Trying to raise money for your startup? What can go wrong?

Wednesday April 20, 2016 , 5 min Read

The Uphill Task Of Raising Money

A lot of startups die at the inception stage itself. There is definitely a need for that capital and getting it is a Herculean task. Easier said than done, but a lot of startups are unable to sell their value proposition to investors effectively. Moreover, with investors being very few in number, the challenge becomes bigger in terms of how to get that share of the pie from the limited pool. Hence, fund raising can be a daunting task, and entrepreneurs need to be thoroughly prepared before they meet investors to raise money. Here are some of the key questions early stage entrepreneurs should ask themselves to be better prepared to meet the challenges that await them in the funding game.

Also read: 5 things entrepreneurs should think about when seeking investment

Is it too early to get funded?

Investors are looking at getting bang for their buck. Hence, they typically look at a growth period of 12-18 months to give themselves enough confidence before they invest. This does become a considerable challenge when you have just started your venture and are looking at getting funded. The problem is compounded by the unrealistic net present value (NPV) assigned to the venture, as the numbers are often unrealistically high. NPV measures the value of the project at the present, which is based on IRR and future cash flows. The projections are not reflective of reality, as they are usually over stated, making it questionable for investors. The recommended practice would be to follow a bottom-up forecasting approach, and stay conservative on the numbers.

The other recommended approach is aim for being bootstrapped. Chances are if you are bootstrapped for 12-15 months and have raised a certain value for your business, you are more likely to get the investor eyeballs.

Is your paperwork ready?

Completed documentation is important to raise investor confidence in terms of how organised you are about your business. A lot is dependent on the perception built and poor documentation leads to a poor image. Documents such as mutual NDA, HR policy documents, employee offer letters, invention agreement, conflict of interest, confidentiality agreement, service agreement, company loan agreement, and investor pitch deck have to be in place before approaching any investor.

How many investors in your network?

Raising money is a matter of raising investor confidence. If you don’t know anyone and no one knows you or your business, the chances of getting immediate acceptance is less. The entrepreneur’s network clout speaks for his/her awareness levels, grip on the industry, ability to take the business forward, and often serves as proof of thorough groundwork. Considering networking is powerful in many ways, it is important to attend startup events and startup conferences and build rapport with the investors and funding companies. The skill to introduce yourself and your business idea during these events most often leads to contact building, idea exchange, and nuggets of advice that may prove useful for improving your business. Most importantly, when you approach a lead investor, it helps your case if you make the investor aware that you are already in the inner circle and well connected.

Also read: What does a VC look for in a startup?

Maybe there is nothing wrong and you still come back empty handed.

Do you have the ability to not give up and keep working on your startup without an iota of self-doubt? While all may be right, it still may not click through. All your documents, plans, and network may be in place, but that does not necessarily guarantee that the funding will come through. It may take a bit more perseverance and luck. Hence, accept the fact that trying to get funding is a process of trial and error, and hits and misses. Paul Graham is an English computer scientist, venture capitalist, and essayist. He is known for his work on Lisp, for co-founding Viaweb, and for co-founding the Y Combinator seed capital firm. He says “Investors are very random. All investors, including us, are by ordinary standards, incompetent. We constantly have to make decisions about things we don't understand, and more often than not, we're wrong.”

Must Read: Why funding is not a parameter for startup success

These questions are just a guide to better preparing yourself as an entrepreneur who is looking for funding. The idea is to do your own due diligence; have a robust business and communication plan; and the readiness to run it with sheer optimism, despite the obstacles that come along. While there may be viewpoints on how to approach it, what remains constant is the conviction you have for your business model, and how far are you willing to go for it?

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