One of the toughest challenges that startups face is to raise capital at the beginning of their entrepreneurial journey.
- Raising your first round of funding is probably going to be the toughest part of starting up…it certainly is for most startups
- Break your fund requirements by risk stages as different classes of investors participate in different risk stages of a venture
- Participate at starting up stage – they invest at a ‘concept risk’ stage i.e. when niether the concept is proven nor the capabilities of the team to execute that concept
- Investment amount is small – enough to sustain operations till the venture becomes ready for institutional capital
- Usually take a bet on the entrepreneur – hence the quality of the founding team is critical
Venture Capitalists – VCs
- VCs typically invest when the concept and business model is proven
- Funding is usually for growing the business and scaling-up
Hence, in round 1, keep your funding requirements to minimum, enough to prove the concept. In round 2, keep your capital requirements to sufficient, enough to expand to a scalable model. And in round 3, raise capital to fund the growth and for scaling up.
- Angel investors can help reduce your funding requirements significantly if they assist you with things like customer introductions, partnerships, infrastructure support etc. Often an investor who takes up an active advisory role can fill in a competency gap in the team.
- Budget at least 3-months for a funding round to close IF YOUR CONCEPT HAS A STRONG BUSINESS CASE AND YOU HAVE A STRONG TEAM
- Raising too little capital or raising too much capital, both are avoidable – raising too little can keep you strapped for funds while raising much more than required will dilute you more. Also, attempting to raise more than required may make it difficult to get the funding!