09Jan / 2017
Chances are that you’re either a founder or are working with a startup if you’re reading this. That means you’ve had to raise funds at some point or are looking to do so now. We’ve written this especially for you.
Truth #1 Starting a venture is not all fun and games; as much as HBO says it is.
Truth #2 Everything will not work out unless you put in the work and make good decisions.
Truth #3 Building a startup requires money. Sometimes a lot of it. All the time more than what you have in your savings account. #fundraising
In this series, we want to focus on the less-spoken-about Truth#3.
Disclaimer: Yes, money is important but remember fundraising is not the end goal. We have seen a lot of founders getting so absorbed with fundraising that they forget the real goal: building a kick-ass company. So don’t forget that as we run through 5 important questions you should answer before you kickstart your fundraise.
How much do I need to DILUTE my ______?
For the first timers: Fundraising is done through multiple financial instruments that give away shares of your company in exchange for investments. The top ones are private equity and convertible debts.
So the question is further broken down to “how much should I raise?” and “how much should I value my company?”
Rule of thumb, what you should raise is contingent on your goals for growth. Don’t get greedy, you can always raise another round. Ideally, set 6 month/ 1 year/ 18 month goals and calculate the cost of reaching them. Be clear on where the money will be spent and why it’s essential for your growth plan.
Next step, calculate the pre-money valuation of your company. Valuation of your company is usually driven by projected revenue, your team, market growth, market size, and scalability of your solution. There are more, but these should help you start. Calculating your valuation at an angel level has become a science, but the main takeaway here is being able to convince your investors of your math. Equity is costly and investors should know why.
Does my LOCATION affect my fundraise?
FYI: Angel Investing is a high risk profession. As an investor I want my risks to be minimized. I do this by spreading my investments across ventures. So I write smaller cheques with a larger pool of investors, usually a syndicate, to close a round. Key takeaway here being smaller cheques and a pool of investors.
So in short, yes, access to a group of investors is important and hence, location is as well. Data from our platform suggests that startups in Tier 1 cities have the most exposure and the shortest time to raise funds. But do note, there has been a rise in angel investments across Tier 2 cities via newly established angel networks and digital investment platforms. The big ones being Pune, Hyderabad, Jaipur, Kolkata and Chandigarh.
Timing + My Idea = Born to Succeed?
Investors are big on accounting for team, product, scalability, market penetration potential etc. But a lot of big success stories are almost always based on timing. Think about it. Airbnb: built post recession when empty wallets opened people up to being part of sharing economies. YouTube: blew up at the peak of internet expansion in US. PayTM: enough said.
So pay attention to market sentiment. What is hot right now might not be later and vice versa. The dynamics revolve around the sector of operation. For example, an early stage horizontal e-commerce company will struggle to raise funds at present and an enterprise software company might just raise post a couple of pilots. So be up to date on your sector, observe who raises money and who doesn’t. Sometimes it’s good to wait and be strategic.
Is my startup at the RIGHT STAGE for Angel funding?
Another means for investors to mitigate their risk is to study the initial adoption of the product/service looking for funding. Your ask changes based on the stage of your product. Goes without saying that successful startups with Early Revenue will find it easier to attract investors and larger cheques than startups in earlier stages like ideation where proof of concept is still being proven and traction is less convincing. Would you have invested in Facebook when it was in an ideation phase? Less likely right?
How good is your TEAM MARKET FIT?
Your team is one of your strongest selling points and value proposals as a startup. The important question here is “Do you have a Founder (Team) Market fit to raise funds?”
Here are 3 key things investors look at in a team:
Domain Experience - The more exposure you have to a problem the deeper your insights are and usually, the stronger your proposed solution. It tells investors the kind of research that has been put into the idea.
Previous Startup Experience - Once bitten twice shy? Not in the startup world. Teams with previous startup experience have a better idea on what to expect and how to navigate to success.
Pedigree - Touchy subject, but investors tend to lean towards teams that have been vetted by reputed educational institutions aka IITs, IIMs, Ivy League schools. If that’s not you, don’t sweat it; it’s only one tick in a checklist.
So there you have it. 5 big questions to ask yourself before a fundraise. We will be exploring each question in-depth in our upcoming posts with data insights from 12,000+ startups and 2,200+ investors.
Last but not least, India's Biggest Angel conference is back this year - bigger and better! Growth Stage Startups looking to raise their Series A / B ($3Mn+) apply today. At LetsIgnite, get connected to the right VC (VC Connect), multinational enterprise customers (Customer Connect) and relevant merger and acquisition opportunities (M&A Connect). The last day to apply is Feb 20th 2017!
Stay tuned and let us know if you have any questions, reach us at firstname.lastname@example.org
Happy Fundraising, you got this!