Raising Capital for Your Startup
Date: Wednesday , September 01, 2010
One of the toughest jobs for a first time entrepreneur (or even a repeat entrepreneur) is the ability to raise capital behind one’s business idea or business plan. In the early phases of your venture, you have very little credibility, as the idea or market that you may be pursuing might still be nascent, the management team of company is yet to arrive and customers are struggling with beta products and early teething challenges. All in all, there are more reasons for investors to say no to you, than to jump in with their check books. For many of us, who have had experiences raising venture money, there is an art to that process but you of course will need lots of patience and some good luck.
Start your fund raising process on Day 1
I believe that the best way to start the fund raising process is start early. Even though you know that you are still bootstrapping and there is yet another year before you will get ready to take outside capital, there is no harm in socializing the concept of your venture with the right VCs and angel investors. In many cases, you may not need to divulge all the details of what you may end up doing, yet, it helps to show them the big picture and get the investor imagination going. All you want at this stage is for potential investor groups to get to know that you exist and that you are onto a great concept and a theme, and that it is worth their time to track your progress along the way. Many entrepreneurs wait too long before they open up to outside investors, and sometimes find themselves running out of financial runway to execute. The sooner you start to build awareness of your venture in the investor community, the easier it will get for you as you get ready for the actual fund raise. In short, it is never too early to start the conceptual discussions with the right investors and financial partners.
Build your team of advisors and well wishers
Early on, it is a good idea to build a network of advisors and well wishers who are at least “emotionally” vested in your success. Make sure that these industry or financial veterans are engaged in seeing you succeed. It is totally appropriate to reach out to your professors, advisors, and friends of friends, family members and others to give you the emotional support, as you have to ride through the tough phase of raising capital for your venture. It is best to treat these mentors and advisors as your extended eyes and ears for helping you gain momentum in the business and to help you attract potential investors. The caliber of your advisors and mentors is critical to establish validation of your idea and technology. It makes a strong statement to rest of the world, that you are onto something nice and big. It sends the right signal to the potential investor, who may be watching your progress by now.
Go After a Big Market
Venture capitalists and investors like to go after big markets with big payoffs. If you are going after a small market, it is best to try and bootstrap the venture and avoid the VC’s. VC’s have a different return expectation, they typically invest in companies with huge potential pay-offs. Hence, it is important that you are building technology, where there is a big market opportunity and that, you as a startup, have a clear advantage of addressing it. Some ideas are best executed within the four walls of the large corporations, and some are best done within the framework of young and agile startups. It is critical to determine that your specific startup, is indeed pursuing an opportunity that is large and is indeed best suited for a startup venture. Many investors and VC’s expect the entrepreneurs to “dream big” and predict the markets right. This does present a significant challenge for the entrepreneur, but, unfortunately there is no short cut to this pre-requisite for attracting venture investments.
Build and showcase Momentum
Seasoned entrepreneurs know the value of building and showcasing momentum early on. It is critical that you strengthen your company through hitting key milestones around management team, product and technology delivery, proof of concept deployments, customer validations and more. The regular momentum on these fronts assures the potential investor, that you know what it takes to execute and tell the story to prospective investors. Periodic updates through phone calls or meetings with these potential investors will show them how, you are gaining ground in your conviction and idea, and how the world is aligning around your venture to create required business momentum. At this stage it is also critical to create a competitive dynamics by showcasing, early involvement of right angles and investors, who lend credibility to your startup. Perhaps, these noteworthy investors, angel investors and advisors who have worked with VCs can help make the introductions in the right manner. Winning entrepreneurs are masterful in the way they build a sense of positive momentum and excitement around their venture, ultimately culminating into some sort of a financing round.
Financing your venture is indeed a difficult road for most entrepreneurs, and it requires tremendous energy and patience at the same time. You have to be relentless in your pursuit, unwilling to up give your dream. On the flip side, you have to be patient enough to wait till the investors start to share your excitement and beliefs. Many great startups and entrepreneurs have taken years to attract the right investors. One thing for sure, is that you cannot give up your pursuit, just because one investor has said “No” to your idea. What is more important, is to listen to the “No” from the investors, and appropriately incorporate the feedbacks into your business, so that through every conversation and investor experience, your startup is actually growing and maturing into the gem, that everybody will see as the next Google!
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