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 gong to be the toughest part of starting up… certainly is for most startups
- Beak your fund requirements by risk stages as different classes of investors participate in different risk stages of a venture
o Participate at starting up stage - they invest at a ‘concept risk’ stage i.e. when the concept is not proven and the capabilities of the team to execute the concept too is not proven
o Investment amount is small – enough to sustain operations till the venture becomes ready for institutional capital
o Usually take a bet on the entrepreneur – hence quality of founding team is critical
Venture Capitalists - VCs
o VCs typically invest when the concept and business model is proven
o Funding is usually for growing the business and scaling-up
Hence, in round 1, keep your funding requirements to just enough to prove the concept. In round 2, keep your capital requirements to be sufficient to expand to a scalable model and in round 3, raise capital to fund the grown and scaling up.
- Angel investors can help reduce your funding requirements significantly if they assist you with things like customer introductions, partnerships, infrastructures 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 are both avoidable scenarios – raising too little can keep you strapped for funds while raising much more than required will dilute you more than required… also, attempting to raise more than required may make it difficult to get the funding