Obviously, this depends on the nature of the business, what is required to be done, your and your team’s capabilities, the competition, etc.
There is no one ‘real number’ on the investment required as that number would be different not just for different businesses but also would be different for different execution strategies for the same business plan.
In fact, there are startups in the online space which have done excellent progress with some angel investments, while there are others which are scaling up nicely with crores in funding, largely for marketing investments.
Broadly speaking, concepts that have been proven and just need great execution + marketing to build a scale business will need to raise larger capital. Concepts that have yet to be proven in the market place could do with lower levels of funding in the initial stages. This is because you don’t need senior employees and huge marketing at pilot or proof-of-concept stages.
What is essential therefore is to have a realistic estimation of the costs and investments required to reach the milestones.
Most often entrepreneurs go wrong in estimating funding needs. They are unrealistically conservative on costs, and impractically optimistic about revenues. Underfunding your venture i.e. raising lesser money that is practically required can have serious consequences as you could run out of cash sooner than expected, thus leaving you without capital to continue the venture… or having to rush to raise another round in a distress situation.
One question investors are most likely to ask you is how much money you need in the round that you have approached them for. While most entrepreneurs give a one-figure reply, my preference is for entrepreneurs to provide a perspective of what can be achieved with different levels of funding. E.g. with INR 50 lacs [USD 100,000] you could develop the solution on a SAAS platform, hire a base team, prove the model in one market and prepare the company for scale. However, if you had INR 200 lacs as a commitment, even if the first tranche was the original INR 50 lacs, you could accelerate the hiring and scale up as soon as the key performance indicators were on the right trajectory. On the other hand, if you got just R. 25 lacs [I.e. USD 50,000] you would just develop the product, outsource the online marketing to an aggregator agency, and prove that the concept works.
You need to bear in mind that if you business is successful, you are most likely to need MORE CAPITAL. Most entrepreneurs assume that very quickly their business will be cash positive and that they are not likely to require more capital beyond the first round.
Working on a realistic business plan is therefore critical in determining how much money you are likely to need for your venture.
The right answer for you is the one that YOU have identified for yourself. If there indeed is a possibility of Google doing what you intend doing, then as a part of your own risk evaluation you need to identify what your response could be.
In a few cases, the answer was “Well, if Google really wants to get into this business, they would be the first one that they should try to buy.”. And that would work well with investors !!!
With most VCs, you will get just one chance to present your business case. VCs are usually a skeptical lot because they see a lot of bad presentations.
Here are some mistakes to avoid when pitching to investors
- Poor assessment of the risks in your venture: All businesses have competition. VCs are not looking for businesses without risks… in the businesses they are in tested in, they are looking for teams who understand the risks and have a plan to manage the risks.
- Poor assessment of the competition or assuming that there is no competition: If there is no one else doing what you are doing, how are the consumers currently solving the problem? E.g. in a online food ordering business, just because there is no other brand dos not mean that there is no competition. ‘Calling up the restaurants using menu cards available at home’ is your competition.
- Exaggerating management strengths: Remember, most VCs will do due-diligence… and most are experienced enough to know what is practical and what is fluff. E.g. for a professional with 2-years experience to claim “In my role as Client Services Manager I was responsible for formulating strategy and operations planning for fortune 500 clients” is usually not going to be an accurate representation of your role. However, “was involved with” instead of “was responsible for” is perhaps closer to reality.
Also, giving the right picture of your current skill sets and capabilities helps investors understand what assistance they may need to bring to the table, in case they decide to invest.
Investors are not looking for ‘we know all and we have been there done that’ teams… those are rare to find. Investors are interested in honest teams who are passionate about the domain and are smart enough to learn the things that they currently don’t know.
- Impractical and unrealistic growth projections: While aspiring for scale is important, planning ‘how’ you are going to achieve it is critical. Without a plan, aspirations of scale are merely a statement of intent. Investors invest in a team with pans… not just on statements of intent.
- Don’t include names of ‘advisors’ if they are not genuinely involved. Plain show & tell names just because you know a few people don’t impress investors.