This article is written to help all entrepreneurs out there building businesses - to give a structure to think about whether they should raise money and how they should do it if they choose to take the fundraising path.
As an entrepreneur, you might be wondering “I’m doing everything that an investor wants, but am still unable to raise funds for my business. Am I doing everything correctly? What am I missing?”.
This a common grievance we hear as investors from entrepreneurs and to-be entrepreneurs irrespective of various sizes and stages of a business. Why is this the case? For starters, not all businesses are suitable for generating returns for external investors. And more generally, today there are more businesses than there are funds to invest in them. Typically, less than 10% of all startups in India have gotten funded.
We have split article this into five sections covering the Why, What, Where, When, and Who. All these are influenced by the type of business and the stage of business you are running. For example, your business could be a product (like Fitbit), a service (like Ola), or a combination (like Amazon). ****On the stage front, you can either be at the stage of idea, prototype/minimum viable product (MVP), market pilot, category leader, or market leader.
The 5 Ws of fundraising
Have you carefully evaluated why you need money for your company? The obvious answer is to grow the company but are you clear on how that will happen? We have seen that sometimes entrepreneurs pitch with an ask of X crores and a split of say 40% for product development, 40% for marketing and sales, and the rest for ops. But when a clarification is sought to understand what they will do with the 40% on marketing, there would be a non-specific reply like “We will use it for online marketing.” Investors like to see clarity of thought. So, it is advantageous to have a strategy of the marketing- who will you hire for the marketing/ branding role, what kind of experience and profile would you look for, why do you prefer online marketing and how much is budgeted for social media ads, how many customers are expected to be acquired with that spend, etc.
Zooming out a little, there are multiple functional aspects of business that the money could be deployed on. It is crucial to be clear on what you expect to spend money on and how much because from the investor’s point of view this would make the ‘Why’ of you’re raising money.
Here are some functions you should keep in mind while thinking about the Why:
Depending on the sector/industry that your company operates in, there may be other costs you need to budget for. For example, healthcare businesses may need to spend on clinical trials, education businesses may need to spend on accreditation / licenses, etc.
Once you have the nitty-gritties of how much you need, for what and how you plan to spend the money figured out, it’s good to also pen down the expected outcomes from each of the spend. For example, with the one crore spent on R&D, you expect that the MVP will be ready in a timespan of 12 months.
<aside> 📌 The key takeaway for entrepreneurs is this: be clear on what functional aspects you are raising money for and what outcomes you expect to achieve after spending the money.
</aside>
What type of capital are you going to raise? Is it going to be grant, debt funding or equity funding? Each of them caters to different needs of the business and has different risk appetite & return expectations.
Selection on the type of capital should be looked at along with the Why, sector and stage of business. For example, a healthcare company making hardware devices at a development stage may not be suitable for venture capital (VC) funding as the development to commercialization phase is longer than the cycle of investment and delivering returns. VCs typically have a 10 year fund cycle in which both fund deployment and exit needs to be done which would not fit in this time frame. This is why, chances are you’ve heard a venture capitalist say “It’s too early for us to invest”.
More suitable in this case, would be to approach a government funded research grant which typically funds companies in the development phase aiming to take their idea to a prototype. Typically a product development cycle is 3-4 years for a healthcare hardware/device company and the uncertainty in this timeline is also not suitable for a VC. On the other hand, a company developing software can get through the development phase quickly and is more amenable for VC funding vis-a-vis hardware devices. Depending on the sector, it needs to be looked at in a nuanced manner.