Startup Sunday Season 3 Episode 17(Theory Behind Raising Funds)

“The entrepreneur is essentially a visualizer and actualizer. He can visualize something, and when he visualizes it he sees exactly how to make it happen.” — Robert L. Schwartz

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A survey by Randstad Workmonitor in 2017 stated that “83% of Indian workforce prefers to be Entrepreneurs”. The Indian entrepreneurial ecosystem has evolved over the last decade. It is rapidly growing with several new ventures starting at regular intervals. Setting up a startup is comparatively easier today with the ecosystem seeing higher engagement. But, entrepreneurs always face struggles and challenges when it comes to raising capital. Recent stats state that “77% of small businesses rely on personal savings for their initial funds.”, “82 percent of businesses that fail, do so because of cash flow problems”, “27 percent of businesses surveyed by the NSBA claimed that they weren’t able to receive the funding they needed.”

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Creative and out of the box thinking is a crucial requirement to have a new and innovative idea for planning any start-up, in the similar sense for executing it, to give it a physical form, the most important factor is FUNDS. When an innovative mind aspires to make a change in the existing market or consumer behavior, it must be backed by a strong team and sufficient funding to make it come true. When any startup is up and running, the first thing they do after market analysis/validation is product development. This requires a lot of input in terms of labour and capital. There is no revenue stream until the product or service is sold. It can take a while for a company to reach profitability and until then, the business needs some cash to keep its operations going.

Types of funding

  1. Bootstrapping: Self-funding, also known as bootstrapping, is an effective way of start-up financing, especially when you are in the budding phase. New entrepreneurs often face problems in getting funds from others as they have not showcased their excellence and the potential of making a profit. Bootstrapping has its own advantages. It keeps the entrepreneur tied to the start-up which is a good sign to attract potential investors in the future.
  1. Crowdfunding: This is a great way of getting funds for a new and amazing business idea. It’s like taking a loan, pre-order, contribution or investments from more than one person at the same time.
    For this, the entrepreneur needs to put up a detailed description of his business plan on a crowdfunding platform. The people who find it promising and potential to make profits, lend you the money with a promise to pre-buy your product or give a donation. This helps in many ways:
  • It also serves as a marketing platform for your business
  • It ensures the purchase of your products
  • You can check the competence of your business idea as there is a lot of competition on crowdfunding platforms.

3. Angel Investment: Angel investors are individuals with surplus money and a keen interest to invest in new start-ups. They also work in groups of networks to collectively screen the proposals before investing. They may also offer mentoring or advice alongside capital.

4. Venture Capital: Venture capitals are professionally managed funds for investing in companies that have more potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as a litmus test of where the organization is heading, evaluating the business from the sustainability and scalability point of view.

5. Funding from Business Incubators & Accelerators: This is a great option for early-stage start-ups. These programmes are available in almost every major city and support hundreds of start-ups.

Money is the primary and the most important need for a company to start operating. An entrepreneur has to choose the appropriate mode of funding or the ratio mix of each of these types. Another challenge for the venture is to decide the amount of capital they require, as no matter how much fund a venture pools up, the needs and wants of the venture keep growing as more and more features keep getting added to their product. Founders need to get their hands-on market research to understand what valuations direct and indirect competitors have raised money at similar stages. An entrepreneur must understand the importance of storytelling, for example in case of tech start-ups, the entrepreneurs may be geniuses in engineering, invention and product design, and even coding beautiful websites, yet they need to convey technical features into tangible benefits and compelling opportunities for non-geeks. This is the most crucial and toughest task for an entrepreneur, like the way he communicates his idea is what decides the fate of the venture.

Challeges of entrepreneur

An entrepreneur tends to miss out on one crucial point, understanding the perspective of the investor, what are the primary aspects that an investor probe into before shelling out his money. The weightage on each dimension may depend on the stage of the startup and the priority of the investor but these points should give the Entrepreneur a good guidance on how an investor calculates the risk of investing in a venture.

  1. Business Model: Every investor will demand clear clarity on how the venture will build a sustainable business and make money. This is the most crucial element based on which the investor makes up half his mind.
  2. Team: The people working on the venture make all the difference between a success and a failure. Investors will typically look for chemistry, zeal and entrepreneurial skill among the team. Prior experiments with entrepreneurship are always beneficial as it brings a startup mindset and the experiences to the mix. This builds up a sense of confidence in the minds of the investors.
  3. Product: The investor will search for the value of the service we intend to provide. The fundamental analysis, by an investor, here would be to see
  • If the offering is mature enough to find a place in the market
  • Whether the offering creates enough entry barriers for others in the marketplace
  • The scalability of the product in the coming future.
  1. Market: The team’s understanding of the market they are addressing with their product offering is key to investors. Market understanding will define the team’s strategy and how they market their product.
  2. Exit Plan: The goal of an investor is to get returns from the investment capital. An Entrepreneur needs to have an idea of how the venture can possibly provide an exit to the investor. The exit could be by subsequent rounds of funding or M&A or an IPO. It is the Entrepreneur’s thought process that grabs the investor’s attention. Overall, an investor will be looking to minimize the risks in investing with the venture by checking the possibility for maximum returns.

Hence we can conclude that raising capital is one of the most critical aspects of starting a new venture apart from exploring the idea and building a strong team to execute the idea into reality. In such a scenario wherein the life of a startup is determined, entrepreneurs need to analyze and contemplate as to how they should go about arranging for funds to pump into their business. Entrepreneurial education also would play a major role in shaping the perspective of the new budding Jack Mas’ and Steve Jobs’ of the future. The entrepreneurial community should think over this and find a solution to Make It Happen.

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