expenses for running a spartan team to get started with is going to be Rs. 2 Lacs a month. And you expect to earn only about Rs. 20,000 per month through various channels. Your shortfall will be Rs. 1.8 Lacs. Let us also assume that you do not expect your income or expense to rise over the next 12 months. In such a case, you need find this shortfall in the form of funding.
Rs. 1.8 Lac multiplied by 12 months gives us Rs. 9.6 Lacs, rounding this off, you would need to raise Rs. 10 Lacs.
The first part is the amount – Rs. 1.8 Lacs and the second part is the duration – 12 months.
Now coming to the duration.
Fundraising is a very time consuming process.
You need to prepare before each pitch, the business plan and other documents must be prepared and continuously fine tuned as your business moves forward or alters. In addition to this, the time that goes into meeting several people and pitching to them, assimilating their feedback, etc.
Typically, it may take between 3 months to 6 months to close a fundraise. So the question really is how often do you want to be doing this?
Typically, entrepreneurs raise between 15-18 months worth of money. The reason for this are as follows:
- Your ability to raise capital would be limited by the network you have. More Capital = More People = Larger Network. Do you have the network?
- You do not know how your business will evolve and in the early days a lot can happen even in 18 months. You can reassess your plans as this evolution occurs.
- Your valuation will rise as time goes on (provided everything is working out well). Raising as you go along ensures you do not dilute too much.
This would apply at each stage of fundraise.
The standard boilerplate response is to go to the 3F’s – Friends, Family and Fools.
The reason is that when you are unproven commodity, the only people who would be willing to risk their money with you, would be people who know you the best. They invest upon you because they trust your ability to execute the vision that you are painting.
While friends and family know you and invest on the basis of that knowledge; there are those who invest just because they are highly enamored by the concept being pursued. Such people are referred to as fools because they are acting purely on gut instinct.
There are a fourth category of people that you can reach out to which is often not mentioned – Ex-bosses. (That is assuming you had good relationship with them.) The people you worked for know you the best (from a professional perspective). They understand your capabilities more than any family member ever could. Therefore, it is highly advised that you reach out to the VPs that you worked with and ask for their support. It would further give future investors more confidence to come on-board and be a part of your journey.
The other reason to not approach outside investors immediately is, if the sum that you are looking for is less than 50 Lacs, investors do not show immediate interest because it would take a while before you get to a scale where subsequent rounds of funding can come in and provide them exits.
Once you have created a proof of business and your ability to sell, you can start approaching angel investors. They would like to see some preliminary traction.
The exception to this rule is if you are working on technology that revolutionises a field, in which case they may be willing to invest earlier. Also, if you are a highly pedigreed entrepreneur who has been there and done that (raised money, sold companies). [Since you are on this page, it is highly unlikely that this is you.]
Typically, angel investors do not invest alone. They invest in a group, which is led by one of the angels. The lead angel is usually someone who understands the industry and has relevant connections that can be useful for the company. They mentor and guide the company on behalf of the others and represent their interests as well. More importantly, they have the time and inclination to do this.
Raising an angel round comes down to being able to bring this group of angels together. If the lead is already convinced, convincing the rest of the investors becomes slightly easier.
Begin by identifying those who can lead an angel round into your company. Find those who are respected in your field and believe in the product or the company enough to invest in the venture.
Always ask for references – Anyone who has reached any level of accomplishment and has the ability to make any investment, would know several others who can do the same for you. This is part of the process of building a group of angels who bring together the money that you seek to raise.
Most angels make investments between 1 Lacs to 25 Lacs on a company; irrespective of whether they are a small angel or Ratan Tata. Hence a Rs. 2 Crore angel round usually includes 15 to 20 angels if not more.
One of the greatest talent that any entrepreneur needs to have at this early stage is to bring together this group of angels. It requires constant networking and pitching to a wide range of people.
An angel round should normally last you for a duration of 18 months. Thereafter, you need to start approaching Venture Funds that have a capacity to make larger investments into your company.
Venture Funds require more data and would need a whole different approach to fundraising.
Angel investors invest their own money into the venture and therefore they are only answerable to themselves so far as the investment – Its success and its failure – is concerned. They can be very light touch on due diligence or heavy on it depending on themselves. Equally, this source can disappear very quickly as well since personal requirement compete for this money as well.
With an institutional investor, they act as custodians of others money, hence they are answerable to investors who have placed their trust in their ability to invest wisely and provide returns. This in turn requires them to be far more diligent with the investment as well as the investment process. The number of filters that one has to pass through as well as the amount of due diligence needed would be far greater.