Raising Capital for Your Venture
Date: Saturday , June 28, 2008
In this article, I share my thoughts on one of the most critical elements of venture success – How to get your venture financed appropriately? Many entrepreneurs struggle with the process of raising funds and either abandon their entrepreneurial pursuit or settle without raising sufficient capital to fuel their business growth.
Do You Really Need to Raise Venture Capital Money at This Time?
I often find that many entrepreneurs are unclear on why they need money for their startups. Some businesses are best bootstrapped and served better by having the customers fund their growth. Many service-oriented businesses – like BPO/KPO/IT Services businesses – could fall in this category. There is no reason in the world, why you could not find your initial customers and get started with them helping you drive the business formation and initial growth. Once you reach a critical mass of revenue and customer base, you would have earned sufficient credibility to approach the venture firms or private equity firms to seek investment capital to accelerate further growth of your business. By the time you seek venture capital money, as an entrepreneur, you would have created real value for your business, and the business venture should have been validated through your initial customer and revenue growth. Typically, from the seed stage to this point may have taken you 3-5 years. In these 3-5 years’ period you have built a real business, perhaps making $2-5 million in revenue, and now the timing is appropriate to evaluate if you are indeed ready for Venture Capitalists to help you accelerate your business. For all of us who have raised venture capital, there are always pros and cons of venture financing (like everything else in life!).
I am a big proponent of figuring out how to get your customers to fund your growth for this class of “service-oriented” businesses.
Do I Need Upfront Venture Capital for Building My Products?
In certain other types of businesses – Web 2.0 ventures, Software startups, Semiconductors, life sciences, clean tech, and technology led businesses you have to first invest to build a great product, before you can think through how to create revenues and customers. In these types of businesses, you are in a bind – you need upfront capital, but you may not have established enough credibility to go and raise the capital from the VC firms at the outset. What should you do in such a situation? Try your friends and family members or angel investors? Or go straight to the VCs to raise your initial seed capital to help build your product and startup?
Over the years, I have personally raised over $100 million in venture, private equity capital for my different product driven ventures. In all of these startups, there have been some common themes, which you have to keep in mind:
Big Market: To be successful in raising capital, there has to be a ‘big market’ ready to explode for the product’s market segment that you are targeting? If the market size is not that big, then chances are that the VCs may not be interested. Most VCs get their returns when the companies can get past $100 million valuation, therein lies the conflict with the entrepreneurs who can enjoy reasonable success in their first venture even if the company gets sold at $20 million value. So, if your product idea is not targeting a ‘big untapped market’, you are better off not chasing the VCs.
Right Team: You need to demonstrate that you as an entrepreneur can assemble the right team to solve the big problem that you are targeting. Most VCs invest behind great teams, not just individuals. This can be a tricky situation for first time entrepreneurs. So, you have to figure out the right set of partners and key team members who can lend credibility to your efforts in the view of the VCs. One of the strategies that work well is to round up genuine advisors for your startup project. These advisors may take some nominal stock or equity, but they can bring domain expertise and credibility to your efforts, early on in the process.
Deal Momentum: Venture capitalists typically invest behind companies, where there is a sense of momentum. How can you create a sense of momentum, when you don’t even have a product? You are pretty much at a power point idea stage, how do you create a sense of momentum, so that the VC firms feel compelled to move and fund your venture? Few things that might go a long way in creating a strong sense of momentum is that you start with getting your concept validated by your key potential customers and partners. If some of the key customers and partners can validate your idea, looking at just a ‘prototype’, the VCs get lot more enthused about the prospects. Without a prototype, it becomes hard for the venture capitalists to see how your product idea is going to look in the real world. The other strategy, which most successful entrepreneurs deploy for financing, is that they certainly start to play one VC against the other, thereby creating a ‘buzz’ in the investor community around their business idea or concept. A small mention about your concept or your startup in a leading publication or magazine can lend momentum and credibility and help build the confidence of the VCs to proceed with investing their capital.
Strong Relationships: Strong deal momentum, large markets, and great teams are necessary for attracting venture capital, though they may not be fully sufficient. You still need a strong ‘personal credibility’ and relationship with the right partners within the venture capital community. They ought to know you from the past, they have to believe in you as a professional and trust that you will be able to execute your vision. When potential entrepreneurs come to me, I certainly recommend to them that they should start their relationship building efforts few years in advance of their entrepreneurial career. It is good to start networking with VCs, CEOs, investors, and Board members early on so that they get to know you well before you are going to approach them with your business ideas. You can join or volunteer in the organizations, where you are likely to meet and interact with these individuals. TiE or siliconindia are great platforms for you to mingle with such individuals. The key is to become active participants early on, so that when you do get ready to launch your ‘product’ startup, you can tap into your professional networks.
How About Tapping Angel Investors as Opposed to Venture Capitalists?
In some scenarios it is better to go to the angel investors early on, as opposed to targeting the venture capitalists for financing your venture. VCs can take much longer before settling down with the idea, and may want to see significant progress before committing capital. On the other hand, angel investors might be willing to move faster instinctively to back your venture. In the U.S. and now in India, there are many angel investor networks, actively seeking the right entrepreneurs and startup ideas. So, the process with the angels has to be similar to what I outlined earlier with the VCs. The big difference is going to be in how you approach the angel investors early on. In my experience, if you approach the angels early on, and make them part of your ‘vision team’, your venture becomes as much their idea as it is yours! Then you have the good fortune of having them join your venture with their investment. Typically, angels will invest anywhere from $50,000 to $1 million, depending on their net worth and their risk appetite.
So, regardless of whether you currently are fine to bootstrap your venture, or going ahead with the venture capital money or starting of with the angel investors to build your business, one thing is for certain: At some stage, your ability to raise capital will help you gain competitive advantage in the marketplace. Smart entrepreneurs are good at raising capital at the right time, from the right investors, and at the right price.
Feel free to drop in your thoughts or comments on this subject, at my blog: http://blogs.siliconindia.com/gunjan or through email:firstname.lastname@example.org
The author is the Chairman of SiliconIndia.com and MetricStream. An internet pioneer, he was the co-founder and President of WhoWhere? Inc., a Internet directory services company acquired by Lycos in 1998 as well as eGain, an online customer service company. Sinha can be reached at email@example.com