13Jan / 2017
If you’re a founder and you probably are, we’re sure you’ve spent time on a white-board, skimmed Quora, googled various search variations and made maybe 10-15 phone calls asking trusted friends and family, “Am I ready? Should I start my fundraise now?”
As we discussed in our previous post on fundraising and sector/market type, timing plays a key role in your fundraise, especially in the early stages. By timing, we meant the timing of the idea. As the data suggested, you need to ride with the sectoral angel wave to raise funds.
In this post, we want to continue on ‘timing’ but from a different angle. Let’s look into the time put into your company or in other words, let’s look at what stage your company should be in to raise funds. Can you raise funds at Ideation or Proof of Concept? Should you start generating some revenues before kickstarting your fundraise or are a few beta customers enough to do the job?
A lot depends on the sector you are operating in e.g. Blockchain companies can raise funds at Ideation/Proof of Concept and its quite acceptable. But if you’re in an emerging sector you’ll find it easier to onboard investors if you have steady revenues or at least early revenues. So let’s check in on some data from Q2 of this year to get an idea of what stage most companies raise funds in. Or in other words, we will see where the early and the late majority lies as per the law of the diffusion of innovation.
Let us explore that a bit. The law of the Diffusion of Innovations analyses how fast technology or ideas spread. It says that diffusion is the process by which an innovation is communicated over time among the participants in a social system. The categories of adopters are innovators, early adopters, early majority, late majority and laggards.
There is a point within the rate of adoption at which the innovation reaches critical mass. Hence to achieve mass market success, you need to reach that critical mass (15-18%) and then the system tips. Here, we are majorly interested in looking at what stage does the early and late majority raise funds averaged over all the sectors.
We have 5 broad stages for any startup on the platform namely, Ideation, Proof of Concept, Beta Launched, Early Revenues and Steady Revenues. The age of the company at which they raise funds definitely depends on a lot of other factors for a simple reason that the cost of running/building one differs for every business. Just to simplify the analysis, here we will just look at the sector and stage of the company.
Let’s get started. First, we plotted startups looking to raise funds. These include startups who applied for Investor Connect in Q2, the fundraising section on our platform. In Q2, 600+ companies applied for Investor Connect and that’s our sample size here. Next, a comparison; we plotted the stages companies who got funded over the previous three months were in (about 90). Here is it how the comparison looks.
Note that we plotted only the percentages of the companies in each category to make more meaningful inferences. The demand (blue), companies looking to raise funds, is spread across all the five stages with the maximum number of startups (almost half) sitting at early revenues. Similar trends can be seen on the supply (red), companies who raised funds, as well. Here are few conclusions that we can make out here-
The majority of angel funding in the ecosystem, a whopping 73.2%, happened at an early revenue stage. 19.7% happened at Beta and the remainder at Proof of Concept and Steady revenues.
We did not see any successful fundraise at Ideation stage and only a tiny percentage at Proof of Concept.
Looks like we need more companies in the Early Revenues stage if we have to move the market towards equilibrium.
Here are few learnings that are helpful for founders from the data:
Validate your idea from customers before you start reaching out to Investors. The current market sentiment just doesn’t allow companies to raise funds at very early stage.
All of you at Ideation and Proof of Concept or Beta need to focus on building your business; move up the ladder and then get back to your fundraise.
To kickstart a company you kinda have to put in some of your own money before external funding picks up. FYI, it’s very difficult to raise a formal round at early stages of business.
“But how long will it take me to go through the cycle of Ideation to Beta/Early revenues?”
“How much money do I need to invest to reach to that stage where the market treats me as funding ready?”
Again, a lot depends on the nature of your business. Product companies usually take more time at the prototyping stage. B2B Enterprise companies have large Sales cycle and hence longer betas and you get the idea. To give us a macro level view of how long it takes for an early stage ventures to reach a funding ready stage, we focused on the age of fundraising and funded companies across sectors.
The graph here depicts the same. Blue lines represent the founding year of the startups looking to raise while the red represents funded startups. Assumption: As we are did this exercise at the end of 2016, it is safe to assume the age of 2016 startups to be half an year old, 2015 startups 1.5 years old, 2014 startups 2.5 years old and so on so forth. That pretty easy to decipher but here are a few take-aways:
The majority of fundraises in 2016 happened for ventures founded in 2015 and 2014. It takes a couple of years for a business to mature and raise a formal angel round.
Both too old or too young are red flags to fundraise. And that makes sense. If you are too early, you are not mature enough to raise funds. You need to show some adoption and validation of your product/service before you raise funds. If you are too old, the vibe is that it’s not working out. Angels look for scale and growth as that is what will drive exits in future.
Before we close, a quick recap of both graphs (Founding year and Stage of the company) together :
73% of the companies raised funds at Early Revenue stage
75% of the companies that got funded where either founded in 2014 or 2015
Pick the problem you want to solve, do some ‘jugaad’ to get the initial money you need (what we mean is be smart and resourceful), work on your idea for 1.5-2 years to reach to that angel funding ready stage and then go out and start raising a formal round. You’ll be ready.
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 email@example.com
Happy Fundraising, you got this!