If starting a business is hard, growing a sustainable one is harder. While fund raising is an essential part of any business, it can be frustrating or demoralising for many first-time entrepreneurs who have no idea about where to start or whom to approach. To demystify the fund raising process, The Department of Management Studies, IIT Madras, organised a ‘Fundraising Workshop’ on Saturday for aspiring and early stage entrepreneurs. The Hindu BusinessLine was the media partner for the workshop.
The workshop was conducted by Thillai Rajan, Professor (Finance) at Department of Management Studies, IIT Madras, and founder of YNOS Venture Engine. Here are the 10 tips for successful fund raising:
Should start-up entrepreneurs go for external funding? The answer is ‘no’, according to Rajan. Noting that fund raising from external investors will make entrepreneurs answerable, he said, “Let fund raising be the last option, try and delay and push as much as you can to avoid fund raising.” Citing the successful growth self-funded organisations like Zoho and IT behemoth Infosys, Rajan said Infosys managed its operations with its own funding for a long time before going for an IPO.
Need for speed
While external funding is not mandatory, however, it is indispensable for entrepreneurs who wish to scale their business quickly. “If you need to be unicorn in ten years then you need external funding,” said Rajan. Listing the benefits of external funding, he said that funding facilitates credibility, market access and talent. “People will know your business if you say you are funded by Sequoia capital or Y Combinator,” he added.
Position your business
Highlighting the need for business positioning, Rajan said that it does not matter which sector the entrepreneur belongs to, as long as he positions his business in a right way. Citing the example of Ola, he said that the cab aggregator has positioned itself as a technology company instead of a transportation player. “Investors like technology-oriented businesses because it brings scalability, profitability and global reach.” Presenting his research reports, Rajan said most of the early-stage funding by Angel investors went to software and internet services sector.
Get your timing right
While there are five stages of growth of a venture such as ideation, proof of concept, beta launch, early revenues and late revenues, Rajan said that the highest number of ventures are funded between beta stage (testing stage of products) to early revenues while the funding drops during the late revenue stage. An investor, therefore, has to time his funding approach before it is too early or too late.
Find your Angel
Citing research reports, Rajan said the number of angel investors in India grew by 250 per cent in the last five years. “The number of investors compounded the problem of finding the right investors for entrepreneurs,” he said. While there are around 10,000 Angel investors investing about ₹7,000 crore every year, an entrepreneur should choose if he needs Business Angels (with non-financial goals ) or financial Angels (return-oriented investors) to grow his business.
“Angel investors are predominantly one-time investors. The have no urgency or obligation to invest in your business,” said Rajan, adding that entrepreneurs should present their business in a way that it creates a fear of missing out (FOMO) feeling in the minds of investors.
Get your pitch right
“Unlike in the US, you cannot get an Angle to invest in your company with a mere PPT presentation in India,” said Rajan. He added that pitch is not just a set of slides but an art of convincing the investors. Noting capital raising as an intensive process, he said that entrepreneurs should prepare the investor presentation themselves instead of outsourcing it.
“You are better placed to communicate about your business than others,” said Rajan.
Incubate to innovate
“Going forward, Angel investors will choose more of start-ups coming from incubation centres than other start-ups,” said Rajan. Highlighting that Tamil Nadu has the highest number of incubators in the country, while Kannur in Kerala has Asia’s largest incubation centre, Rajan said, association with incubators increases the chance of getting funded.
Plan your business today
From scouting and identifying Angel investors to executing term sheets, and allocation of shares to investors, will require 4-6 months. Rajan said that entrepreneurs should plan their business today if they need money after six months. “Cash management is an extremely important step for entrepreneurs.”
Stage your growth
‘Staging’ the growth is an important aspect for start-up entrepreneurs. Rajan said that instead of raising the funds at one go, entrepreneurs should stage the funding through a series of multiple rounds to get a better valuation of their business. Citing Ola’s fund raising strategy, he said the cab aggregator’s pre-money valuation grew rapidly to $6 billion in January 2019 from $4.3 billion in September 2018.